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 ratings 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 progress toward restoring fiscal balance and a large, well-diversified economy with an improving, growth outlook; however, because of the notable run-up in debt since the onset of the Great Recession, the Province has yet to restore meaningful flexibility in its credit profile.

Based on preliminary estimates, Ontario reported a deficit of $5.7 billion in 2015-16. After making adjustments to recognize capital expenditures as incurred rather than as amortized and to remove the proceeds from the partial sale of Hydro One, this equates to a DBRS-adjusted shortfall of $11.9 billion, or 1.6% of gross domestic product (GDP), compared with a $13.3 billion deficit anticipated at the time of DBRS’s last review. This marks the seventh straight year that the Province has met or outperformed its budget targets. DBRS-adjusted debt is estimated to have grown by 5.2%. Slower-than-anticipated growth in nominal GDP helped to push the debt-to-GDP ratio up to 44.6% from 44.0% a year earlier.

For 2016-17, a deficit of $4.3 billion is projected, which is a modest improvement from last year. This translates into a DBRS-adjusted shortfall of $10.0 billion, or 1.3% of GDP. The medium-term plan shows that Ontario remains on track to restore fiscal balance in 2017-18 and remain in balance in 2018-19. In DBRS’s view, this will require ongoing discipline as years of fiscal restraint have likely led to pent-up expenditure pressures. On a DBRS-adjusted basis, the plan suggests modest deficits of less than 1.0% of GDP each year. As a result, the debt-to-GDP ratio is expected to have peaked in 2015-16 and will begin to slowly trend downward, approaching 42.0% of GDP by 2018-19.

Supported by expectations of moderate U.S. economic growth, accommodative monetary policy, low oil prices and a weaker Canadian dollar, the Province projects real GDP growth of 2.2% in 2016 and 2.4% in 2017. These estimates appear conservative compared with the current private-sector consensus tracked by DBRS, which has seen upward revisions over the past two months and points to real growth of 2.7% and 2.5% in 2016 and 2017, respectively.

A positive rating action appears highly unlikely over the medium term as it would require improvements in fiscal performance on a sustained basis to reduce debt to a level more commensurate with the AA-range rating. Alternatively, although not anticipated by DBRS in the current environment, a negative rating action could result from a relaxation in fiscal discipline or an unforeseen economic shock that leads to deteriorating fiscal performance and rising debt.

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 Canadian Provincial 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.

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