Fitch Ratings has affirmed its ‘AA’ rating on the long-term foreign and local currency debt of the province of Ontario, but it lowered the rating outlook to stable from positive citing its deteriorating fiscal situation.

The rating agency says that the province’s rating “is supported by its wealthy, diversified economy, sound financial management, and demonstrated commitment over the last decade to balanced finances and reducing its debt burden.”

However, the outlook revision “reflects the magnitude of the economic weakness now facing the province, and the necessary though difficult fiscal responses it is taking to confront the challenge. Slowing tax revenues, spending for economic stimulus, and now the province’s participation in the joint Canada-U.S. bankruptcy settlement with Chrysler and General Motors are forecast to generate very large deficits this year and beyond.”

Fitch says that Ontario’s economic performance has declined rapidly since late 2008 as the global recession has disproportionately affected the province’s large export sector, especially auto manufacturing. “Motor vehicles and parts, which make up 30% of provincial international goods exports, were affected by declining U.S. and Canadian auto sales and widespread cost cutting at the three U.S. automakers. Weakness is now evident in the broader economy, with job losses across most goods and services sectors, declining business and consumer spending, and a housing market slowdown,” it adds. Moreover, unemployment is up to 9.4% in the province, compared to 6.4% a year ago.

The rating agency says that recent economic data shows continued weakness “and underscores the risk that the recession could be deeper or more protracted than currently envisioned.”

The province is now forecasting a deficit for fiscal 2010 of $18.5 billion, including the $4.8 billion cost of the bankruptcy reorganizations of GM and Chrysler. It notes that the 2010 budget included a plan to return to balance, but not until fiscal 2016. “The plan relies on spending restraint and unspecified efficiencies to gradually lower annual deficits. The plan incorporates an ambitious realignment of the province’s sales tax system to the federal sales tax, beginning July 1, 2010, part of a broader package of tax reform measures to improve competitiveness and raise additional revenue over the long term,” it says.

It also notes that the province’s debt burden, which fell substantially over the previous decade, is now rising once again as forecast fiscal imbalances and capital stimulus lead to higher issuance. Net debt to GDP is estimated at 25.1% in fiscal 2009, rising to 32.6% in fiscal 2012 under the current plan.

IE