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

DBRS Limited (DBRS) confirmed the Issuer Rating, Long-Term Debt rating and Short-Term Debt rating of the Province of Ontario (Ontario or the Province) at AA (low), AA (low) and R-1 (middle), respectively. DBRS has also confirmed Ontario Electricity Financial Corporation’s Long-Term Obligations (bsd. on Prov. Ont.) rating at AA (low). The trends on all ratings are Stable.

The Province accomplished its long-sought goal of balancing the provincial budget in 2017–18, achieving a modest surplus of $642 million. On a DBRS-adjusted basis, recognizing capital investment on a pay-as-you-go basis, this equated to a deficit of $4.4 billion, or 0.5% of gross domestic product (GDP).

In March 2018, the Liberal government tabled a pre-election budget in which the government abandoned its commitment to balanced budgets and reducing the debt-to-GDP ratio. The budget proposed $20.3 billion in new initiatives over a three-year period. In the absence of substantive offsetting revenue measures to pay for the new initiatives, the Province is planning to incur deficits ranging between $6.5 billion and $6.7 billion over the period. This equates to DBRS-adjusted deficits ranging between $10.5 billion and $13.0 billion, or 1.2% to 1.4% of GDP. The budget plan suggests a return to balance would occur in the mid-2020s, providing the economic expansion continued unabated and expense growth can be constrained.

The policy shift clearly demonstrates the elected government is no longer committed to disciplined fiscal policy. Rather than shifting to a neutral or conservative fiscal policy stance and rebuilding budget and balance sheet flexibility, the government proposed to pursue expansionary fiscal policy potentially near the peak of the business cycle when the economy is already at or near full capacity.

If the budget plan is implemented as proposed, DBRS-adjusted debt will likely stabilize around 43.0% of GDP over the medium term. While halting the improvement in the debt-to-GDP ratio, the outlook is not inconsistent with the AA (low) ratings. However, the policy shift increases the risk that the Province’s ratings may come under pressure in the future. In past recessions, budgetary results have weakened and the debt-to-GDP ratio has increased sharply. If such circumstances were to materialize, Ontario’s ratings could be adversely affected.

At this time, the outlook for budgetary results and debt is uncertain and will depend on the outcome of the June 7, 2018, provincial election. DBRS understands that the Province will seek to pass the budget before the writ of election is issued; however, implementation of the substantive budget measures will not occur unless the Liberal government returns to office. Current polls suggest a change in government is possible. The direction of fiscal policy under an alternative government is not clear at this time.

DBRS expects the ratings to remain stable in the near term. A downgrade could occur if debt were to rise sharply because of a downturn in the economy or a deterioration in the budgetary outlook beyond what is already proposed in the 2018 budget. An upgrade could occur if there was a significant reduction in the provincial debt burden to a level commensurate with the AA-range ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Canadian Provincial Governments and Rating Canadian Provincial Agents of the Crown, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.