Thursday, October 29, 2009

DBRS Downgrades Province of Ontario to AA (low) and R-1 (middle) on Continued Fiscal Erosion

DBRS has downgraded the long-term rating of the Province of Ontario (the Province or Ontario) to AA (low) from AA as a result of the considerable erosion reported today in the Province’s already depressed debt and fiscal outlooks. While the trend on the short-term rating was held Stable when the long-term trend was revised to Negative last June, DBRS has also downgraded the short-term rating to R-1 (middle) due to the extent of the deficits now foreseen for the next three years and the pressure this is expected to place on the borrowing program, which will require a much greater use of short-term debt. The long-term ratings of the Ontario School Boards Financing Corporation, Ontario Power Authority, University Health Network, MaRS Development Trust and the Ontario Electricity Financial Corporation are also being downgraded by one notch given their strong ties to the Province. All trends are now Stable.

Based on the Q2 2009 update, the Province is now looking at a deficit of nearly $32 billion or 5.6% of GDP for this year on a DBRS-adjusted basis (including capital expenditures on a pay-as-you-go basis rather than as amortized), up 50% from the forecast available at the time of the budget. This also marks a notable deterioration from the Q1 2009 update released last June, which captured the effect of the auto sector bailout and rapidly declining tax revenues and led DBRS to change its trend on the long-term rating to Negative from Stable. The latest revisions are primarily the result of dampening tax collection due in part to the ongoing recession, and increased pressure on social program spending. Faced with a weaker-than-expected tax base, the Province has also trimmed its medium-term outlook, with DBRS-adjusted shortfalls of $27 billion to $30 billion now expected for the next two years, up from previous estimates of $17 billion to $21 billion.

Total debt as measured by DBRS is now projected to increase by 22% in 2009-2010 alone, and by 11% to 14% over the following two fiscal years. This will in turn boost Ontario’s debt-to-GDP-ratio from 29% at March 31, 2009, to approximately 37% by fiscal year-end, the third-highest level of all provinces, and to a peak as high as 43% by 2011-2012, well in excess of the level recorded at the onset of the early 1990s recession.

DBRS continues to take comfort in the scale and diversification of the provincial economy and expects Ontario to eventually regain its place among the provincial growth leaders. However, the uncertain pace of the global economic recovery still points to downside risk for the rest of the fiscal year, especially for Ontario given the adverse effect the strong Canadian dollar has on its large manufacturing base. More importantly, the limited success at containing in-year expenditure pressure raises considerable doubt about the Province’s fiscal resolve and ability to return to balance by 2015-16, as projected in the spring budget. Furthermore, the poor performance foreseen for the years to come will boost the debt burden to the highest level on record. As such, in the absence of notable tax increases or a meaningful effort to rein in expenditures, restoring the debt burden to the level enjoyed by the Province prior to the downturn could take more than a decade.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.

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