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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of Québec (the Province) at A (high), along with its Long-Term Debt and Short-Term Debt at A (high) and R-1 (middle), respectively. Concurrently, the Guaranteed Long-Term Debt and Commercial Paper ratings of Hydro-Québec are confirmed at A (high) and R-1 (middle), respectively, and the Long-Term Debt and Short-Term Debt ratings of Financement-Québec are confirmed at A (high) and R-1 (middle), respectively.

All trends remain Stable, supported by the Province’s prudent fiscal management, which is helping to restore fiscal balance, and a debt burden that appears to have peaked. Despite this progress, Québec’s debt burden remains considerably higher than that of other provinces, leaving the Province vulnerable to a negative economic shock with limited flexibility to mitigate further fiscal pressures, given the considerable efforts already undertaken.

For the year ending March 31, 2015, preliminary estimates indicate that the Province’s fiscal plan remains on track with a deficit of $2.4 billion anticipated, after contributions to the Generations Fund. On a DBRS-adjusted basis (including capital expenditures as incurred, rather than as amortized), this equates to a shortfall of approximately $6.7 billion, or 1.8% of GDP. As a result, debt is estimated to have grown by 4.8%, pushing the debt-to-GDP ratio to 61.8%, up from 61.0% in 2013–14.

After experiencing only mild growth in 2014, the budget is based on an acceleration in real GDP growth to 2.0% in both 2015 and 2016. This compares to the current private sector consensus tracked by DBRS of 1.8% and 2.1% growth in 2015 and 2016, respectively. A strengthening U.S. economy and weaker Canadian dollar should be supportive of improved trade, while lower fuel prices and recently enacted federal personal income tax cuts are favourable for domestic consumption. However, the Province’s growth forecast is based on a pickup in non-residential investment, which presents downside risks to the forecast should it continue to disappoint.

Québec introduced its 2015–16 budget on March 26, 2015, which is consistent with its fiscal plan presented last June. The government continues to emphasize efforts to constrain spending while also moving forward with a plan to gradually reduce taxes for individuals and businesses, but only after fiscal balance is restored, to help stimulate investment and job creation. For 2015–16, the budget points to a balanced position which translates into a DBRS-adjusted shortfall of $3.6 billion, or 0.9% of GDP. Looking ahead, the budget points to the continuation of a balanced fiscal position through 2019–20. This translates into DBRS-adjusted deficits of less than 1.0% of GDP. Based on these projections, it now appears that the Province’s debt-to-GDP ratio has reached a peak and is expected to gradually trend downward over the medium term, as nominal GDP growth is expected to be sufficient to more than offset modest growth in debt. DBRS recognizes the sound fiscal progress made thus far and notes that the Province’s disciplined fiscal management provides comfort that these targets can be met, provided the economy remains supportive.

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 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.