DBRS Confirms Province of Québec at A (high) and R-1 (middle); Trends Stable

DBRS has today confirmed the Short-Term Debt and Long-Term Debt ratings of the Province of Québec (the Province or Québec) at R-1 (middle) and A (high), respectively. The trends are Stable. The global economic downturn that took hold of the Canadian economy has drastically changed the economic and revenue outlooks of most provinces. Despite expectations of a somewhat milder-than-average contraction in the provincial economy in 2009, the Province of Québec is faced with a relatively weak fiscal outlook due to increased government stimulus, with several years of sizeable deficits projected. Nonetheless, the Province has flexibility to weather the downturn thanks to its large diversified economy and its demonstrated track record of cost control, although the challenging fiscal conditions will drive debt up markedly and will likely require difficult choices in the years ahead in order to restore fiscal soundness.

For 2009-10, the Province has budgeted for a deficit of $3.9 billion. On a DBRS-adjusted basis (recognizing capital expenditures on a pay-as-you-go basis rather than as amortized), this translates into a shortfall of $10.6 billion or 3.4% of GDP, which is a notable increase from last year due mostly to increasing capital investments as part of Québec’s five-year $41.8 billion capital plan and declining tax revenues. The budget also points to a sizeable imbalance for the years ahead despite a notable rebound in real GDP growth foreseen next year and annual core program spending growth contained at 3.2%. Revenue measures already identified by the Province should help address $2.4 billion of the gap. Barring a strong economic recovery, however, closing the remainder of the imbalance within the five-year period outlined in the fiscal plan will be challenging. In DBRS’s view, Québec will have little opportunity for relief on the spending side given its already lean expenditure growth outlook, the health-care cost pressure besetting all provinces and the likely high expectations of labour unions at the approach of the renewal of most labour agreements in 2010, as the current contracts legislated in 2005 imposed a two-year wage freeze to all employees. As such, more revenue measures will likely have to be identified to restore fiscal balance.

Following an increase of 2.8% in 2008-09, total debt as measured by DBRS (including unfunded pension liabilities) is projected to jump by 6.8% or nearly $12 billion this year to an estimated $183.3 billion. The deterioration will also be noticeable in the debt-to-GDP ratio, which will rise from 56.9% at March 31, 2009 to approximately 61% by fiscal year-end and 62% in 2010-11, keeping the ratio at the highest of all provinces. Debt growth should slow beyond 2010-11, however, as Québec returns to its growth potential and the government gradually removes its stimulus from the economy. This should help stabilize the debt-to-GDP ratio, although the chance of seeing the ratio rapidly returning below 60% greatly depends on the Province’s success at reining in its deficit.

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.