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

DBRS has today confirmed the ratings of the Province of Québec (the Province) at A (high) and R-1 (middle), with Stable trends. Despite the introduction of new policy directions and a greater emphasis on progressive taxation, the election of a minority government of the Parti Québécois (PQ) last September does not seem to have eroded fiscal discipline, as restoring fiscal balance and containing debt growth remain key priorities in the new government’s first budget. However, weak economic growth and sustained spending pressure are likely to test fiscal resolve in 2013-14. The change of governing party has also revived the debate over the sovereignty of Québec, which the Parti Québécois views as its primary objective, although a public opinion survey conducted last fall points to much weaker support for the initiative than in the 1990s.

Slowing economic growth put a damper on revenues in 2012-13. Nevertheless, strict spending control, lower-than-expected debt servicing costs and mitigating revenue measures allowed the Province to meet its deficit target of $1.5 billion, excluding one-time expenses related to the closure of the Gentilly-2 nuclear power plant. This translated into a shortfall of $7.2 billion, or 2.0% of GDP, on a DBRS-adjusted basis (including capex as incurred rather than as amortized), which is $695 million better than budgeted. As a result, total debt as calculated by DBRS reached $217.6 billion by fiscal year-end, up $11.7 billion, or 5.7%, year-over-year. The increase was primarily driven by record-high capital investments, pushing the debt-to-GDP ratio to 60.9% at March 31, 2013, its highest level in more than a decade.

Eager to provide clarity on its priorities, the new PQ government introduced its first budget on November 20, 2012, much earlier than usual and less than three months after its election. The 2013-14 budget is relatively prudent, as it maintains the previous government’s target of restoring fiscal balance in the current fiscal year and holds spending growth to a minimum. According to the Update on Québec’s Economic and Financial Situation released in March, the Province remains on track with its 2013-14 fiscal target, which represents a relatively modest shortfall of $4.7 billion, or 1.3% of GDP on a DBRS-adjusted basis (including capex as incurred rather than as amortized). Spending estimates for the fiscal year remain virtually unchanged from budget, with most of the increased funding allocated to health care and education. Revenue projections have been scaled down slightly due to softening economic growth anticipated in 2013, which has particularly dampened tax revenues, although the erosion has so far been absorbed by the contingency reserve included in the budget.

Owing to the improved fiscal outlook and reduced capital spending, DBRS-adjusted debt is projected to rise by $4.8 billion, or 2.2%, in 2013-14. If sustained, balanced budgets and a reduced capital program have the potential to slow growth in DBRS-adjusted debt to approximately 2% per year. This represents the best debt outlook in a long time for the Province and should be supportive of continued, though slow, improvement in the debt-to-GDP ratio. However, this outlook depends heavily on the strengthening of global economic conditions and the ability of the Province to contain expenditure pressures. Otherwise, additional efforts will likely be required from taxpayers to maintain a balanced budget.

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, which can be found on our website under Methodologies.

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