DBRS Limited (DBRS) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Ontario (Ontario or the Province) at AA (low) as well as its Short-Term Debt rating at R-1 (middle). DBRS also confirmed Ontario Electricity Financial Corporation’s Long-Term Obligations rating at AA (low). The trends on all ratings are Stable. The ratings are supported by the Province’s diverse and growing economy, effective debt and liquidity management practices as well as the improving direction of fiscal policy.
In June 2018, the Progressive Conservative party assumed power in the Province after 15 years in opposition. With the change in government, the direction of fiscal policy changed considerably. Following a period of rapid spending growth and more than a decade of deficit spending, the new government committed to balancing the budget through spending restraint and fundamental public-sector reforms. The new government also pledged to reduce the provincial debt-to-gross domestic product (GDP) ratio, lower provincial taxes as well as pursue regulatory reduction and other measures to support business investment and job creation.
The change in fiscal policy direction is clearly positive from a credit perspective and there appears to be a genuine and credible commitment to addressing the Province’s budget imbalances and gradually reduce the debt burden. The outlook, however, is not without challenge or risk. Ontario put forward a five-year plan to balance the budget that will require significant program changes and a much slower pace of spending growth, which may be difficult to sustain, particularly if economic growth moderates or if opposition to public-sector reforms emerge ahead of the next provincial election, which is expected in 2022. In addition, there is further risk that economic conditions could deteriorate, exacerbating the Province’s deficit-reduction efforts.
The 2019 budget projects a deficit of $10.3 billion for 2019–2020, which equates to a DBRS-adjusted shortfall of $15.6 billion or 1.8% of GDP. The budget projects modest revenue growth (+2.3%) and declining expenditures (-0.3%) on a DBRS-adjusted basis. The modest revenue growth reflects the impact of recent policy measures while the decline in expenditures reflects broad-based restraint in program spending and a modest reduction in planned capex. The budget incorporates significant reserves and contingencies and efforts are underway to identify further savings and efficiencies. As such, DBRS expects that the Ontario government will likely outperform its budget targets if economic conditions remain supportive.
The Province’s debt burden rose significantly over the past decade with persistent deficit spending and ongoing capital investment. The DBRS-adjusted debt-to-GDP ratio rose to an estimated 43.5% of GDP at March 31, 2019, from under 25.0% before the financial crisis. The multi-year outlook suggests that the debt-to-GDP ratio will decline gradually over the forecast horizon, falling to about 39.0% of GDP in 2023–2024, provided that economic conditions remain supportive.
Ontario’s economy has performed well in recent years. Economic growth has been relatively broad based with gains in consumption, investment and trade supported by the improving global economy, low interest rates and strong population growth. With the economy currently at or near full employment, growth is moderating to a more sustainable pace partly as a result of a slowdown in growth of consumer spending and housing-market activity. The Province projects real GDP growth of 1.4% in 2019 and expects growth to return to its longer-term trend potential thereafter (1.5% to 2.0% annually).
DBRS expects the ratings to remain stable through the medium term. DBRS could downgrade the Province’s ratings if debt rises sharply because of a downturn in the economy or a significant deterioration in the budgetary outlook. DBRS could upgrade the Province’s ratings if Ontario addresses its structural budget deficit and reduces the debt-to-GDP ratio to below 35%.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Canadian Provincial and Territorial Governments and Global Methodology for Government Related Entities, which can be found on dbrs.com under Methodologies & Criteria.
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