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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of Ontario (Ontario or the Province) at AA (low), along with its Long-Term Debt and Short-Term Debt ratings at AA (low) and R-1 (middle), respectively. Ontario Electricity Financial Corporation’s Long-Term Obligations rating is also confirmed at AA (low). The trends on all ratings are Stable. The ratings remain well supported by the Province’s large and diversified economy, improving budgetary results and declining debt burden.

In 2015–16, the deficit narrowed to $1.5 billion, which was well ahead of expectations at the time the budget was presented. On a DBRS-adjusted basis, recognizing capital spending on a pay-as-you-go basis, this equates to a deficit of $5.2 billion, or 0.6% of gross domestic product (GDP). The better-than-expected result stemmed from strength in the underlying economy, which provided incremental revenue more than sufficient to offset the moderate in-year spending pressures.

The Province tabled a balanced budget for 2017–18, which anticipates relatively strong growth in revenue, enabling the Province to boost spending while balancing the budget. With underlying economic momentum driving revenue growth, the Province is now in a position to implement various policy priorities and ease some of the constraints that have been pervasive in government ahead of the June 2018 election.

Over the medium term, the Province intends to maintain balanced budgets, with rising revenues being redirected into program spending and a growing capital plan. Debt growth has slowed with the return to balance, which is leading to a gradual decline in the debt-to-GDP ratio. DBRS projects that the debt burden, currently at 43.3%, will approach 40.0% of GDP over the medium term. While the outlook is positive, the debt burden will remain elevated and leave the credit profile vulnerable to an economic shock.

The Ontario economy has performed well in recent years, and this momentum is expected to continue through 2017 and into the coming years. The Province projected real growth of 2.3% for 2017, and initial indications suggest growth may be on track to outpace budget expectations. While the outlook remains positive, there are risk factors to note, the most significant of which relate to uncertain U.S. trade and tax policies and the vulnerability of Ontario households from elevated housing prices and household indebtedness.

At this time, DBRS expects the ratings to remain Stable. Changes in Ontario’s credit profile tend to be gradual because of the diverse economy and revenue base. Nevertheless, a downgrade could occur if debt were to rise sharply because of a downturn in the economy or a change in the government’s fiscal policies. In contrast, an upgrade would require a significant reduction in the provincial debt burden to a level commensurate with the AA-range rating.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Canadian Provincial Governments and Rating Canadian Provincial Agents of the Crown, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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