Moody’s Investors Service has dropped its outlook for Ontario’s debt and issuer ratings to negative from stable, citing rising fiscal risks.
In dropping its outlook to negative, the rating agency says that the move reflects its view of the risks to 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,” it says.
Moody’s notes that Ontario has exceeded fiscal targets in recent years, but says its consolidated deficits have shown little change. “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,” it says. Yet, at the same time, it says that the province is also facing large, ongoing capital expenditures.
“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.
The province has not yet tabled a new budget since the election in June, but Moody’s says that “indications are that it will be little changed from the May budget”, which it 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.
While Ontario has a high degree of both revenue and spending flexibility, Moody’s says that it has observed over the past several years that it “has been reluctant to fully utilize this flexibility.”
Moody’s says that 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.”
Additionally, it says that “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.”
Conversely, it suggests that 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.”