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15 Dec 2011
Toronto, December 15, 2011 -- Moody's Investors Service has revised the outlook on the Province
of Ontario's Aa1 issuer and debt ratings to negative from stable,
affecting approximately CAD190 billion in debt securities.
The change in the outlook reflects Moody's assessment of risks surrounding
the province's ability to meet its medium term fiscal targets given
the recent slowdown in provincial economic growth and the resulting risks
to the province's ability to stabilize the recent accumulation in
"The negative outlook on the province reflects the softening economic
outlook, Ontario's growing debt burden, and the extended
timeframe to achieving a balanced budget," said Moody's
Assistant Vice President Jennifer Wong, lead analyst for the Province
The province's Fall 2011 statement, released in November,
revised its forecasts down for provincial growth in 2011 and 2012 to 1.8%
and 1.8% from 2.4% and 2.7%,
respectively. The provincial economy is particularly affected by
the moderation in US growth, given its higher export share relative
to other Canadian provinces and the high proportion of international exports
(roughly 80%) destined for the US.
The province set out in its 2011-12 budget a plan to return to
fiscal balance in 2017-18. Moody's has highlighted
that the extended period of fiscal consolidation presents an element of
risk in achieving the planned consolidation path, and a risk to
stabilizing and reversing the recent deterioration in the province's
financial position. At March 31, 2011, Ontario's
net direct and indirect debt, at roughly 200% of consolidated
revenues, was at the high end of the spectrum for Canadian provinces,
whose ratings remain in the narrow range of Aaa to Aa2.
The slowdown in provincial economic growth presents a challenge to the
already lengthy planned consolidation path, particularly given the
strong expense growth seen in recent years. Expense growth leading
up to the recent downturn was relatively robust, highlighting the
challenge ahead. Indeed, expense growth averaged 7%
annually in the five years to 2007-08, with health expenses
having grown at an average of 8%. The fiscal plan presented
in the 2011-12 budget assumed expense growth of roughly 2%
annually for the duration of the plan.
Nevertheless, Moody's reports that Ontario's high investment-grade
rating reflects high debt affordability and the high degree of fiscal
flexibility inherent in the institutional framework governing the way
Canadian provinces operate. The current low interest rate environment
has enabled the province to issue long-term debt bearing historically
low coupons. While the proportion of revenues consumed by interest
payments has increased with the recent accumulation in debt, this
remains manageable given the province's fiscal flexibility.
Moreover, the province's large and diversified economy and growing
population provides access to a broad and productive tax base and,
as such, remains a source of credit strength.
While Ontario retains sufficient fiscal flexibility inherent in the institutional
framework to adjust its fiscal outcomes, thereby improving its financial
position, difficult policy decisions are required.
"We believe that increased fiscal discipline will be required to
sustain debt affordability," said Ms. Wong.
"If a credible plan to address the fiscal imbalance and stabilize
the debt burden is not implemented in the next provincial budget,
expected in March 2012, downward pressure on the province's
Aa1 rating would emerge."
Moody's P-1 rating on Ontario's commercial paper program
The Province of Ontario is Canada's largest province, representing
approximately 40% of national GDP. The province's population
measured approximately 13.2 million in 2010.
WHAT COULD CHANGE THE RATING UP/DOWN
A rating upgrade is unlikely in the near term given the current context
of continued consolidated deficits and debt accumulation.
An inability to address continued consolidated deficits and to stabilize
the debt burden over the medium term would put downward pressure on the
rating. Further downward revisions to growth would also place pressure
on the province's ability to achieve medium term fiscal targets
and would place negative pressure on the rating. Finally,
if 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 methodologies used in this rating were "Regional and Local Governments
Outside the US", published in May 2008, and "The
Application of Joint-Default Analysis for Regional and Local Governments",
published in December 2008.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 31 January
2012. ESMA may extend the use of credit ratings for regulatory
purposes in the European Community for three additional months,
until 30 April 2012, if ESMA decides that exceptional circumstances
arise that may imply potential market disruption or financial instability.
Further information on the EU endorsement status and on the Moody's
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For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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Information sources used to prepare the rating are the following :
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Moody's considers the quality of information available on the rated
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Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Jennifer A. Wong
Asst Vice President - Analyst
Moody's Canada Inc.
70 York Street
Toronto, ON M5J 1S9
MD - Sub-Sovereigns
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's revises Ontario's outlook to negative from stable on Aa1 rating
Moody's Canada Inc.
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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