Standard & Poor’s is lowering its long-term issuer credit and senior unsecured debt ratings on Ontario to ‘A+’ from ‘AA-‘, the New York City-based credit rating agency said Monday.
“The downgrade reflects our view that Ontario is a sustained and projected underperformer on its budgetary performance and debt burden versus domestic and international peers,” S&P said in announcing the move.
The rating agency also affirmed its short-term and commercial paper ratings on the province, and the outlook on the ratings is stable.
“Although Ontario continues to beat its fiscal targets and expects to close its operating budget gap by fiscal 2018 (year-ended March 31), it will still have to contend with sizable yearly after-capital deficits, given its large net capital spending intentions,” S&P said.
“Additional capital revenues from potential asset sales or the cap-and-trade scheme put forward but not articulated in the fiscal 2016 budget could mitigate the province’s medium-term borrowing demands. In the next two years, however, we expect capital funding needs to cause Ontario’s tax-supported debt to peak at 267% of consolidated operating revenues (and its interest payments to remain near 9% of adjusted operating revenues from fiscal years 2015-2017), which we consider very high,” the rating agency said.
“While some domestic and international peers display very weak budgetary performances or very high debt burdens similarly, it is the combination of both that sets Ontario apart from the group, leading us to conclude that its credit profile is more consistent with an ‘A+’ rating,” S&P concluded.
The downgrade “illustrates what we consider to be a meaningful fiscal imbalance between the federal and provincial levels of government in this country,” National Bank Financial (NBF) said in a commentary.
Although the feds have a balanced budget, a relatively low (and declining) debt burden, tremendous revenue flexibility and a ‘AAA’ credit rating, the provinces, on the other hand, “in many cases remain in deficit and collectively carry a record high debt burden, with long-term health care pressures a worry,” NBF said.
More could be done to better balance Canada’s federal-provincial-local government fiscal framework, NBF suggests, “with the upcoming federal election the first and best opportunity to elevate the fiscal plight of Canada’s lower levels of government.”