DBRS Changes Trend on Province of Québec to Positive, Confirms Ratings at A (high) and R-1 (middle)

DBRS Limited (DBRS) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Québec (Québec or the Province) at A (high) as well as its Short-Term Debt rating at R-1 (middle). Concurrently, DBRS confirmed the Guaranteed Long-Term Debt and Commercial Paper ratings of Hydro-Québec at A (high) and R-1 (middle), respectively, as well as the Long-Term Debt and Short-Term Debt ratings of Financement-Québec at A (high) and R-1 (middle), respectively. In addition, DBRS changed the trends on the Issuer Rating and all long-term ratings to Positive from Stable and maintained the Stable trends on all short-term ratings.

Québec’s credit profile has steadily improved in recent years with the commitment of successive governments to addressing budget imbalances, reducing the debt burden and improving the Province’s economic potential. At the time of its last review, DBRS indicated that policy continuity and a supportive economic backdrop could have positive implications for Québec’s ratings; the Positive trend reflects these conditions being met.

With the election of the Coalition Avenir Québec (CAQ) government in October 2018, the direction of fiscal and economic policy remains fundamentally unchanged. DBRS is confident that the Province will continue to report positive operating results, which will lead to a further decline in Québec’s debt burden and improved fiscal flexibility.

Based on preliminary results reported in the 2019–20 budget, Québec recorded a surplus of $5.6 billion (before contributions to the Generations Fund) in 2018–19, representing a marked improvement from initial expectations. On a DBRS-adjusted basis, this represents a balanced budget and DBRS expects results to be even better when public accounts are released.

The 2019–20 budget is the first to be tabled by the CAQ government, led by François Legault, since assuming office in October 2018. The fundamental direction of fiscal policy is unchanged. The Province remains committed to a pro-growth agenda, sustainable public finances and meaningful debt reduction. Québec is in an enviable position as past efforts to address budget imbalances, strong growth in federal transfers and solid economic activity now provide the government with ample flexibility to pursue a range of new policy measures without jeopardizing the Province’s long-term fiscal policy goals. For 2019–20, the Province projects a surplus of $2.5 billion (before contributions to the Generations Fund). On a DBRS-adjusted basis, including capital investment, this equates to a deficit of $3.2 billion or 0.7% of gross domestic product (GDP).

Over the medium term, the Province projects surpluses (before contributions to the Generations Fund) ranging between $2.7 billion and $4.0 billion between 2020–21 and 2023–24, equating to DBRS-adjusted deficits of less than 1.0% of GDP. The plan is based on revenues growing in line with economic activity at 3.1% annually between 2020–21 and 2023–24 while expenditure growth is forecast to average 2.7% annually over the same period. The budget forecast suggests that the DBRS-adjusted debt-to-GDP ratio will trend steadily lower, potentially reaching 46.0% by 2023–24, down from almost 59.0% in 2014–15. Given Québec’s history of budget outperformance and the high likelihood that the capital budget will be underspent, the debt-to-GDP ratio could fall faster. While the debt burden remains high for the assigned ratings, this is mitigated by a diverse and growing economy combined with strong fiscal management. Additionally, the pace of debt reduction continues to exceed DBRS’s expectations.

Economic growth is expected to moderate through 2019 and 2020 to 1.8% and 1.5%, respectively, as the provincial economy is at or near full capacity. As in much of the country, growth in consumption and residential investment are slowing and business investment is accelerating while trade remains resilient. Over the medium term, real GDP growth is forecast to average 1.3% from 2021 through 2023 and will largely be dependent on productivity improvements and, to a lesser extent, employment gains from increased labour participation among older workers and new immigrants. The economic outlook remains susceptible to downside risks, including ongoing global trade tensions, Brexit, commodity-price uncertainty and the monetary policy outlook.

RATING DRIVERS
Provided that fiscal management and overall performance remain consistent with DBRS’s expectations, an upgrade of the Issuer Rating and long-term ratings is likely within the next 12 months. Alternatively, the trend on the long-term ratings could be restored to Stable if fiscal management and/or economic conditions significantly weaken, leading to a materially higher debt burden.

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

The principal methodologies are Rating Canadian Provincial and Territorial Governments and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

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.

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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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