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

DBRS has today confirmed the Long-Term and Short-Term Debt ratings of the Province of Québec (the Province) at A (high) and R-1 (middle), respectively. The trends remain Stable, reflective of the fiscal resolve of the Province and the progress achieved in the implementation of its fiscal recovery plan, which calls for a sharp reduction in the deficit next year and a return to balance by 2013-14.

Stronger-than-expected economic activity and sustained spending discipline helped Québec better its budget projections in 2010-11 with a deficit of $4.2 billion. On a DBRS-adjusted basis (recognizing capital expenditures on a pay-as-you-go basis rather than as amortized), the deficit was still significant, at $9.1 billion, or 2.9% of GDP, reflecting elevated levels of capital spending. Operating spending remained under tight control while revenue benefited from real economic growth of 3% in 2010 and selective tax increases as part of Québec’s plan to restore balance by 2013-14. The Province was also successful at renewing several major labour agreements under favourable terms, which will be instrumental in restoring fiscal balance.

Encouraged by the better-than-expected results of the last two years, the Province has eased its fiscal consolidation targets for the next two years. The latest budget points to a shortfall of $3.8 billion in 2011-12, which is still down $400 million year-over-year but $900 million larger than foreseen in last year’s fiscal plan. On a DBRS-adjusted basis, this represents an imbalance of $7.4 billion, or 2.2% of GDP. Lower net government capital spending will be an important contributor to the receding growth trend in expenditures projected this year, providing a partial offset to the moderate increases planned in key programs. Revenue growth will be mainly supported by sound-though-slowing economic growth and sustained efforts to curb tax evasion, as well as by higher fuel and sales taxes.
The medium-term plan points to a much smaller deficit in 2012-13. On a DBRS-adjusted basis, this likely means a deficit of approximately $6 billion next year and more manageable shortfalls of around $5 billion per year thereafter. Consistent with last year’s expectations, total debt as measured by DBRS will post another sizeable increase of 6.5% this fiscal year, which will push the debt-to-GDP ratio up to a new high of 63.2%. However, debt growth should start showing signs of slowdown next year although elevated levels of capital investments will continue to drive debt up at a still-solid annual rate of 3% to 4% going forward. The return of more normal economic conditions should help keep the debt-to-GDP ratio fairly stable.

DBRS remains encouraged by the successful implementation of the recovery plan and the affordable collective agreements secured with a significant portion of the labour force. Nonetheless, the plan remains heavily reliant on the continued recovery of the global economy. Furthermore, limiting annual spending growth to the targets assumed in the plan of 5% for the health-care sector and 0% for most other programs until 2015-16, with the exception of education, family and income support, constitutes a tall order.

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.