PrefBlog

There’s a bit of cheerful news in the fiscal wasteland:

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Long-Term Debt rating of the Province of Ontario (Ontario or the Province) at AA (low) and the Short-Term Debt rating at R-1 (middle). DBRS Morningstar also confirmed the Ontario Electricity Financial Corporation’s (OEFC) Long-Term Obligations rating at AA (low) (based on the Province’s rating). Concurrently, DBRS Morningstar changed the trends on all ratings to Positive from Stable.

The Positive trends reflect DBRS Morningstar’s assessment that Ontario’s fiscal management has improved. Despite economic headwinds, DBRS Morningstar has increased confidence that Ontario’s improved fiscal outlook can be sustained. Stronger-than-anticipated revenue growth has been allowed to flow to the bottom line, while increased program spending is, in part, being offset by a lapse in temporary Coronavirus Disease (COVID-19) supports and other one-time measures.

Ontario’s fiscal outlook continues to improve relative to prior expectations. For 2023–24, Ontario forecasts a budget deficit of $1.3 billion, after incorporating a $1.0 billion reserve. Should the reserve be unnecessary, the budget is essentially balanced. The Province then anticipates small surpluses in 2024–25 and 2025–26. On a DBRS Morningstar-adjusted basis, after including capital expenditures (capex) as incurred rather than as amortized and assuming some modest capex underspending, this equates to DBRS Morningstar-adjusted deficits of 1.0% of GDP or less over the forecast horizon.

Ontario’s debt outlook is expected to show steady improvement, provided the economy remains resilient and fiscal targets are met. On a DBRS Morningstar-adjusted basis, the debt-to-GDP ratio is estimated to fall to roughly 37.0% by 2025–26. Despite ongoing economic uncertainty, DBRS Morningstar believes that Ontario’s track record of budgetary outperformance, combined with the ongoing use of conservative assumptions, could lead to an even faster decline in the debt-to-GDP ratio, which supports the Positive trends.

Economic growth is expected to slow in Ontario as global economic conditions deteriorate in response to central bank efforts to raise policy rates and curb inflation. The Province is forecasting real GDP growth of just 0.2% for 2023, which appears conservative in relation to the current private-sector consensus. Real GDP growth is then forecast to rebound to 1.3% in 2024. Recent financial market instability and deteriorating credit conditions present downside risks to the outlook, while the evolving outlook for inflation and interest rates along with global geopolitical tensions present further uncertainty.

RATING DRIVERS
DBRS Morningstar will look to resolve the Positive trends within the next 12 months. Provided the Province continues to demonstrate prudent fiscal discipline and the economic backdrop remains supportive, DBRS Morningstar could upgrade the ratings by one notch. DBRS Morningstar could restore the Stable trends should there be a deterioration in one or more critical rating factors or a material deterioration in financial risk metrics such that DBRS Morningstar has reduced confidence that the debt-to-GDP ratio will remain on a downward trend.

This entry was posted on Thursday, June 8th, 2023 at 7:05 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.