Ontario Outlook Downgraded to Negative
TORONTO – BUSINESS – The new Ontario Liberal Government has been dealt a dose of fiscal reality. Moody’s Investors Service has today changed the outlook on the Province of Ontario’s debt and issuer ratings to negative from stable, and at the same time affirmed the Aa2 ratings. This affects approximately CAD $250 billion in debt securities. Moody’s P-1 rating on Ontario’s commercial paper program remains unchanged.
“The expected path to balance and stabilization of the debt burden, in our opinion, faces greater challenges than before,” noted Michael Yake, Moody’s Vice President and lead analyst for Ontario. Although the province has not yet tabled a new budget following its June election, indications are that it will be little changed from the May budget, which Moody’s indicated was credit negative for the province. “Failure to redress the fiscal challenges would add further pressures to a debt burden that has worsened in recent years,” added Yake.
Ratings Rationale
In a media release, Moody’s states, “The change in the outlook reflects Moody’s assessment of risks surrounding the province’s ability to meet its medium term fiscal targets. After several years of weak to moderate economic growth, and higher than previously anticipated deficits projected for the next two years, the province is facing a greater challenge to return to balanced outcomes than previously anticipated. Although the province has exceeded fiscal targets in recent years, consolidated deficits have shown little change over the period 2011/12-2013/14, averaging -9.9% of revenues”.
The required revenue growth, in an environment of continued slower than average economic growth, and necessary operating expense control to achieve fiscal targets will require a considerable shift from recent trends. The province also continues to face large, ongoing capital expenditures which also places pressure on the province’s fiscal position.
Ontario’s rating benefits from high flexibility of both revenue and expenditure levers providing adequate tools to achieve the desired fiscal outcome should one of these register lower than expected results. However, Moody’s has observed over the course of the past several years that Ontario has been reluctant to fully utilize this flexibility.
WHAT COULD CHANGE THE RATING UP/DOWN
Ontario’s rating could be downgraded if the province fails to provide clear signals of its ability and willingness to implement the required measures to redress the current fiscal pressures. Furthermore, if medium-term debt affordability were to deteriorate due to higher-than-expected increases in debt levels or a significant rise in interest rates, the province’s fiscal flexibility would be reduced, exerting downward pressure on the rating.
The outlook could return to stable if the province demonstrates through concrete measures that it will be able to achieve the very constrained expenditure growth rates and expected revenue growth over the term of its fiscal plan.The Province of Ontario is Canada’s largest province, representing roughly 40% of national GDP. The province’s population measured approximately 13.5 million in 2013.
