Fitch affirms Province of Quebec, revises outlook to negative
Dec 12 - (The following statement was released by the rating agency) NEW YORK, December 12 (Fitch) Fitch Ratings affirms the 'AA-' long-term ratings on senior unsecured obligations of the Province of Quebec, Canada, as detailed at the end of this release. In addition, Fitch affirms the outstanding 'F1+' short-term ratings on the Province of Quebec. The Rating Outlook is revised to Negative from Stable. SECURITY Senior unsecured obligations are direct and unconditional obligations of the Province to which the Province's full faith and credit is pledged. Commercial paper notes are promissory notes ranking equally with Quebec's other unsubordinated and unsecured indebtedness. For Financement-Quebec, payment of debt service is unconditionally guaranteed by the Province from the consolidated revenue fund. KEY RATING DRIVERS NEGATIVE OUTLOOK BASED ON DELAYED FISCAL BALANCE: The revision of the Outlook on the Province's long-term rating, to Negative from Stable, reflects the delay in achieving budgetary balance, to fiscal 2016 from fiscal 2014. The delay is based on slower economic and revenue performance since the fiscal 2014 budget was tabled and the consequent reduction in forecast economic and revenue growth thereafter. HIGH DEBT: Debt is high relative to resources and has grown as the Province works toward budgetary balance. Debt management is strong and centralized, and the Province maintains ample access to liquidity for both operations and debt service requirements, supporting the 'F1+' short-term rating. FISCAL FLEXIBILITY: Fiscal flexibility has been provided by a willingness to date to adjust tax policy and by progress in constraining spending growth; budgeted contingency funds provide additional cushion. Longer term spending control remains the most persistent risk to fiscal balance, particularly given lower spending growth targets in the revised fiscal consolidation framework. DIVERSE ECONOMY: The economy is large and diverse, and historically slower growing and less wealthy than the Canadian average. Modestly paced growth continues. Vulnerabilities include global trade links, particularly with the U.S. market, and a significant manufacturing sector. SOVEREIGNTY MOVEMENT REMAINS: The sovereignty movement has been a source of uncertainty in the past although it is not a current issue. FINANCEMENT-QUEBEC'S RATING LINKED TO PROVINCE: The rating for Financement-Quebec reflects the credit strength of the Province given the Province's unconditional guarantee. RATING SENSITIVITIES INABILITY TO ACHIEVE ECONOMIC AND FISCAL TARGETS: Additional near-term economic and revenue deterioration, or an inability to attain revised fiscal targets under current forecast trends would result in a rating downgrade. CREDIT PROFILE The revision of the Outlook on Quebec's long-term 'AA-' rating, to Negative from Stable, is based on weaker-than-planned economic and revenue performance since the fiscal 2014 budget was tabled, reducing the province's near-term revenue forecast and resulting in a two-year delay, to fiscal 2016, in achieving fiscal consolidation. Although the revised fiscal framework includes additional corrective actions to return to balance and offset the additional deficit borrowing now expected in fiscal years 2014 and 2015, a higher accumulated debt burden further reverses the progress on debt reduction made by the Province during the decade prior to the last recession. Despite the slow, uneven economic recovery now underway, Quebec's credit quality continues to be supported by careful fiscal and debt management, ample access to debt markets for liquidity needs, and past success of achieving progress in debt reduction and spending control. The Province has drawn on its considerable budgetary flexibility to date as it carries out its fiscal consolidation framework, including raising a variety of taxes and curbing spending growth. The latter is a particularly notable achievement, and Fitch believes the Province has additional flexibility to reduce spending. DEBT BURDEN WILL REMAIN HIGH The Province's high debt remains its most significant long-term credit challenge, in Fitch's view. Outstanding gross debt, including debt of consolidated entities and pension liabilities, was C$191.8 billion in fiscal 2013, equal to 53.6% of GDP. Debt service, at C$7.8 billion in fiscal 2013, consumed 11.5% of fiscal 2013 budgetary revenues, a high but manageable level. Much of the current debt burden stems from accumulated deficits built over prior decades and in the years since the 2008-2009 recession, amounting to C$118.1 billion in fiscal 2013 or 33% of GDP. Total public sector debt, at C$256.4 billion, equals 71.7% of GDP. Under the revised forecast through fiscal 2018, projected gross debt gradually flattens out, albeit at higher levels than envisioned in the government's previous plan. The government forecasts that gross debt will begin to decline as a percent of GDP in fiscal 2015, and its statutory debt burden target includes achieving a gross debt to GDP