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Credit rating agency puts Alaska on ‘negative’ watch amid plunge in oil prices and COVID-19 pandemic

A major credit rating agency on Friday said it has placed a “negative” watch on Alaska’s credit rating after a plunge in world oil prices as the COVID-19 economic crash batters fishing and tourism that are critical to state revenue.

Fitch Ratings expressed concern that Alaska leaders would continue to pull large amounts from the state’s reserves, including by boosting the economy with a Permanent Fund dividend stimulus payout, according to the statement.

“Planned, significant draws on the state’s accessible reserves to balance financial operations or to fund other priorities in light of a likely extended period of weak natural resource markets and financial market volatility, will lead to a downgrade,” Fitch said in the statement.

Fitch lowered the state’s credit ratings in September, including lowering its general obligation bond rating to AA-.

A lower rating could force the state to pay more to borrow money from investors, as the market demands higher payments for bonds deemed to carry increased risk.

“We are signaling that if the state continues along the path we foresee, we could see the ratings go down,” said Marcy Block, a senior director for Fitch, in an interview Friday.

The next notch lower for the state’s general obligation bonds would be an A+, Block said.

“For a U.S. state, an A+ rating is considered low,” she said.

The state as of June 30 had about $670 million in general obligation debt that is outstanding, she said.

Also under watch for a possible lowered rating is about $1.1 billion in bonds from the Alaska Municipal Bond Bank Authority, she said. Those bonds are currently at A+.

Fitch’s negative outlook for Alaska’s credit “reflects the severe financial and economic stress the state is expected to undergo as a result of the recent plunge in crude oil prices,” the ratings agency said in the statement.

The situation is "compounded by the negative impact the coronavirus pandemic is expected have on the state’s important fishing and tourism industries.”

Further complicating the picture is the state’s reliance on the Alaska Permanent Fund earnings reserve, used to support state operations and the annual dividend, Fitch said.

The ratings agency said it will closely watch potential impacts to the reserve amid recent market volatility that has lowered the fund’s value by billions of dollars.

Losses in the fund’s reserve could be compounded if the state uses it to help pay an economic stimulus, something Gov. Mike Dunleavy and some state lawmakers have proposed.

“As the coronavirus crisis unfolded and oil prices plunged, the Legislature is now debating further increases to the supplemental budget to fund coronavirus related costs as well as provide an additional $1,000 per capita stimulus payment to its residents by a further draw on the (Permanent Fund Earnings Reserve) in response to the oil price plunge and the coronavirus crisis,” the ratings agency said.

“These actions are expected to further declines to the state’s reserves," Fitch said.

Years of cuts during low oil prices have reduced the state’s options for additional cuts, Fitch said. Recent plunging oil prices, related to the COVID-19 epidemic and a price war between Saudi Arabia and Russia, have pushed oil prices well below state revenue forecasts.

“The scale of the impact to the state’s economy and revenues, which is also expected to be negatively affected by declines in the important tourism industry from the coronavirus pandemic, is currently uncertain,” the ratings agency said.

The price for Alaska North Slope crude oil on Wednesday hit $26.73 a barrel, well below state forecasts for the year of close to $64 a barrel.

Fitch’s negative outlook may be reversed if the “state advances financial policies in the current legislative session that promote stable financial performance and make progress toward improved financial resiliency,” Fitch said.

Fitch said it will make a decision after it analyzes the state’s spring 2020 revenue forecast, expected in April.

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