DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Ontario (Ontario or the Province) at AA (low), as well as the Short-Term Debt rating at R-1 (middle). DBRS Morningstar also confirmed Ontario Electricity Financial Corporation’s Long-Term Obligations (bsd. on Prov. Ont.) rating at AA (low). The trends on all ratings are Stable.
The Province released an economic and fiscal update on March 25, 2020, which assumed no growth in real GDP in 2020 and for the budget deficit to increase to $20.5 billion. Since that time, the economic outlook has deteriorated further, with private-sector economists forecasting a sharp contraction in 2020. Nevertheless, the Province's credit profile remains consistent with the AA (low) rating category under DBRS Morningstar's stress scenario. The deterioration in the Province's credit metrics, however, does increase the risk of a negative rating action in the future, particularly if the Province is unable to quickly reduce the budget deficit and slow debt growth.
In the absence of an updated provincial forecast, DBRS Morningstar assumed a meaningful contraction in economic activity for its stress scenario (6.5% real, 4.5% nominal), reflecting a shutdown of nonessential services followed by an extended period of normalization characterized by a slow return to work and ongoing physical distancing requirements.
The added impact of the stress scenario on the Province's 2020–21 budget outlook is limited. The Province's fiscal update already included considerable new spending, a modest reduction in revenue, and $4.8 billion in contingencies and reserves. DBRS Morningstar estimates that the Province's deficit could increase modestly to $22.5 billion, which equates to a DBRS Morningstar-adjusted deficit of $27.3 billion (-3.2% of GDP).
DBRS Morningstar believes the Province's borrowing requirement may rise modestly higher than the budgeted $40.1 billion program, but it is unlikely to see the significant revisions that are now common for many other provinces. While the revenue outlook has weakened, further reductions in revenue are likely to be offset by a smaller capital program and the considerable contingencies and reserves that have been incorporated into the forecast. Moreover, the Province preborrowed $7.6 billion in 2019–20, enabling it to start the year with more than $36.5 billion in its liquidity reserve, which should limit borrowing needs in 2020–21 if the budget outlook deteriorates further.
DBRS Morningstar estimates that the Province's net debt will surpass $380 billion and that the Province's DBRS Morningstar-adjusted debt will approach $405 billion in 2020–21. This equates to a DBRS Morningstar-adjusted debt-to-GDP ratio of about 47.5%, an increase of 5.4 percentage points over the prior year.
The outlook for 2021–22 and subsequent years remains uncertain. DBRS Morningstar believes the government remains committed to balancing the budget but expects the Province will extend its timeline for balancing the budget. DBRS Morningstar's projections suggest that the deficit will remain elevated through the medium term but that the debt-to-GDP rations will begin to fall in 2021–22 with the economic recovery.
A negative rating action could result from the government's failure to reduce budget deficits and stabilize the debt-to-GDP ratio over the medium term. A positive rating action is not contemplated in the current environment.
DBRS Morningstar expects to conduct a subsequent review of the Province's credit profile once the outlook has stabilized and Ontario has provided an updated fiscal and economic outlook. At that time, DBRS Morningstar expects to release its customary rating report.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Canadian Provincial and Territorial Governments (May 15, 2020) and Global Methodology for Government Related Entities (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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