DBRS Confirms Province of Ontario at AA (low) and R-1 (middle)

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of Ontario (Ontario or the Province) at AA (low) and R-1 (middle), respectively. The trend on all ratings is Stable. The Province’s fiscal outlook remains weak, with the expectation that prolonged fiscal deficits will continue adding to debt in a meaningful way and push the debt-to-GDP ratio to its highest level on record. While these expectations are already factored into the current ratings, with room left to manoeuvre, the extended path to recovery leaves the Province susceptible to any major deviations on the economic or fiscal front.

In 2010-11, the Province has budgeted for a deficit of $19.7 billion, which translates into a DBRS-adjusted deficit of $25.6 billion after including capital expenditures as incurred rather than as amortized by the Province. This represents 4.3% of GDP, likely one of the largest deficits of all the provinces and only a slight improvement from the 4.8% (of GDP) gap estimated in 2009-10. An improving revenue outlook will be insufficient to meaningfully reduce the budgetary shortfall as program spending continues to expand in most areas and a solid capital stimulus program weighs on results. Nevertheless, the Province is taking steps to gradually rein in spending, including targeting two years of zero compensation increases, which DBRS views as ambitious. Fiscal challenges are expected to persist over the years ahead as a return to balance (on the Province’s basis) is not anticipated until 2017-18. This constitutes the slowest fiscal recovery plan of all the provinces and is not without downside risks as it relies on containment of compensation costs, slowing annual health-care spending growth to an average of 3% and a return to sound economic growth.

The difficult fiscal environment has led to a notable increase in DBRS-adjusted debt, a trend that is expected to continue. In 2009-10 alone, debt is estimated to have grown by $37 billion, or roughly 21%, pushing the debt-to-GDP ratio up to 36.6% from 29.1% in 2008-09. Based on the medium-term fiscal projections, debt will continue rising steadily to 40% of GDP in 2010-11 and DBRS expects it to eventually reach a peak of nearly 50% by 2014-15, which would be one of the highest debt burdens among the provinces.

The global economic contraction had a severe impact on Ontario due to its reliance on manufacturing and international exports, particularly to the United States. In 2009, Ontario’s real GDP fell by 3.1%, slightly worse than the decline experienced nationally. Emerging signs of global economic recovery point to a solid rebound in 2010 as the Province has assumed real growth of 2.7%, followed by annual growth of 3.2% in 2011 and 2012. This forecast appears somewhat conservative in relation to the private-sector estimate; however, DBRS notes that the strong Canadian dollar and global economic uncertainty continue to pose a risk over the forecast horizon. In DBRS’s opinion, additional measures, through higher taxes or enhanced spending discipline, are likely to be required to ensure that fiscal targets can be met and limit further erosion of the credit profile.

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.