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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of Ontario (Ontario or the Province) at AA (low), along with its Long-Term Debt and Short-Term Debt at AA (low) and R-1 (middle), respectively. The Long-Term Obligations rating for the Ontario Electricity Financial Corporation is also confirmed at AA (low). The trends on all ratings remain Stable, supported by the Province’s continued adherence to its fiscal recovery plan targets and DBRS’s belief that it is increasingly likely fiscal balance will be restored as planned. Furthermore, a more supportive economic environment and a debt burden that is expected to be nearing its peak will help to limit further erosion in the credit profile. However, given the extended period of fiscal restraint, this raises concerns about the amount of pent-up demand that is building and the Province’s ability to manage these pressures over the medium to longer term.

For the fiscal year ended March 31, 2015, the Province is estimated to have recorded a deficit of $10.9 billion, compared to a budgeted shortfall of $12.5 billion. On a DBRS-adjusted basis, this translates into a shortfall of $15.9 billion, or 2.2% of GDP, and represents modest erosion relative to the prior year, but nevertheless marks the sixth year that Ontario has met or exceeded its fiscal targets. As a result, DBRS-adjusted debt is estimated to have grown by 6.1% − a similar pace to that experienced the prior year and consistent with DBRS’s expectations at the time of last year’s review. This pushed the debt-to-GDP burden up to 43.8%, from 42.8% in 2013–14, and represents the third-highest debt burden among Canadian provinces.

The budget assumes real GDP growth of 2.7% in 2015, followed by 2.4% in 2016, potentially positioning Ontario as one of the provincial growth leaders, but this is dependent on improving business investment and export growth. These projections are just slightly below the current private-sector consensus and, despite a weak first quarter, a strengthening U.S. economy and weaker Canadian dollar are expected to provide support to the forecast.

Ontario’s latest budget forecasts a deficit of $8.5 billion in 2015–16 – a marginal improvement from that projected in last year’s plan. This equates to a DBRS-adjusted shortfall of $11.7 billion, or 1.6% of GDP. Total revenues are projected to grow by 5.2%, which would mark the fastest pace of growth since 2010–11, and reflects an improving economic outlook as well as one-time adjustments which lowered 2014-15 revenues. Expenditure control remains of paramount importance, with DBRS-adjusted spending estimated to grow by just 1.3% in 2015–16. Over the medium term, the fiscal plan calls for a deficit of $4.8 billion in 2016–17, followed by a return to balance in 2017–18, or, on a DBRS-adjusted basis, shortfalls of approximately 1.2% of GDP and 0.6%, respectively. Based on this plan, the debt-to-GDP ratio is expected to reach a peak of 43.9% in 2015–16 and begin declining in the following two years. This is just slightly lower than anticipated in last year’s plan, although the Province has yet to rebuild flexibility to withstand another economic shock or loss of fiscal discipline.

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 methodologies are Rating Canadian Provincial Governments and Rating Agents of the Crown, which can be found on our website under Methodologies.

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