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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Long-Term Debt rating of the Province of Ontario (Ontario or the Province) at AA (low) as well as the Short-Term Debt rating at R-1 (middle). DBRS Morningstar also confirmed Ontario Electricity Financial Corporation’s Long-Term Obligations (based on the Province's) rating at AA (low). All trends are Stable.

The Province released its 2021 budget on March 24, 2021. The near-term fiscal outlook remains largely consistent with the budget presented in November 2020 and the 2021 budget now presents an initial path back to balance—albeit a lengthy one subject to a lot of uncertainty. While the fiscal recovery plan is somewhat lacking in ambition, the underlying economic assumptions appear conservative, leaving room for outperformance. As promised, the Province announced new fiscal anchors, which entail holding net debt-to-GDP below 50.5% and slowing growth in net debt-to-revenue and interest on debt-to-revenue.

For 2021–22, the Province is forecasting a shortfall of $33.1 billion, down from $38.5 billion in 2020–21. On a DBRS Morningstar-adjusted basis, this translates to a deficit of $38.8 billion, or 4.3% of GDP. DBRS Morningstar makes adjustments to recognize capital spending as incurred, rather than as amortized, and assume a modest amount of capital underspending.

Over the medium term, deficits of $27.7 billion and $20.2 billion are anticipated for 2022–23 and 2023–24, respectively. On a DBRS Morningstar-adjusted basis, these equate to deficits of 3.5% of GDP and 2.6% of GDP, respectively. An eventual return to balance is not anticipated until 2029–30, although, given the heightened level of uncertainty, this is likely to be revised.

Consistent with the November 2020 budget, Ontario's debt and debt-to-GDP ratio are set to rise sharply. On a DBRS Morningstar-adjusted basis, debt-to-GDP is projected to reach 51.2% by 2023–24, at which point it should start to stabilize. This is substantially above the levels reported prior to the 2008–09 financial crisis but roughly consistent with DBRS Morningstar's expectations last fall.

The Province projects net debt-to-GDP to rise to 50.2% by 2023–24. Ontario has established a target of keeping net debt-to-GDP below 50.5%. This leaves little room to manoeuvre, but conservative economic assumptions and ongoing budget prudence may provide a little breathing room.

Looking ahead, the Province has assumed real GDP growth of 4.0% and 4.3% in 2021 and 2022, respectively. This appears conservative in relation to the current private-sector consensus, which has been buoyed by stronger growth expectations for Canada as a whole as well as the United States.

RATING DRIVERS
A negative rating action could result from the government's failure to reduce budget deficits over the medium term and to stabilize the debt-to-GDP ratio within DBRS Morningstar's expectations as outlined above. A positive rating action is not contemplated in the current environment.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Canadian Provincial and Territorial Governments (May 3, 2021; https://www.dbrsmorningstar.com/research/377881) and Global Methodology for Government Related Entities (March 8, 2021; https://www.dbrsmorningstar.com/research/374948), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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