Ontario hit with credit rating downgrade

‘Very weak budgetary performance’

Ontario’s long-term credit rating has been downgraded by Standard & Poor’s after years of warnings the province needed to control its spending.

The long-term rating was lowered from double-A-minus to A-plus, but Ontario’s shortterm A-1+ rating was affirmed and its outlook remains stable. That means there will be few short-term costs to the provincial treasury but in the long-run the downgrade could drive up Ontario’s borrowing rate when interest payments already eat up the third-largest chunk of its $132-billion budget.

This is the second time S&P has downgraded Ontario since it started running deficits after the recession.

Though the agency notes Ontario is set to balance its books by 2018 — as promised by Finance Minister Charles Sousa — it worries about how much capital spending the Liberal government has committed to.

Premier Kathleen Wynne ran and won in the 2014 election in part on a plan to spend $130 billion over 10 years on transit across the province. Some will be financed by selling part of Hydro One, other asset sales, minor tax increases and increased beer sales, but there are still billions going onto the net provincial debt, which is expected to top $298 billion by the end of this fiscal year.

Ontario’s a large province with a “wealthy economy,” the agency notes in a release, but “we believe the province’s credit quality has deteriorated due to consistently very weak budgetary performance and very high debt levels,” said credit analysts Daniela Brandazza and Mario Angastiniotis.

Servicing that debt will cost Ontario $11.4 billion this fiscal year alone. Further downgrades or future interest rate increases (which aren’t expected for years) could further drive those costs up.

“Ontario has been slow to fully roll out the spending controls and revenue measures needed to eliminate its structural operating deficit, which has caused its tax-supported debt level to approximately double since fiscal 2008,” the S&P ratings release states, suggesting the government has not been aggressive enough in cutting its spending.

It also notes “Ontario is a sustained and projected underperformer on its budgetary performance and debt burden versus domestic and international peers.”

That means S&P believes Ontario is lagging behind comparable governments. Quebec, for example, expects to return to surplus this year, while Ontario ran a $10.9-billion deficit last year, up $400 million over the previous fiscal year.

The news isn’t all bad: S&P notes Ontario’s economy is expected to grow, albeit moderately, and it’s still considered an attractive and “safe” jurisdiction to invest in, especially given recent global instability, particularly in Europe.

Finance Minister Charles Sousa tried to pick out the positive news in a statement Monday on the downgrade.