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. Despite a revenue outlook weakened by volatile global economic conditions, the Province remains on course with its fiscal recovery plan, which calls for a return to balance next year with a mix of spending restraint and revenue measures. This should help slow debt growth to a more manageable pace below GDP growth.

The Province expects to have outperformed its budget target in 2011-12 with a shortfall of $3.3 billion, which is $500 million better than originally anticipated. On a DBRS-adjusted basis (including capex as incurred rather than as amortized), however, the deficit was nearly 17% larger than projected at $8.6 billion, or 2.6% of GDP, as higher-than-expected capital spending more than offset the positive effects of low borrowing rates, rigorous program spending management and strong mining revenues. Tax-supported debt as measured by DBRS reached $207.0 billion by March 31, 2012, or 61.8% of GDP. This was somewhat below expectations, though still up 5.7% year over year due mainly to capital investments and the fiscal imbalance.

The recent budget confirms the continuation of the recovery plan introduced in 2009 with a deficit target of $1.5 billion for 2012-13. This translates into a deficit of approximately $7.9 billion or 2.3% of GDP on a DBRS-adjusted basis. New spending initiatives added to the fiscal plan are modest. Nonetheless, consolidated expenditure growth is projected at 4.3% on a DBRS-adjusted basis, with most of the new funds earmarked for health care, education and debt servicing. Total revenue as measured by DBRS is projected to grow 5.8%. Federal compensation for the harmonization of the provincial sales tax will help make up for weaker economic growth prospects while own-source revenues will benefit from a one percentage point increase in sales tax implemented on January 1, 2012, another one cent per litre increase in fuel tax effective April 1, 2012, and other revenue measures highlighted in the plan to restore fiscal balance. The budget prudently assumes real growth in Québec of 1.5% in 2012 and 1.9% in 2013, which is in line with the private sector consensus but down notably from the forecasts available last year. Improving fiscal results should allow growth in tax-supported debt as measured by DBRS to slow notably in 2012-13. This will bring the overall load to $216.1 billion or approximately 62% of GDP. Barring another global downturn, debt growth should further slow to a more sustainable pace of around 3% starting in the next fiscal year. Cost containment and other initiatives part of the fiscal recovery plan will remain instrumental in slowing debt growth, complemented by accelerating growth in the Generations Fund.

Overall, DBRS commends the Province for the progress achieved to date in its plan to restore fiscal soundness but notes that the operating environment will remain challenging for some time owing mainly to fragile economic conditions prevailing globally and the need to restrain spending growth to unusually low levels for an extended period of time.

Notes:
All figures are in Canadian dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.