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Monday, 27 August 2012

The Province gets an “A”. Finance Minister gets a “C” (Part 1)

The Dominion Bond Rating Service (DBRS) released its economic outlook for the Province of Newfoundland and Labrador on August 10, 2012.  A few days later, on August 13th, the Finance Minister released a Statement informing us that DBRS had confirmed the Province’s ‘‘A’’ credit rating.    

The DBRS Report had placed the Minister in a jovial mood.  Likely, he was not surprised about our credit rating being maintained.  What had made him so pleased?  The Report contained a few nuggets about Muskrat Falls he wanted to share.
DBRS is an important and objective international financial house engaged in the business of rating the bonds of governments and corporations. 

Banks and their clients use this information to assess creditworthiness; investors parse every phrase used by such firms; their words cause interest rates to rise and fall.  For governments and for large corporations, a change of credit status may represent millions of dollars of cost, or of savings.      
It is important to note that any downgrade is seldom made in the absence of prior expressions of guidance, subtle hints or outright warnings.

Institutions like DBRS are, therefore, important.  No one knows that better than a Minister of Finance.

Following the rating confirmation, the Minister added:

“In discussing Muskrat Falls, the DBRS Report notes that the long-term benefits of the project are substantial and it should be of economic benefit to the province especially as it relates to diversifying the economy”.    

The Minister took to “Open Line” Shows and other media. The DBRS comment on Muskrat was promoted as a message of support for the government.

The Minister might have thought that the DBRS Report would put some steel into the spines of doubters of the project.  We were supposed to have been impressed. 
Reports like this one are not as challenging to understand as a missive, say, from the Governor of the Bank of Canada.  BOC Statements require the reader to parse every phrase, consider every syllable and look for conclusions as obscure as a smoke signal.   

Notwithstanding DBRS economic verbiage, crafted, as it is, with caveats and qualifiers, the intended message is loud and clear.
For example:

Page 2, quote: Uncertainty remains with regard to the Province’s plan to develop the hydro potential of the Lower Churchill River. Depending on the financing structure used and the level of recourse to provincial taxpayers, the rating could be materially affected, especially in the case of significant cost overruns. 

Page 6, (as if DBRS needed to reinforce the page 2 comment), quote:  …the financing of the Lower Churchill Project continues to weigh on the financial outlook (of the Province). Depending on the financial structure selected and the extent of any potential cost overruns, the financing of the project may result in debt needs that could have a negative impact on the rating. .

Page 7, quote: The $6.2 billion Lower Churchill project will soon begin to have an economic impact…In spite of any potential pressure that debt incurred to finance the project could have on the rating, the development should be of economic benefit….

(Note: the reference is to a $6.2 billion project not the figure a former Minister of Natural Resources confirms may have hit $8.5 billion.  Now, re-read the page 2 excerpt,  with reference to “cost overruns”.) 

The former Minister of Natural Resources, Sean Skinner, stated “…8.0 to $8.5 billion” figure recently on CBC’s On-Point Show.  Mr. Skinner, though defeated in the last election, still enjoys the ear of the Government and, as one of CBC’s expert analysts, uses that news segment to float the government’s latest ‘trial balloon’.
At $8.5 billion and construction barely underway (though not officially sanctioned), DBRS has inscribed a concern many critics of the Project have been voicing: cost overruns are a serious issue for taxpayers and for the Provincial treasury including our credit rating.    

DBRS is well aware of the current pressures on our over-heated economy and aware too of the fact that full employment already exists, in the Province, for most trades suited to Muskrat Falls.  Likely, DBRS is also familiar with more than one mega project that did not come in on budget.
Hence, I will repeat a point made earlier: any downgrade in a credit rating is seldom made in the absence of prior expressions of guidance, subtle hints or outright warnings.

Finance Ministers are normally careful about their words, knowing that misleading language is frowned upon in prudent economic circles.  Everyone understands that he is a partisan; but, he is the one Minister who is expected to engage in less rhetorical flourish than any of his colleagues; he is also expected tell them and the Premier when they are being reckless.
Yet, when even the Minister of Finance feels it is necessary to engage in subterfuge to defend a risk laden and unnecessary $8.5 billion hydro project, for which only the Newfoundland taxpayers are on the hook, it is well to recall a popular warning: “Houston, we have a problem”.

More on the DBRS Report next week.