DBRS Morningstar Maintains Positive Trend on the Province of Ontario and Confirms Ratings at AA (low)

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) and the Short-Term Debt rating at R-1 (middle). DBRS Morningstar also confirmed the Ontario Electricity Financial Corporation’s Long-Term Obligations rating at AA (low) (based on the Province's rating). The trends on all ratings remain Positive.

The provincial economy demonstrated resilience through the first half of the year, although momentum appears to be slowing. With lower growth expectations, modest deterioration in the fiscal outlook relative to the spring budget is anticipated, nevertheless, this slowdown is expected to be temporary and DBRS Morningstar believes that the trend of improving fiscal performance will remain intact over the medium term, which supports the Positive trends.

Based on Ontario's fall economic statement, the Province now projects a deficit of $5.6 billion in 2023–24 compared with a shortfall of $1.3 billion anticipated in the spring budget. Despite generally stronger-than-anticipated real GDP growth for 2023, tax revenues have been revised lower while expenses have been revised higher—mainly to top up the contingency fund. The planned return to balance has been delayed a year with the Province anticipating a further deficit of $5.3 billion in 2024–25 followed by a small surplus in 2025–26. On a DBRS Morningstar-adjusted basis, after including capital expenditures (capex) as incurred rather than as amortized and assuming some modest capex underspending, this equates to DBRS Morningstar-adjusted deficits of 1.5% of GDP or less over the forecast horizon.

Ontario's debt-to-GDP ratio continues to show improvement, although the pace is slowing. Based on the fall economic statement, Ontario's debt-to-GDP ratio is estimated to fall to roughly 39.0% (DBRS Morningstar-adjusted) by 2025–26 from 40.8% at March 31, 2023. Despite ongoing economic uncertainty, DBRS Morningstar believes that Ontario's track record of budgetary outperformance, combined with the ongoing use of conservative assumptions, could lead to an even faster decline in the debt-to-GDP ratio, which supports the Positive trends.

For 2023, Ontario now projects real GDP growth of 1.1% (higher than the 0.2% budget projection), supported by stronger-than-anticipated exports and resilient consumer spending. Economic growth is expected to slow in 2024 as global economic conditions remain challenging. The Province is forecasting real GDP growth of just 0.5% for 2024, before rebounding to 2.0% and 2.8% in 2025 and 2026, respectively.

RATING DRIVERS
DBRS Morningstar will look to resolve the Positive trends within the next 12 months. Provided the Province continues to demonstrate prudent fiscal discipline and the outlook for key financial risk metrics does not materially deteriorate, DBRS Morningstar could upgrade the ratings by one notch. DBRS Morningstar could change the trends to Stable should there be a deterioration in one or more critical rating factors or a material deterioration in financial risk metrics such that DBRS Morningstar has reduced confidence that the debt-to-GDP ratio will remain on a downward trend.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
Rating Canadian Provincial and Territorial Governments (https://www.dbrsmorningstar.com/research/413265; April 28, 2023).

The following methodology has also been applied:
Global Methodology for Government Related Entities (https://www.dbrsmorningstar.com/research/410361; February 28, 2023).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

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

This is a solicited credit rating.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: YES

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

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Travis Shaw, Senior Vice President, Credit Ratings – Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Managing Director, Credit Ratings – Global Fundamental Ratings
Initial Rating Date: May 15, 1987

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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