April 25, 2012 / 2:17 PM / in 5 years

S&P sends wake-up call to Ontario, lowers outlook

Ontario Provincial Minister of Finance Dwight Duncan is seen in his office adjacent to Queen's Park in Toronto March 5, 2012. REUTERS/Fred Thornhill

TORONTO (Reuters) - Ontario’s bold austerity budget and accelerated path to balance its finances were met with nagging skepticism on Wednesday after credit rating agency Standard & Poor’s lowered its outlook on the province’s debt ratings to “negative.”

The move provided another wake-up call to analysts and investors, raising the possibility of further rating downgrades and higher borrowing costs for Canada’s most powerful province.

“Whenever we revise an outlook, it means there is at least a one-in-three chance that there will be a rating revision,” S&P’s lead Ontario analyst Mario Angastiniotis told Reuters, noting a downgrade to the credit is possible within two years.

S&P’s lowered outlook followed similar action by Moody’s in December. The news came hours after the minority Liberal government announced forecasts for lower budget deficits and a surplus in 2017-18.

Ontario’s credit is scored Aa1 at Moody‘s, AA- at S&P, and AA low at DBRS. They are investment grade ratings, but below the federal government’s top rating.

Moody’s still has a higher rating on Ontario than the other two agencies, which downgraded the province in 2009 after the province’s manufacturing-based economy was ravaged by the global recession.

“You have a minority parliament that may not be able to implement all the proposed restructuring that the Liberal government has proposed. ... The record on minority parliaments in Canada is mixed,” said Angastiniotis.

He pointed out the current government may not stay in power for long enough to fulfill its plan and that external headwinds such as Europe’s debt crisis and a still recovering U.S. economy just make matter worse for the province.

Ontario Finance Minister Dwight Duncan responded by saying the negative revision should not come as a shock. “I don’t think that should surprise anyone. Moody’s did the same thing back in December,” he told reporters.

“This is something I think all Ontarians need to embrace and we need to make the legislature work.”

ONTARIO TRIMS DEFICIT FORECASTS

Earlier in the day, Ontario offered a slightly rosier financial outlook, trimming its budget deficit forecasts to 2017-18, when it projects the province will run a C$500 million (US$505 million) surplus.

Other credit rating agencies and economists sounded cautiously encouraged by the revisions. “Obviously any improvement is welcome, but at this stage, it’s not a material change to the credit story,” said Eric Beauchemin, managing director of public finance at credit rating agency DBRS.

“They still have a lot of work to do going forward and our focus will be on their progress with respect to some of the key assumptions factored to the budget,” Beauchemin added, noting that Ontario still faces hurdles in its attempts to freeze public sector pay and constrain health care spending growth.

Duncan delivered the budget update a day after the provincial government passed its 2012-13 budget with the help of the left-leaning New Democratic Party.

To get NDP support and avoid a second election in six months, the Liberals said they would introduce a surtax on the rich.

The Liberals said the extra revenue, which they project will rise to an annual C$495 million by 2014-15, would go to pay down the deficit, and was partly responsible for the revised deficit forecasts.

Duncan said the higher tax bracket for residents who earn more than C$500,000 a year will be eliminated in 2017-18, along with the deficit.

The government forecast its 2012-13 budget deficit at C$14.8 billion versus the C$15.2 billion estimated in the budget and said its 2011-12 deficit was C$15 billion instead of the C$15.3 billion estimate.

Revenue resulting from a number of changes to federal-provincial taxation agreements helped reduce the deficit forecasts, the government said.

($1=$0.98 Canadian)

Reporting By Claire Sibonney; editing by Todd Eastham

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