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

DBRS has today confirmed the Issuer Rating of the Province of Ontario (the Province) at AA (low), along with its Long-Term Debt and Short-Term Debt at AA (low) and R-1 (middle), respectively. All trends remain Stable. A new Premier was selected in January 2013 and Ontario’s fiscal plan remains largely unchanged despite softening economic growth forecasts. DBRS acknowledges the solid budgetary performance achieved for the year ended March 31, 2013; however, this heightened fiscal resolve will need to be maintained, especially in the outer years of the current plan, to ensure targets are adhered to and debt growth slows to a sustainable pace. In addition, the political situation remains somewhat fragile, although the New Democratic Party recently announced their support for the current budget thus avoiding an election in the near term.

Based on preliminary results, Ontario handily exceeded expectations in 2012–13, posting a deficit of $9.8 billion compared with a budgeted shortfall of $14.8 billion. On a DBRS-adjusted basis, after including capital expenditures as incurred rather than as amortized and excluding a one-time expenditure reduction related to the elimination of banked sick days for teachers and support staff, this equates to a deficit of $16.6 billion, or 2.5% of GDP. As a result, DBRS-adjusted debt is estimated to have grown by 8.2% to $279.9 billion, or 41.6% of GDP, which is one of the highest debt burdens among Canadian provinces.

For 2013, the budget points to real GDP growth of 1.5%, consistent with the current private-sector consensus tracked by DBRS. Net trade and investments are again expected to drive growth with government restraint continuing to provide a partial offset. Given Ontario’s heavy reliance on exports to the U.S., continued improvement in U.S. economic momentum should prove beneficial for provincial exports, as will a modest softening in the Canadian dollar, should it persist. For 2014, the Province has assumed real GDP growth of 2.3%, just slightly below the current consensus.

While several provinces have delayed their fiscal recovery plans in response to weaker growth, Ontario continues to target a return to balance (on its basis) by 2017–18. A deficit of $11.7 billion is projected for 2013–14, a $1.1 billion improvement from what was anticipated in last year’s plan. On a DBRS-adjusted basis, this translates into another sizeable shortfall of $17.6 billion, or 2.5% of GDP. The impact of slower economic growth has been more than offset by a higher tax base and lower debt servicing costs. For 2014–15 and 2015–16, the budget points to DBRS-adjusted deficits of $15.0 billion (2.1% of GDP) and $12.1 billion (1.6% of GDP), respectively. Given the recent trend of outperforming budget targets and reduced borrowing needs, the debt trajectory is encouraging though still a concern for DBRS. DBRS-adjusted debt is now projected to stabilize at around 43% of GDP in 2014–15. However, the fiscal plan still entails considerable risk, including limiting the average annual increase in health care spending to just 2.0% and containing compensation increases when existing collective agreements expire. In DBRS’s opinion, global economic risks appear to be more balanced than recent years, but a further interruption in the economic recovery or a failure to maintain newfound fiscal discipline could jeopardize the stability of the credit profile that the Province has gradually begun to restore.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Canadian Provincial Governments (August 2012), which can be found on our website under Methodologies.

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