Government of Nunavut
Travis Shaw Paul Le Bane
+1 416 597 7582 +1 416 597 7478
Rating tshaw@dbrs.com plebane@dbrs.com
Rating Rationale
DBRS Limited (DBRS) assigned an Issuer Rating of AA (low) For the year ended March 31, 2018, Nunavut reported a surplus
with a Stable trend to the Government of Nunavut (Nunavut or of $160.8 million. DBRS makes adjustments to recognize capi-
the Territory). The strong institutional framework is founda- tal spending as incurred rather than as amortized and to remove
tional to the credit profile. Enshrined in federal legislation, the non-recurring items. This results in a DBRS-adjusted surplus of
institutional framework decouples the government’s finances $7.2 million, or 0.3% of GDP. For 2018–19, the budget (non-con-
from a weak underlying economy and results in stable govern- solidated) points to an operating deficit of $54.3 million (includ-
ment finances and a low debt burden. The Stable trend reflects ing net results of revolving funds). On a DBRS-adjusted basis,
DBRS’s view that the framework is unlikely to fundamentally before contingencies, this equates to a deficit of $27.8 million,
change through the medium term. As such, DBRS expects bud- or 0.9% of GDP. Nunavut also prepares a multi-year forecast
getary results to remain strong and the debt burden low. (excluding Qulliq Energy Corporation (QEC) and the revolving
funds), which forecasts modest surpluses for 2018–19 through
Canadian territories are created by the federal government 2020–21.
through legislation. Under the framework, territories are del-
egated powers similar to those granted to provinces by the Nunavut has a small, volatile economy that is dominated by the
Constitution. The federal government retains significant control public sector. The economy has grown strongly over the past
and influence over the territories, both financially and operation- decade (5.5% p.a.), with growth exceeding the national average
ally. The federal government (1) can disallow any law passed by in most years. Growth is volatile, however, as private- and pub-
the territorial legislature within one year of its passage by simple lic-sector investment projects are often lumpy and have a pro-
order in council, (2) imposes limits and requirements on finan- nounced impact on the small economy. The economy is gradually
cial management practices (e.g., debt limit, Canada’s Auditor beginning to diversify, with mining accounting for an increasing
General is the territorial auditor, etc.) and (3) effectively con- share of economic activity. The industry now accounts for 21.5%
trols the overall size of the government through its Territorial of economic activity, up from 3.9% a decade ago. The increasing
Formula Financing (TFF). The federal government also plays a amount of mining and construction activity, however, has given
greater role in service delivery in areas that would typically be rise to greater volatility in nominal GDP.
a provincial or territorial jurisdiction (e.g., health care). This
framework has resulted in a history of strong fiscal performance
and limits the likelihood that leverage will grow excessively. Continued on P.2
Issuer Description
Nunavut is one of Canada’s three northern territories. Created through federal legislation and partitioned from the eastern portion
of the Northwest Territories, Nunavut covers approximately 20% of Canada’s land mass, with a population of approximately 38,000
and nominal GDP of roughly $2.8 billion.
Rating Considerations
Assuming modest growth in nominal GDP, DBRS estimates that
Strengths
Nunavut’s debt-to-GDP ratio will trend downwards, approaching
roughly 14% by 2020–21. The federal government limits Nunavut’s
1. Strong institutional framework gross debt to $650 million, which is equivalent to approximately
Nunavut is a creation of federal legislation, and the federal govern- 21% of GDP.
ment retains significant control over it and the other territories,
both financially and operationally. The federal government can 4. Young, growing population
disallow any law passed by the territorial legislature, imposes ad- Nunavut has the youngest population in Canada, with a median
ditional limits on the Territory (e.g., debt limit, Canada’s Auditor age of 26.0 years compared with a national average of 40.6 years.
