A international credit ratings agency is painting a grim picture of Newfoundland and Labrador's finances, downgrading the province's credit rating to the make it the lowest in Canada, and keeping its outlook as negative.

Moody's announced Thursday it had downgraded the rating from Aa2 to Aa3, noting the amount it expects the province to spend on financing its debt will reach 12 per cent of total revenue by 2020, a level not seen in the province since 2004.

​Additionally, the province's net direct and indirect debt will reach 240 per cent, the highest forecast in the country, and internationally notable.

"It's in the upper portion of what we see for regional governments. There's very few regional governments that we rate around the world that have debt levels 200 per cent or above," said Michael Yake, a vice-president and senior analyst with Moody's.

Yake added Ontario had similar levels, but has taken steps to bring that under control.

"For a relatively small province such as Newfoundland and Labrador, a province that doesn't necessarily have the same economic diversity as Ontario or Quebec... 240 per cent [debt] to revenue is what we consider an exceptionally high level for the province."

Moody's applauded the budget's austerity measures, but noted any flip-flopping on cuts could further impact the province's credit rating. (Mark Lennihan/Associated Press)

Tax hikes helped

Moody's noted the province's recent fiscal measures to improve its situation have been "very aggressive" — moves like hiking the HST by two percentage points, increasing income taxes and introducing the deficit reduction levy — which Yake called "a positive sign" that the government is willing to use everything at its disposal to tackle its problem.

However, Yake worried there is only so far the province can go with such austerity.

"There is a practical limit. The individuals, the taxpayers can only absorb themselves so much pressure, and to see their tax bills rise so much as well," he said.

And budget reversals, like Friday's announcement that the province would not close two courts after all, do not help Moody's faith in the province's finances.

"If we start to see the expenditure measures that they've introduced they need to sort of pull back on and relax and not go as far, if we see that, the deficits because of that are not going to fall as quickly as planned, and then there's downward pressure on the rating," he said, adding the province could be downgraded again in 18 months or less.

The cost to build Muskrat Falls has increased to $11.4 billion, $4 billion more than when it was first announced. (Andrew Vaughan/Canadian Press)

Muskrat Falls a slight factor

Yake said the driving factor in the downgrade has been the slump in oil prices, but that the troubled Muskrat Falls megaproject played a small role.

"It is a component," he said.

The debt associated with Muskrat Falls' ballooning construction costs was not figured into the downgrade, as Moody's sees Nalcor as financially self-sufficient from the province.

But Moody's is not ignoring the situation.

"We have to recognize that there is a large debt burden building up in Nalcor as well, that ultimately the province may be responsible for," Yake said.

"If we do see that the province needs to step in and start supplying ongoing, regular support payments to Nalcor for whatever reason, than that may change our definition of self supporting."

Being downgraded can have a negative effect on the province's ability to borrow money, with investors charging more interest on what they see as a riskier bet with a higher chance the province could default on its loans or have delays in payment.

Another credit ratings agency, DBRS, downgraded its assessment of Newfoundland and Labrador's financial situation following the spring budget.