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

DBRS Limited (DBRS) 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. The Province’s track record of strong fiscal management is allowing the government to take advantage of economic momentum to provide additional tax relief, increase spending in priority areas and maintain its focus on debt reduction. While rising trade protectionism and an upcoming provincial election present near-term uncertainties for Québec’s economic and fiscal outlook, sustained fiscal discipline and continued improvement in debt metrics will be positive for the credit profile.

For the fiscal year ending March 31, 2018, the Province is reporting a surplus of $3.1 billion (before contributions to the Generations Fund), representing a modest improvement from budget expectations. On a DBRS-adjusted basis (including capital expenditures as incurred rather than as amortized), this equates to a shortfall of $1.3 billion, or just 0.3% of GDP. As a share of GDP, the debt burden is estimated to have declined to 53.8% at March 31, 2018, down from 55.8% a year earlier.

The 2018 budget continues the Liberal government’s multi-year effort aimed at reducing the relatively high tax burden and making broad-based investments in priority areas, while ensuring these measures remain affordable within the context of the overall fiscal plan. For 2018–19, a surplus of $904 million is projected before contributions to the Generations Fund and use of the stabilization reserve. On a DBRS-adjusted basis, this equates to a shortfall of $3.8 billion, or 0.9% of GDP. Over the medium term, the plan points to deficits (DBRS-adjusted) ranging from 0.6% of GDP in 2019–20 to a near-balanced position in 2022–23. As a result, debt-to-GDP is forecast to decline steadily, potentially falling below 50% by 2022–23.

Economic growth is expected to moderate through 2018 and 2019 to 2.1% and 1.7%, respectively, as the contribution from household consumption begins to subside and residential investment comes off record highs. Business investment is expected to continue rising strongly amid high levels of confidence and the strength of domestic and foreign demand. However, DBRS notes that the economy is now nine years into the expansion and there are downside risks, including increasing trade protectionism and rising interest rates.

RATING DRIVERS:
At present, debt remains high for the current rating level, but provided that the political commitment to debt reduction remains strong following the upcoming election, combined with ongoing fiscal discipline and a supportive economic backdrop, this could have positive implications for the Issuer Rating and Long-Term Debt rating over the medium term. A negative rating action is unlikely, but 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 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.

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 no longer 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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