General) and controls the overall size of the government through As a result, the Territory also has a high fertility rate, which has
its TFF. Federal transfers account for roughly 80% of Nunavut’s contributed to above-average population growth of 1.9% over the
revenue base. This is largely driven by TFF payments, which are past decade. Strong population growth will support economic
meant to act as a gap-filling formula between Nunavut’s gross ex- growth in the future.
penditures and the small portion of revenues derived from the tax
base. This framework provides a high degree of stability and pre- Challenges
dictability to the revenue outlook and, by design, supports respon-
sible fiscal management and consistent results. 1. Small economy that exhibits considerable volatility
The Territory has the smallest economy among Canada’s prov-
2. Economic growth potential inces and territories. Total output was $2.8 billion in 2017, or
Nunavut’s economic growth is expected to exceed the national 0.1% of total Canadian output. The small economy lacks diver-
average over the medium to longer term. Persistent population sity and is heavily influenced by a large public sector, although
growth, increasing investment in the mining industry and an mining has accounted for an increasing share of economic ac-
expanding public sector will support economic growth in the tivity over the last decade. Since its establishment in 1999, aver-
coming years. age GDP growth in Nunavut has exceeded the national average
but exhibits considerable volatility, contracting five times in 18
3. Low debt burden years, and increased exposure to resource extraction and com-
Nunavut’s debt burden is low, and debt growth is limited by the fed- modity prices will only add to Nunavut’s economic volatility in
eral government. Its debt consists of loans and mortgages for QEC the coming years.
and Nunavut Housing Corporation (NHC) and for P3 obligations.
At March 31, 2018, DBRS-adjusted debt totalled $457.4 million, or 2. Geographically dispersed population
16.6% of GDP. The QEC has substantial infrastructure needs and With a population of approximately 38,000 — just 0.1% of
will be the primary driver of Nunavut’s consolidated debt needs Canada’s total population — spread across an area accounting
over the medium term. However, existing loans, mortgages and for roughly 20% of Canada’s land mass, Nunavut has the low-
P3 obligations continue to amortize, providing a partial offset. est population density of any province or territory. Few of the
3. Socioeconomic challenges
Nunavut has systemic socioeconomic challenges that are not
easily addressed. The Territory faces chronic housing shortag-
es, high living costs, poor health outcomes, high rates of suicide
and substance abuse, and lower levels of educational attainment.
The TFF provides a high degree of stability to Nunavut’s revenue Nunavut also receives Canadian Health Transfer and Canadian
base, as it acts as a gap-filling mechanism based on the difference Social Transfer payments, based on the per capita allocation,
between a territory’s gross expenditure base and its capacity to consistent with provincial governments.
Division of Responsibilities:
• Nunavut Act (1999) • Province-like responsiblities for • Represents interest of Inuit es-
• Territorial Formula Financing health, education, social services, tablished under the Nunavut Land
• Debt limit ($650 million) justice and municipal government Claims Agreement (1993)
• Financial audit through the OAG • Devolution • Active in cultural and land/water/
• Stewards of Crown lands wildlife management
• Devolution • Stewards of Inuit-owned land
• Devolution
Devolution would provide increased powers and responsibilities Nunavut’s revenues are composed primarily of federal govern-
to Nunavut, including resource policy and legislation, land use ment transfers through the TFF program, modest tax revenue
planning and permitting, water quality testing and mine inspec- and earnings from territorial corporations and revolving funds
tions. This would entail increased costs for new personnel, train- (see Exhibit 1).
ing, program delivery and infrastructure.
Exhibit 1: Revenues (2017–18: $2.3 billion) Ex
Currently, all stakeholders are working toward reaching an
Agreement in Principle (AiP) which is expected to outline any Taxes
5.0%
potential one-time funding to support Nunavut in the transi-
tional phase while it prepares for a negotiated effective date of Other own-source
15.4%
devolution and additional ongoing funding to be provided as
part of TFF following the effective date. This would also include TFF
66.9%
an arrangement with Canada to share resource royalties from
Other federal transfers
Crown lands. An AiP is not expected to be reached until 2019 at 12.7%
the earliest.
(
Governance
Nunavut has a consensus style of government without politi- (
cal parties. Following a general election, elected Members of
the Legislative Assembly (MLAs) select a premier, speaker and Source: Government of Nunavut and DBRS. So
cabinet ministers. Elected MLAs then come together to establish
priorities for the coming five-year mandate, which are expected
to persist regardless of a change in premier or cabinet members.Federal transfers account for approximately 80% of revenue and
The current Premier of Nunavut is Joe Savikataaq, who was se- have grown by an average of 4.1% (DBRS-adjusted) over the past
five years. Specifically, the TFF has grown by an average of 3.7%
lected in June 2018 following a loss of confidence in the previous
premier. The current mandate (known as Turaaqtavut) has five over the past five years. As growth in the TFF is, in part, influ-
priority areas: enced by the average growth rate in provincial spending, which
• Inuusivut – Work toward the well being and self-reliance of has slowed, this has reduced growth in the TFF, and it is not ex-
our people and our communities. pected to accelerate over the near term. The federal government
recently completed a five-year renewal of the TFF through to
• Pivaallirutivut – Develop our infrastructure and economy in 2023–24, which did not include any meaningful changes in the
ways that support a positive future for our people, our com- formula.
munities, and our land.