ratio of 45% and accumulated deficit to GDP of 17%, in fiscal 2026. Debt figures are net of the Generations Fund balance, a reserve for debt reduction, funded at about C$5.2 billion in fiscal 2013. Despite its high debt metrics, the Province has demonstrated broad market access for borrowing and is a sophisticated debt manager. ECONOMIC GROWTH CONTINUES AT SLOWER PACE As of its November 2013 forecast, Quebec's economic performance in 2013 is estimated to have slowed considerably compared to forecast expectations in March 2013 when the government last updated its economic outlook. After rising 1.5% in 2012, real GDP in 2013 is now estimated to rise only 0.9%. Real GDP growth in 2013 was expected to be 1.3% as of the government's March 2013 forecast, and 1.5% in November 2012, when the fiscal 2014 budget was tabled. The disappointing performance is attributed to numerous factors, including continuing weak global economic trends, more modest domestic consumption and much lower inflation. Economic gains are continuing, even if at a slower pace than expected. November 2013 employment rose 0.4% year over year, compared to 1% for Canada; unemployment, at 7.2% in November 2013, was ahead of the 6.9% Canadian level. The revised forecast assumes modest labor market gains through 2013, with the unemployment rate at 7.7% for the year. Forecast expectations for 2014 appear reasonable, in Fitch's view, with higher economic growth rates, albeit off the lower 2013 base. The update assumes real GDP growth accelerating to 1.8% in 2014, unchanged from the March 2013 forecast. Growth going forward is driven in part by the accelerating, but still slow, U.S. recovery, among other factors. The strength of the economic recovery in the U.S., Quebec's main international trading partner, remains a key uncertainty to achieving forecast expectations. The next forecast update will be released in spring 2014, when the fiscal 2015 budget is tabled. DELAYED FISCAL CONSOLIDATION Quebec, as with many Canadian provinces, has been on a multi-year path to restore budgetary balance since the recession of 2008-2009. In its fiscal 2010 budget, the province announced a framework for returning to budgetary balance by fiscal 2014, with gradually diminishing annual deficits. Disappointing 2013 economic performance and its effect on recent actual revenue collections and forecast growth is now prompting a delay, to fiscal 2016, in achieving balance and requiring additional actions to consolidate the budget. To date, the province has relied on considerable fiscal flexibility to diminish projected operating deficits, although in Fitch's view much less flexibility now remains given the extent of actions taken to date. The Province estimates tax rate changes since the framework began will generate a cumulative $6.3 billion in revenues as of fiscal 2014; recent phased-in changes, notably in consumption taxes, are believed to have affected consumer demand, and the government's newly-revised consolidation plan avoids additional tax rate adjustments. Quebec has had notable success in reducing spending growth. The government's revised fiscal framework relies on additional spending controls both to offset lower revenues and absorb certain spending increases (including a recently-announced stimulus program and for retiree obligations). Program spending growth has fallen from an average of 5.6% annually during the fiscal 2007-2010 period, to 1.2% in fiscal 2013; lower than planned spending helped to absorb some of the unexpected revenue weakness experienced during fiscal 2013. The government's revised framework maintains fiscal 2014 spending at the budgeted level, while reducing projected annual growth in fiscal 2015 and beyond to 2%. Fiscal 2014 is now forecast to end with a deficit of $2.5 billion, essentially matching the November 2013 downward revision in own source revenues; fiscal 2014 own source revenue growth is now expected at 2.6%, down from 5.2% in the March 2013 plan. The revenue outlook in fiscal 2015 and beyond also has been lowered accordingly, although newly-announced budget measures reduce the projected fiscal 2015 deficit to $1.75 billion. To offset the higher near term deficits and resulting higher borrowing, the revised framework increases planned deposits to the Generations Fund beginning in fiscal 2017. AFFIRMED RATINGS Fitch's affirmation of the long-term 'AA-' rating and revision to Rating Outlook Negative applies to the following senior unsecured bonds of the Province of Quebec and Financement-Quebec, as follows: Province of Quebec: --Senior unsecured debt; --Local currency long-term rating; --Long-term issuer rating. Financement-Quebec: --Senior unsecured debt; --Local currency long-term rating; --Long-term issuer rating. In addition, Fitch affirms the short-term 'F1+' ratings on the Province of Quebec and Financement-Quebec, as follows: --Province of Quebec short-term issuer rating; --Province of Quebec short-term commercial paper; --Financement-Quebec short-term issuer rating.
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