Commentary

2025 Canadian Provincial Ratings Outlook

Sovereigns, Sub-Sovereign Governments

Summary

The credit quality of Canadian provinces remains strong and resilient. Over the past 12 months, Morningstar DBRS upgraded the long- and short-term ratings on the Province of Ontario and changed the trends back to Stable from Positive. All other provincial ratings were confirmed with Stable trends. Under the weight of higher interest rates, economic growth has been lacklustre in 2024. As a result, fiscal improvement has largely stalled or taken a step backwards in some cases; however, provincial debt-to-GDP remains largely in check, helped by material upward revisions to historical GDP.

"Looking ahead to 2025, we see little prospect of ratings improvement, while downside may be increasing for some," said Travis Shaw, Senior Vice President, Public Finance, Global Sovereign Ratings. "A further easing in monetary policy is expected to provide a boost to domestic economic activity, although changes to federal immigration policy and the threat of more restrictive trade policy cloud the outlook. Political uncertainty remains heightened in Canada with a federal election required by the fourth quarter, if not earlier, and the potential for an early election in Canada's most populous province, Ontario."

Key highlights from this commentary include:

-- We expect provincial ratings to remain largely stable, though some downside is possible.
-- The Canadian economy is poised to strengthen in 2025, although changes to immigration policy and the threat of tariffs present headwinds.
-- Only two provinces are showing in-year fiscal improvement with many opting to provide various forms of tax relief.
-- The political landscape in Canada is changing following recent provincial elections, with more on the horizon.

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