• Sivummuaqpalliajjutivut – Provide education and training Taxes make up 5.0% of revenue and have been growing steadily
that prepares children, youth and adults for positive contribu- over the past five years. Personal income tax (PIT), corporate
tions to society and for meaningful employment. income tax (CIT), payroll tax and tobacco tax are the primary
(1.0%)
In education, cost escalation has been more manageable, ris-
ing by 2.6% on average over the past four years, but improv- (2.0%)
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19B
ing outcomes will continue to be challenging. Despite its young
population, Nunavut’s
Source: Government student
of Nunavut population exhibits poor atten-
and DBRS. Source: Government of Nunavut and DBRS. B = budget (non-consolidated).
dance, and high school graduation rates are the lowest in the
country. The Department of Education is working closely with 2017–18 Results
individual communities to train more local educators, as find- For the year ended March 31, 2018, Nunavut reported a surplus
ing qualified staff presents challenges, which is compounded of $160.8 million. DBRS makes adjustments to recognize capi-
by fast population growth. tal spending as incurred rather than as amortized and to remove
non-recurring items. This results in a DBRS-adjusted surplus of
Housing remains another key expense driver, as a growing pop- $7.2 million, or 0.3% of GDP.
ulation and scarcity of affordable housing has meant that there
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19F
2019-20F
2020-21F
The government expects QEC’s debt to be serviced by its com-
(
mercial operations. However, DBRS does not treat QEC’s debt as
self-supporting for three reasons: (
Other Debt Obligations Capital Leases P3 Obligations
1. Nunavut does not account for QEC as a government business
enterprise, because of its lack of operational and financial in- Source: Government of Nunavut and DBRS. F = forecast. So
dependence from the government. As a result, Nunavut con-
solidates QEC on a line-by-line basis.
2. QEC’s rates are not set by an independent regulator. Final rate Nunavut maintains a prudent debt structure with a relatively
decisions rest with the minister responsible for QEC. smooth maturity profile, with no more than 8%, or $39 million,
of the debt stock maturing in any of the next five years. As a
3. DBRS believes there is limited opportunity to monetize the as- share of total debt, exposure to interest rate reset risk represents
sets of QEC in a stress scenario. 26.0% of the debt stock as of March 31, 2018, composed of three
floating-rate loan facilities. However, the debt burden is low, and
The federal government imposes a debt limit on the terri- Nunavut’s substantial cash position should generate increased
tory. Under the Nunavut Act, the Governor in Council may, on investment returns in an environment of rising rates. In addition,
the recommendation of the Minister of Finance, set the maxi- there is no exposure to unhedged foreign currency debt.
mum amount of all borrowings. The limit is currently set at
$650 million and includes all loans and mortgages, P3 obligations, Nunavut has substantial cash on hand, well in excess of out-
capital leases and bank overdraft facilities. This is equivalent to standing debt obligations. As of March 31, 2018, unrestricted
approximately 21% of GDP. This definition of debt differs from cash and investments totalled more than $860 million and have
DBRS’s definition of debt in that it does not include pension obli- been steadily rising. In addition, regular monthly TFF install-
gations. At March 31, 2018, Nunavut had $209.0 million in unused ments of roughly equal size and federal administration of the tax
debt capacity under the federal limit. Nunavut is not seeking to system with regular installment payments results in a high de-
change the debt limit. The Territory’s borrowing program is very gree of predictability for cash inflows, while monthly outflows
narrow, limited to domestic markets and funded largely through are largely predictable given the nature of the expense base.
bank financing or Canada Mortgage and Housing Corporation.
Unfunded pension liabilities are very low and are being ad-
dressed by offsetting investment set aside in the government’s
Consolidated Revenue Fund. The majority of government
Economic Structure
80 to 84 years
10.0% 75 to 79 years
70 to 74 years
65 to 69 years
60 to 64 years
5.0% 55 to 59 years
50 to 54 years
45 to 49 years
0.0% 40 to 44 years
35 to 39 years
30 to 34 years
25 to 29 years
(5.0%) 20 to 24 years
15 to 19 years
10 to 14 years
(10.0%) 5 to 9 years
0 to 4 years
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018F
2019F
Nunavut Canada
Source: Statistics Canada and Conference Board of Canada. Source: Statistics Canada.
