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Moody's downgrades Ontario's credit rating

By CO Staff @canadaone |

Ontario's timeframe to reach a balanced budget has prompted Moody's Investor Service to downgrade the province's credit rating from an Aa1 with a negative outlook to an Aa2 with a stable outlook.

"The downgrade of Ontario's rating reflects the growing debt burden and the risks surrounding the province achieving its medium-term fiscal plan given the subdued growth outlook, extended timeframe back to balance and ambitious expenditure targets," said Moody's Assistant Vice President Jennifer Wong, lead analyst for the Province of Ontario.

Citing the expectation of a subdued growth outlook and fact that the expectation of a balanced budget hinges on "significant expenditure restraint" as some of the key reasons for the downgrade, the agency noted that the province's "... expense growth targets appear particularly ambitious in light of growth in expenses averaging 7% annually in the five years to 2011-12 and continued pressures on health expenses, the province's largest expense item, due to demographic pressures."

Moody's have noted that an ratings upgrade is unlikely in the short term.

To see an upgrade in its rating, Ontario would have to successfully execute what Moody's has described as "an ambitious fiscal plan to return to fiscal balance".

"If the province were to successfully execute the plan and also stabilize and then reverse the recent accumulation in debt, this could put upward pressure on the rating," the Moody's report notes.

However, a further deteriorates of the province's financial position could put downward pressure on the rating.

"Furthermore, if 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," notes the report.

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