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Rating Action:

ONTARIO'S CREDIT STRENGTH STEADY UNDER CURRENT DEBT LOAD, MOODY'S SAYS

13 Jun 1997
ONTARIO'S CREDIT STRENGTH STEADY UNDER CURRENT DEBT LOAD, MOODY'S SAYS New York, June 13, 1997 -- In its annual report on Ontario, Moody's Investors Service says that the province's Aa3 rating for domestic and foreign-currency obligations is stable for the medium term. Among the strongest reasons for the agency's conclusion are the relatively low ratio of debt to GDP, continued fiscal discipline, and a solid, diversified economy.
Although it believes that Ontario's fiscal gap will narrow, Moody's also identifies potential risks to the province's financial health.
"The current business cycle has probably passed its mid-point," the report says, "and if the economy sours beyond 1998, the government's 5-year timetable to eliminate the deficit could be frustrated." Public resistance to cost-cutting measures would also become a challenge, Moody's states.
Adding complexity to Ontario's fiscal outlook is the personal income tax-cut initiative. "From a budgetary perspective," the report says, "the magnitude of the announced tax cut increases the risk that cuts beyond what is currently contemplated will be needed to secure the government's medium-term balanced-budget objective."

Debt Profile
Moody's notes that Ontario borrowed heavily since the early 1990s to meet major deficit requirements, but it emphasizes that the province began the decade with little debt. Ontario's debt-to-GDP ratio continues to compare favorably to those of other provinces. "Going forward, the anticipated declines in new financing requirements should curb the growth of tax-supported debt and stabilize the province's debt ratios," the report concludes.
About 35% of Ontario's direct debt is issued in foreign currency, Moody's points out, but extensive use of hedging instruments has limited the net exposure to less than 2% in the last five years. "A self-imposed 5% cap on net foreign currency exposure and ongoing monitoring of counter-party risks provide comfort that the budgetary position of the province will continue to be insulated from fluctuations in world currency markets," the report says.
The rating agency also points out that an important feature of the province's debt profile is the contingent liability stemming from the explicit guarantee it provides on the interest and principal payment of the debt issued by Ontario Hydro -- its wholly owned electric utility. The ability of the utility to service its debt through its own sources of revenue, without calling on provincial support, has been a long-standing and positive attribute of the province's debt profile.
The report notes that streamlining efforts since 1993 have improved the cost structure of the utility. Nevertheless, Moody's believes that further progress will be needed in coming years to preserve the self-supporting nature of the utility's debt as the industry encounters increased competition.

Sound Fiscal Policy
In its report, Moody's notes that the province is engineering a realignment of the spending base that should lead to further improvement in financial performance.
The highly publicized deficit reduction targets, stronger-than-anticipated revenue last fiscal year, and the inclusion of contingency reserves in the budget planning process add further comfort regarding the direction of provincial finances in the next few years.

Vibrant Economy
The province's large and diversified economic base remains a source of strength bolstering the overall credit profile, Moody's says. In 1996, Ontario's share of Canada's GDP and population base was estimated at 40% and 38%, respectively. "In recent years," the report states, " low inflation, wage restraints and business investment have reduced unit labor costs and enhanced the competitive position of the province."
The rating agency notes that Ontario's long-term economic growth potential also benefits from strong ties with the United States--and, to a large extent, these are protected under the North American Free Trade Agreement.

NOTE TO JOURNALISTS: For a copy of this report please contact Donna Gee in New York (212) 553-0376, Andrew Chmaj in London (171) 772-5454, Juan Pablo Soriano in Madrid (341) 310 1454, Katrina Braund in Sydney (612) 9270 8111, Mauricette Salque in Paris (331) 53 30 10 20, Juergen Berblinger in Frankfurt (4969) 242 840, Velvet Yoshinami in Tokyo (813) 3593 0734, Hilary Parkes in Toronto (416) 214-1635, Edward Young in Hong Kong (8522) 509 0200, or Patrick Winsbury in Singapore (65) 320 8330.
No Related Data.
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