Nunavut’s economy is heavily influenced by a large public sector, Since its establishment in 1999, GDP growth in Nunavut has ex-
although the relative size of the public sector has been declining ceeded the national average and been considerably more volatile,
over the past decade as mining’s share of economic activity has contracting five times in 18 years. Over the last decade, growth
increased. In 2017, the public sector (proxied by public admin- has averaged 5.5%, including an estimated 9.8% in 2017. Nominal
istration, education, health and social assistance) accounted for GDP is heavily influenced by commodity prices and has averaged
33.4% of nominal GDP, down from 43.4% a decade earlier. Over 8.3% over the past ten years, including 13.3% in 2017.
the same period, mining grew from 3.9% to 21.5% of the economy
with the opening of three new mining operations. The construc- Commodity prices will continue to influence resource development
tion industry is the third-largest contributor to GDP at 14.2% in the territory. Nunavut currently has three producing mines:
in 2017 and is heavily influenced by both the public sector and • Meadowbank gold mine – Operated by Agnico Eagle, the
resource development. Traditional land use activities, primarily mine opened in 2010, employs close to 700 people and pro-
fishing and hunting, are culturally important but do not account duced approximately 350,000 ounces of gold in 2017. The mine
for a meaningful share of employment or GDP. is scheduled to close in 2019, but the processing facility will be
used to process ore from a new satellite deposit, Amaruq, start-
ing in late 2019.
According to Statistics Canada’s survey of investment intentions, While strong population growth has contributed to above-
non-residential construction, machinery and equipment spend- average labour force growth, unemployment remains high.
ing is forecast to grow by 17.7% in 2018, surpassing the growth In 2017, the unemployment rate was 14.6%, surpassed only by
rate of all other provinces and territories. This largely reflects Newfoundland and Labrador. Low high school graduation rates
ongoing investment in existing and new mining projects and result in a lower-skilled workforce. The Government of Nunavut
public infrastructure investments, including the Iqaluit Port and other large employers (e.g., mining companies) have set goals
Development Project — a four-year project to develop a deep- for a representative workforce but remain highly dependent on
sea port that will allow for faster offloading and an extend- imported skilled labour for many roles. As a consequence, Inuit
ed shipping season. are significantly underrepresented in the workforce, and struc-
tural unemployment persists.
Primary household income in Nunavut is just below the national
average, while average weekly earnings are well above the na- Outlook
tional average exceeding all provinces and second only to the Overall, the outlook is for strong, though volatile, economic
Northwest Territories. Despite strong incomes, income inequal- growth through the medium term. Economic forecasts are based
ity is a significant concern while the high costs of travel and on estimates provided by the Conference Board of Canada,
transportation in the north and scarcity of adequate housing which point to real GDP growth of 4.4% in 2018 and 9.1% in 2019.
contribute to a high cost of living. Food prices are high, even with Nominal GDP is projected to rise by 6.7% in 2018. Economic ac-
food subsidies for certain products, and food security is a con- tivity will continue to be heavily influenced by commodity prices
cern. Furthermore, the majority of housing in Iqaluit is not mar- and future developments in the resource sector along with fluc-
ket based, and the public sector plays a significant role through tuations in government spending.
