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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt rating of the Province of Québec (the Province) at A (high) and the Short-Term Debt rating at R-1 (middle). 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, as the Province has a track record of strong fiscal management and is now taking advantage of economic momentum to provide additional tax relief, increase spending in priority areas and continue to reduce debt. Although encouraging, this momentum will need to be sustained over the medium term to tackle Québec’s significant debt burden – still the largest as a share of gross domestic product (GDP) in the country.

For 2016–17, Québec is projecting a surplus of $250.0 million after $2.0 billion in contributions to the Generations Fund for debt retirement. On a DBRS-adjusted basis (including capital expenditures as incurred rather than as amortized), this equates to a better-than-expected deficit of $1.8 billion, or a modest 0.5% of GDP. As a result, Québec’s debt burden declined to 59.3% of GDP from 60.1% in 2015-16, marking the lowest level since the onset of the last recession.

The Province continues to target a balanced budget for 2017–18 which, on a DBRS-adjusted basis, would result in a deficit of 0.5% of GDP. The stable economic outlook and track record of responsible fiscal management have provided Québec with the flexibility to introduce additional tax relief while still aiming for balanced budgets through 2021-22, after incorporating rising contributions to the Generations Fund. This is likely to result in small DBRS-adjusted surpluses by the final two years of the plan (2020-21 and 2021-22) provided that capital spending declines as presented and economic growth is not interupted. As such, DBRS-adjusted debt is estimated to remain firmly on a downward trend, potentially approaching 54% by 2021-22. Given the Province’s recent track record of exceeding expectations, DBRS believes there is potential that the debt burden could track even lower.

Following a strong finish to 2016, the provincial economy is expected to maintain momentum in 2017, with real GDP growth of 1.7% and 1.6% assumed in the budget for 2017 and 2018, which now appears conservative relative to the private-sector consensus tracked by DBRS. Continued strength in the labour market, with unemployment at historic lows, should further support strong household consumption, while the low Canadian dollar and sound growth outlook for both Canada and the United States bode well for Québec’s exports. However, the likelihood of delayed tax reform and infrastructure spending in the United States and threat of restrictive trade policies, present downside risks in the near term.

RATING DRIVERS:
While not anticipated in the near term, a positive rating action will be dependent on sustained fiscal discipline and a material reduction in debt. Conversely, 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 principal methodologies are Rating Canadian Provincial Governments and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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