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

DBRS has today confirmed the Issuer Rating of the Province of Québec (the Province or Québec) at A (high), along with its Long-Term Debt and Short-Term Debt at A (high) and R-1 (middle), respectively. All trends remain Stable. Following the April 2014 election, which saw the Liberal Party form a majority government, a new fiscal plan was presented that continues to show erosion in the Province’s fiscal outlook but maintains the previous government’s commitment to return to balance by 2015-16. The plan is potentially manageable but ambitious, as it will require considerable effort to contain spending through program review savings still to be identified in 2015-16 and to get the necessary support from unions. As such, the Province remains in a vulnerable position, with limited tools left to mitigate further fiscal erosion and the accumulation of debt should the economy continue to underperform. DBRS also notes that the convincing defeat of the Parti Québécois government suggests seemingly weaker support for sovereignty (a key objective of the party) than in the 1990s, removing an element of political uncertainty.

For the year ended March 31, 2014, preliminary estimates point to a budgetary deficit of $3.1 billion, consistent with the experts’ report on the state of Québec’s public finances released on April 25, 2014, but a notable deterioration from the balanced budget anticipated at the time of DBRS’s last review. On a DBRS-adjusted basis (including capital expenditures as incurred rather than as amortized), this represents a shortfall of approximately $8.4 billion, or 2.3% of gross domestic product (GDP). The erosion largely stems from disappointing economic performance, resulting in weaker-than-planned revenues, although program spending also increased meaningfully. As a result, total debt (as calculated by DBRS) is estimated to have grown by 3.3% to $222.4 billion as of March 31, 2014, pushing the debt-to-GDP ratio to 61.0%, up from 60.2% a year earlier.

The revised fiscal plan introduced in June maintains the commitment to restore fiscal balance by 2015-16, two years later than originally forecast in the 2009 budget. For 2014-15, the budget points to a deficit of $2.4 billion, which equates to $8.1 billion on a DBRS-adjusted basis, or 2.1% of GDP. Over the medium term, DBRS-adjusted deficits are expected to range between 0.5% and 1.5% of GDP through to 2018-19. Unlike past budgets, the revenue measures proposed by the new government are relatively modest, perhaps in recognition of the already considerable effort required from taxpayers in previous years. As a result, the majority of new efforts will take place on the expenditure side. Based on the latest estimates, the debt burden is projected to peak at approximately 62% in the current fiscal year, after which the forecast points to a gradual decline. This will be dependent on the Province’s ability to adhere to its revised fiscal recovery targets and a moderation in capital spending as planned.

The June budget assumes accelerating real growth of 1.8% in 2014. This is slightly above the current private sector consensus tracked by DBRS and highlights the still tepid growth environment. For 2015, the current private sector consensus points to real GDP growth of 2.0%, supported by an expected improvement in domestic demand and the external environment. Despite a difficult first quarter, the outlook for the U.S. economy is encouraging and a lower Canadian dollar will add further support to Québec’s exports, although DBRS notes that downside risks remain.

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

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The applicable methodologies are Rating Canadian Provincial Governments and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

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