Revenues Budget
($ millions) 2018-19 1 2017-18 2016-17 2015-16 2014-15 2013-14
Personal income tax 33.4 23.5 33.3 30.1 28.3 29.7
Corporate income tax 17.9 18.4 13.1 19.0 14.9 14.1
Payroll tax 29.8 29.4 25.8 25.5 25.2 23.5
Tobacco tax 21.0 21.4 17.8 16.8 16.4 16.1
Fuel tax 8.6 14.0 9.3 9.0 5.5 4.7
Property tax 6.9 6.6 6.3 5.5 4.4 3.0
Insurance tax 2.1 1.9 1.9 1.8 1.7 1.3
Total Taxes 119.7 115.2 107.5 107.8 96.4 92.4
Petroleum products division 129.8 137.5 145.6 150.7 141.3
Liquor revenue 9.9 5.8 6.0 5.9 6.0
Nunavut Development Corporation 3.4 3.0 2.6 3.8 5.2
Qulliq Energy Corporation 65.0 66.0 70.7 74.6 61.1
Revolving funds (net of COGS) 1 35.0
Staff housing recoveries 19.6 19.4 19.3 18.9 18.9 18.5
Other 40.5 113.4 75.4 69.2 60.2 66.8
Recoveries 15.0 10.6 14.8 15.9 12.8 9.3
Total Own-Source Revenues 229.8 466.7 429.4 436.7 423.3 400.6
Territorial Formula Financing 1,578.8 1,529.9 1,488.6 1,454.2 1,409.1 1,350.4
Transfers under third-party agreements 275.8 147.6 124.7 121.7 126.2 137.2
Other 2 92.1 142.1 108.1 151.4 150.8 117.7
Total Federal Government Transfers 1,946.7 1,819.7 1,721.4 1,727.3 1,686.2 1,605.3
DBRS-Adjusted Revenues 2,176.5 2,286.4 2,150.8 2,164.0 2,109.5 2,006.0
Non-recurring revenues 2 - 74.1 - - - -
Total Revenues (as reported) 2,176.5 2,360.5 2,150.8 2,164.0 2,109.5 2,006.0
Expenditures
Health 392.7 505.4 446.8 419.1 388.6 376.1
Community and Government Services 251.6 434.7 429.3 444.9 439.8 421.5
Education 251.2 272.3 272.7 261.9 246.7 245.5
Housing 201.1 279.2 272.2 265.8 253.4 241.8
Finance 88.3 195.9 165.0 174.2 157.7 141.2
Family Services 153.2 145.9 144.3 128.8 124.3 117.5
Justice 121.7 126.5 125.4 121.6 117.1 110.2
Environment, Culture, Economic Development and Transportation 140.0 174.1 150.1 141.5 142.5 144.0
Other 55.0 54.0 52.2 52.3 48.3 43.3
Net acquisition of tangible capital assets 226.5 79.5 51.6 43.6 69.9 55.9
311.1
Program Expenditures 2,192.3 2,267.6 2,109.6 2,053.7 1,988.4 1,897.1
Interest costs 12.0 11.7 8.8 9.4 9.6 10.9
DBRS-adjusted Total Expenditures 2,204.3 2,279.2 2,118.4 2,063.0 1,997.9 1,907.9
Government of Nunavut
Consolidated Statement of Financial Position
($ millions) As at March 31 As at March 31
Assets 2018 2017 2016 Liabilities 2018 2017 2016
Cash and cash equivalents 739.0 707.8 637.5 Accounts payable 345.7 335.9 353.5
Portfolio and other investments 148.8 133.4 131.8 Deferred revenues 127.4 110.1 68.8
Accounts receivable 239.3 134.8 120.4 Contaminated sites 9.4 9.3 8.4
Inventories for resale 87.9 114.4 161.4 Post employment benefits 74.0 75.9 66.0
Loans receivable 22.6 26.8 23.1 Long term debt 180.2 154.8 147.8
Tangible capital assets 2,409.5 2,230.7 2,140.1 Airport P3 156.7 134.3 100.1
Other non-financial assets 47.4 53.5 36.3 Capital leases 92.9 33.7 42.3
Total assets 3,694.5 3,401.5 3,250.4 Total Liabilities 986.2 854.0 787.0
Net Assets 2,708.3 2,547.5 2,463.5
DBRS-adjusted debt 466.6 457.4 345.2 312.9 258.9 233.8 194.9 189.0
Authorized borrowing limit 650.0 650.0 650.0 650.0 400.0 400.0 400.0 400.0
Available borrowing capacity 1 199.7 209.0 318.8 348.9 149.9 175.0 212.9 217.8
DBRS-adjusted debt-to-GDP 15.4% 16.1% 13.7% 12.9% 10.9% 10.2% 8.9% 9.3%
Rating History
Current 2017 2016 2015 2014 2013
Issuer Rating AA (low) NR NR NR NR NR
Related Research
• Rating Canadian Provincial Governments, May 7, 2018.
• Corporate Risk Assessment Scorecard for Canadian Provincial and Territorial Governments, December 6, 2018.
• DBRS 2018 Provincial and Territorial Government Fact Sheet, December 6, 2018.
Notes:
All figures are in Canadian dollars unless otherwise noted.
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