Amid concerns about the viability of its deficit reduction plans, Fitch Ratings has downgraded Ontario’s credit ratings.
The rating agency announced today that it has trimmed Ontario’s long-term issuer default rating (IDR) to ‘AA-‘ from ‘AA’, and revised the rating outlook to stable from negative. The downgrade is being driven by worries about the province’s fiscal consolidation plans.
“Difficult actions will be necessary to achieve the province’s deficit elimination goal of fiscal 2018 and budget options are likely to prove more limited given the extent of actions taken to date and use of one-time actions to achieve targets,” Fitch says.
The government is currently expecting its deficit to rise in fiscal 2015, for the second straight year. Fitch says that it believes there is the potential that actual results will be better than the current forecast, but that a planned deficit increase is a negative credit factor, “particularly with the planned use of one-time measures, and offsets some of the otherwise positive financial progress made in recent years.”
Indeed, Fitch says that it expects Ontario’s debt levels to increase through fiscal 2016, and then to begin to decrease, “given the province’s expectation of an annual deficit through that fiscal year and continued growth in GDP.”
The rating agency notes that the province is considering alternative deficit reduction measures for fiscal 2016, if economic conditions restrain revenue growth. But, Fitch says the downgrade reflects a concern that “risks remain to achieving its goals and both debt burden and the accumulated deficit will remain significantly elevated.”
“The rating is sensitive to the province’s commitment and success in achieving deficit elimination targets and restoring fiscal balance,” it says. “Failure to enact budgets that follow a path toward articulated deficit elimination targets would result in negative rating pressure. Reaching deficit elimination targets ahead of forecast, sizeable growth in GDP, and steady progress on lowering debt burden and the accumulated deficit would be positive credit factors.”