Provincial debt rating means all eyes on Ontario

Ontario is now on credit watch after Moody's Investors Service revised the province's outlook to Aa1 negative from Aa1 stable.

Sudbury MPP Rick Bartolucci said it is important to note the province has not been downgraded; rather, the province's outlook has changed, and it means bond traders of the world are looking to Ontario to “work hard to balance our budget.”

The change in the outlook reflects Moody's assessment of risks surrounding the province's ability to meet its medium-term fiscal targets given the recent slowdown in provincial economic growth and the resulting risks to the province's ability to stabilize the recent accumulation in debt, according to its report.

The negative outlook is an indication of the softening economic outlook, the growing debt burden and the extended timeframe to achieve a balanced budget.

The Liberals ran with the plan to protect education and health care, job creation and ensuring it puts in place a logical plan to get rid of the deficit (estimated at $16 billion), Bartolucci said. The change in the province's outlook “simply means there is more need to move ahead with that plan.”

The province set out in its 2011-12 budget a plan to return to fiscal balance by 2017-18, but Moody's stated the extended period of fiscal consolidation presents an element of risk in achieving the planned consolidation path, and a risk of stabilizing and reversing the recent deterioration in the province's financial position.

“We've committed to having the deficit erased by 2017,” Bartolucci said. “A negative rating means there is a challenge in Ontario, but a lot of countries, including the United States, have been downgraded; whereas, we are simply an outlook to negative, which means they are watching what we're doing.”

This puts the province on the right track to fiscal restraint, he added.

Nipissing MPP Vic Fedeli blasted Dalton McGuinty's “reckless spending” that is affecting the city of North Bay's “sparkling credit rating.”

At the same time Moody's revised its outlook for Ontario, it revised North Bay's rating from Aa1 stable to Aa1 negative, Fedeli said in a press release. This could very well lead to higher borrowing costs for the city down the road, he stated.

“Dalton McGuinty has dragged North Bay into his credit rating quagmire,” he wrote, and repeated his call for a legislated mandatory wage freeze and a two-per-cent cut in spending across all ministries except health and education. Ontario's 2011-12 budget assumed expense growth of roughly two per cent per year for the duration of the 2017-18 plan.

Moody's reported that the province's expense growth leading up to the recent downturn was “relatively robust,” averaging seven per cent annually in the five years to 2007-08, with health expenses having grown at an average of eight per cent.

Bartolucci said he isn't sure why North Bay's credit was affected, and that would be a question for the mayor, but it “certainly isn't because Ontario's outlook is negative, or that other municipalities are negative - that's not how it works. Bond lenders look at the individual entity, whether it's a country, a province, a state or a municipality.”

As long as municipalities use their money wisely, there is no reason to be downgraded, he said. Sudbury's rating has not been affected, Bartolucci said.

For Ontario, this revised rating sheds light on “an opportunity for us to understand that the bond traders of the world are looking to Ontario and expect us to work hard to balance our budget and pay down the deficit,” he said. “Compared to what's happening with the rest of the world, Ontario is faring quite well. (Bond lenders) are watching and will be carefully attuned (to us) as we move forward with our commitment of restraint and paying down the deficit.”

A further downward trend on the province's rating would be likely if a credible plan to address the fiscal imbalance and stabilize the debt burden is not implemented in the next provincial budget, expected in March 2012, according to Moody's report.

Posted by Mark Gentili