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

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Long-Term Debt credit rating of the Province of Québec (Québec or the Province) at AA (low) as well as its Short-Term Debt credit rating at R-1 (middle). Concurrently, Morningstar DBRS confirmed the Guaranteed Long-Term Debt and Commercial Paper credit ratings of Hydro-Québec at AA (low) and R-1 (middle), respectively, as well as the Long-Term Debt and Short-Term Debt credit ratings of Financement-Québec at AA (low) and R-1 (middle), respectively. The trend on all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
Québec released its 2024 budget on March 12, 2024, and is forecasting a budget deficit of $11.0 billion for 2024-25 (including deposits into the Generations Fund) versus a deficit of $6.3 billion in the prior year. On an adjusted basis, this equates to a shortfall of $15.5 billion, or 2.6% of GDP, after adjusting for capital spending as incurred and assuming the contingency reserve is not needed. The financial framework includes an annual contingency reserve of $1.5 billion beginning in 2024-25 for five years to offset any unexpected declines in economic activity. The Province plans to review its tax and budgetary expenditures in spring 2024. The outcome of this review will guide the Province's 2025-26 budget as well as a longer-term plan to restore fiscal balance no later than 2029-30 (including deposits into the Generations Fund). Previously, Québec anticipated a return to balance in 2027-28. This subdued outlook will somewhat reduce flexibility within the current credit ratings; however, the Province maintains the ability to respond to challenges that may arise should growth prove to be weaker than anticipated.

The pace of debt reduction continues to slow relative to previous expectations as a result of deficits and significant investments in public infrastructure. On a Morningstar DBRS-adjusted basis, we expect the debt-to-GDP ratio to hover between 47% and 48% from 2024-25 through 2028-29. Québec has reaffirmed its commitment toward its debt reduction objective from Budget 2023 that aims to reduce the net debt-to-GDP ratio to 30% by 2037-38.

For 2023, Québec estimates that real GDP was stagnant, versus growth of 2.5% in the previous year, as a result of temporary weakness in a few sectors. Québec expects economic growth to be modest, forecasting real GDP growth of 0.6% for 2024, followed by 1.6% real GDP growth in 2025. The evolution of inflation and interest rates along with global geopolitical tensions and commodity price volatility present downside risks to the outlook.

CREDIT RATING DRIVERS
A positive credit rating action is dependent on improvement in critical credit rating factors or sustained improvement in financial risk factors.

A combination of a material erosion in economic fundamentals, sustained large operating deficits, and a significant increase in the debt-to-GDP ratio could result in a negative credit rating action.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

CRITICAL RISK FACTORS (CRFs) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of CRFs
In the analysis of Québec, the CRFs are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Québec, the BRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the CRFs and the FRA
In the analysis of Québec, the CRFs carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Rating Canadian Provincial and Territorial Governments (April 15, 2024),
https://dbrs.morningstar.com/research/431208

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

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

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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