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

DBRS has today confirmed the Long-Term Debt and Short-Term Debt ratings of the Province of Québec (the Province or Québec) at A (high) and R-1 (middle), respectively. The trends are Stable. Fiscal results remain relatively weak and debt continues rising at a fairly solid pace, but DBRS takes comfort in the determination so far exhibited by the Province and in its credible plan developed to restore fiscal soundness. Accordingly, the operating shortfall should be eliminated by 2013-14, although the pace of the Province’s fiscal recovery will be heavily dependent on the strength of the global economic recovery.

Thanks to a relatively well-diversified economic base, the Québec economy weathered the recession better than many of its peers, although the Province still posted a solid deficit in 2009-10, estimated at $4.3 billion. On a DBRS-adjusted basis (recognizing capital expenditures on a pay-as-you-go basis rather than as amortized), this represented a shortfall of $9.5 billion, or 3.1% of GDP, which was the largest deficit since the mid-1990s and primarily reflected the impact of the recession on tax revenues as well as markedly high capital spending and other initiatives aimed at mitigating the effect of the recession on the economy. Despite a rebound in economic conditions, this year’s budget points to only modest improvement in fiscal results, with a DBRS-adjusted basis shortfall of $8.7 billion foreseen for 2010-11 as much stronger tax collection will be partly offset by new spending in priority areas and the continuation of stimulus measures until the recovery is well underway.

However, DBRS believes that the Province may outperform its plan given the strong growth recorded year to date, which is now likely to be in excess of the 2.3% assumption incorporated in the budget. Furthermore, Québec has proposed a fairly focused strategy to restore fiscal soundness in a timely fashion, addressing some of the concerns voiced by DBRS in its last rating review. The plan relies heavily on new revenue measures such as increases in the provincial and sales taxes, and the introduction of a new health-care levy, but also proposes considerable actions to contain spending growth to 2.2% annually over the next three years and restore the operating balance by 2013-14. DBRS views the plan as credible but notes that GDP growth notably below expectations would likely stretch the string of deficits and fuel debt growth.

In 2009-10, debt as measured by DBRS (including unfunded pension liabilities) is expected to have risen by 5.9%, with another jump of 6.8%, or $12.3 billion, projected this fiscal year, taking the total to $193.3 billion. It is anticipated that this will drive the debt-to-GDP ratio up from 60.2% to a new high of nearly 62% by fiscal year-end, which is in line with last year’s expectations. Improving fiscal revenues and receding fiscal stimulus should help slow debt growth notably next year, although the continuation of high levels of capital investment will still translate into material increases of 3% to 4% over the next two to three years. However, the expected return of more normal economic growth conditions should help keep the debt-to-GDP ratio fairly stable.

Note:
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.