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. Ontario remains on track with its fiscal recovery plan, which is the slowest of all provinces. DBRS believes that the Province’s credit profile has begun to stabilize and the risk of further material erosion has diminished meaningfully. While deficits are projected to continue for several years, better-than-expected results thus far and a supportive economic recovery have helped to lessen the impact on Ontario’s debt-to-GDP ratio, which now stands at its highest level on record.

Based on preliminary results, the Province recorded a deficit of $16.7 billion in 2010-11 or $23.0 billion on a DBRS-adjusted basis after including capital expenditures as incurred rather than as amortized. For 2011-12, the Province is budgeting for a deficit of $16.3 billion, or $23.0 billion (DBRS-adjusted), a still sizeable 3.6% of GDP. Despite modest improvement in the fiscal projections for 2011-12 and 2012-13, the plan to restore fiscal balance (on the Province’s reporting basis) by 2017-18 remains unchanged and assumes a steady economic recovery and disciplined cost management over the forecast horizon, both continued sources of uncertainty in DBRS’s view. Ontario exhibits one of the widest fiscal gaps among Canadian provinces which highlights the considerable work that remains.

Ontario’s DBRS-adjusted debt burden is expected to continuing rising although the pace should begin to slow as fiscal results gradually improve. In 2010-11, debt is estimated to have grown by 11.8%, pushing the debt-to-GDP ratio to 37%. Based on the medium-term projections, the debt-to-GDP ratio is forecast to rise further in 2011-12, approaching 39% and should peak somewhat below 45% of GDP by 2015-16. This forecast is an improvement from the prior year’s budget, in part due to better-than-expected nominal GDP growth and fiscal results which have helped to lessen debt needs.

In 2010, real GDP is estimated to have grown by 2.8%, just slightly below the national average. The economic recovery is forecast to persist in 2011 with the Province budgeting for real growth of 2.4%. This remains somewhat below the current private-sector average providing comfort that minor deviations will not disrupt the fiscal plan. While DBRS considers the uncertainty surrounding the economic recovery to have diminished from this time last year, the risk of a further disruption in global demand, a weak U.S. recovery and a strong Canadian dollar maintain some uncertainty in Canada’s and Ontario’s growth outlook and may require additional measures, through added fiscal discipline or higher taxes, to ensure targets are met.

The upcoming provincial election, scheduled for October 6, 2011, has the potential to introduce new spending measures and adds an element of uncertainty to the fiscal plan, although DBRS notes that the government has demonstrated restraint in its latest budget and maintains moderate flexibility to manoeuvre within its current ratings.

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.