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 are Stable, supported by the continuation of sound fiscal performance, a gradually improving albeit still modest economic growth outlook, and expectations that Québec’s debt burden is now on a downward trend. However, Québec’s debt burden remains high for the current ratings, leaving the Province vulnerable to a negative economic shock with potentially limited flexibility to raise taxes or further constrain spending, if required.

For 2015–16, preliminary results point to a balanced fiscal position after $1.4 billion in 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 $3.2 billion, or 0.8% of GDP – a favourable outcome in relation to many provincial peers, especially in light of disappointing economic growth in 2015. As a result, debt growth was relatively modest, which helped to reduce the debt-to-GDP ratio to 61.7%, down from 61.9% a year earlier.

Québec continues to demonstrate responsible fiscal management, as the 2016–17 budget targets a balanced fiscal result for the third consecutive year. This has allowed the Province to move forward with modest tax relief and enact some targeted investments, while continuing to emphasize fiscal sustainability. On a DBRS-adjusted basis, a shortfall of $2.4 billion is anticipated in 2016–17, or just 0.6% of GDP, followed by very modest deficits before slowly moving to balance by the end of the fiscal planning horizon in 2020–21. This should contribute to a gradually declining debt burden, potentially falling below 60% (DBRS-adjusted) of GDP by 2018–19.

Real GDP is budgeted to rise by 1.5% and 1.6% in 2016 and 2017, respectively. This appears to be slightly below the current private sector consensus tracked by DBRS, and is dependent on steady growth in exports and consumption. Should global growth soften, or business investment prove more subdued, they would present key downside risks to the provincial forecast.

A positive rating action appears highly unlikely in the near term, as it would require sustained fiscal discipline and a material reduction in debt to a level more commensurate with a AA-range rating. While not anticipated in the current environment, a negative action could result from an unforeseen economic shock that leads to a material deterioration in 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 DBRS Criteria: Guarantees and Other Forms of Support, which can be found on our website under Methodologies.

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