DBRS Changes Trend on Province of Ontario’s Long-Term Rating to Negative on Continued Fiscal Erosion

DBRS has today changed the trend on the long-term debt rating of the Province of Ontario (the Province or Ontario) to Negative from Stable. The trend on the Province’s short-term rating remains Stable. The rating action reflects the material erosion observed in the Province’s already depressed fiscal outlook since the beginning of the fiscal year, due in part to the larger-than-expected government bailouts recently announced for two large North American auto companies, amidst significant economic and fiscal uncertainty. As a result, while DBRS takes comfort in the economic diversification and moderately low debt burden of the Province, concerns have increased with respect to the Province’s ability to weather the global recession and the crisis of its auto sector without unduly weakening its credit metrics.

On June 1, 2009, the governments of Canada and Ontario jointly announced financial aid totaling US$9.5 billion to support the restructuring of General Motors (GM). This adds to the US$3.7 billion in financial aid for Chrysler announced by both governments on April 30, 2009, and brings the total value of the Canadian rescue package to approximately $14.1 billion. Ontario will be responsible for one-third of the package, or an estimated $4.7 billion. Combined with the erosion observed in other parts of the fiscal plans (primarily tax revenues), these initiatives are expected to boost this year’s deficit target to approximately $25.7 billion or 4.5% of GDP on a DBRS-adjusted basis, compared to the forecast of $21.2 billion available at the time of the budget, only two months ago. As a result, debt forecasts are also revised upward, with the latest projections pointing to a 17.1% increase in debt as measured by DBRS in 2009-2010. This will boost Ontario’s debt-to-GDP-ratio from 29% at March 31, 2009, to approximately 35% by fiscal year-end, the third-highest level of all provinces, and to a peak of nearly 40% by 2011-2012 as a result of continued large deficits planned for the years to come.

The government assistance was likely essential to prevent a substantial contraction of the Canadian auto sector, which is especially important to the Ontario economy. However, DBRS notes that the cost of the initiative to the Province is substantial and considerably dampens the fiscal outlook revealed in the March 2009 budget, which was already a significant source of concern for Ontario’s credit profile. Under-spending in the capital plan or the eventual sale of the GM shares owned by the Province as a result of the restructuring may provide partial offset to the deterioration. However, the notable erosion posted in the plan so far this year, along with the significant expenditure efforts that will be required to restore fiscal balance and the uncertain timing of the global economic recovery, point to further significant downside risk for the Province going forward, making the Stable trend no longer appropriate for the rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.