DBRS Ltd. Thursday confirmed its ratings on the province of Ontario at AA (low) and R-1 (middle), both with a stable trend.
The rating agency says it sees the Ontario government’s fiscal plans as a step in the right direction, although it does face considerable execution risk.
On Wednesday, Standard & Poor’s Ratings Services revised its outlook on the province to negative from stable, on concerns about its deficit reduction plan.
DBRS says that it views the province’s plan, and the increasing emphasis on cost containment, as “an encouraging step in the right direction”.
However, DBRS notes that the recent budget negotiations reveal that the political environment remains fragile, and it too believes that “implementing the tough measures required to achieve fiscal targets and limit debt growth will be very challenging and will require a significant pickup in fiscal resolve.”
The latest provincial budget spells out the government’s plan to return to balance by 2017-2018, however DBRS notes that it relies on “some bold assumptions, especially with respect to future growth in health care costs and public sector compensation, an area that will be watched closely as most major labour agreements will be up for renewal in the coming months.”
Additionally, in the wake of a concession to impose a new surtax on high-income individuals, DBRS says that further tax measures may be necessary “should growth weaken, if certain spending targets prove too ambitious or to appease the opposition, given the government’s minority position.”
“While growth remains fragile and is expected to lag behind the national average, Ontario should benefit from a gradual strengthening in the U.S. economy and improving net export position,” it says, adding that the risks are skewed o the downside, including the possibility of a further disruption in global demand, a weak U.S. economy or a strengthening Canadian dollar.