Ontario and Quebec are able to maintain high credit ratings despite their debt levels because they have exceptional financial flexibility, large and diverse economies, and strong debt management practices, says Moody’s Investors Service.
The rating agency indicates that it rates both provinces just two notches below the highest rating possible, despite the fact that they have some of the highest debt levels among the sub-sovereigns that it rates. At the end of fiscal 2011-2012, Ontario had $247.4 billion in net direct and indirect debt, equivalent to 212.4% of total revenues, and Quebec had $166.4 billion in net direct and indirect debt, equivalent to 204.8% of its total revenues, it reports.
The debt levels of the two provinces have been increasing in recent years, but Moody’s has a stable rating outlook on their ratings.
“A major factor in Ontario’s and Quebec’s ability to carry a large amount of debt at their high investment grade ratings is their exceptional fiscal flexibility, on both the revenue and expenditure sides of the ledger,” says Michael Yake, a Moody’s assistant vice president and co-author of the report. “Canadian provinces have access to, and complete control over, a wide range of revenue bases, while they also have complete autonomy to adjust their spending from year to year.”
Additionally, it notes that they have large and diverse economies, which provide access to a stable and productive tax base, with little vulnerability to a shock in any specific industry. And, the third factor, Moody’s says, is the provinces’ strong debt management practices “that a create broad and stable access to international capital markets.”
“Both use of a wide variety of products, foreign currency denominated debt when appropriate, with varying maturity lengths to ensure interest from a wide variety of potential investors,” it says, noting that, given the size of their borrowing programs, “unquestioned market access is an important factor in maintaining their high ratings.”