Credit Rating Agencies Satisfied with Ontario’s Progress to Fiscal Balance

Ontario’s debt is rated by four principal international credit rating agencies^[1], which typically publish an annual update of their view of the Province’s finances and the quality of Ontario’s debt based on the budget and other financial statements. This note provides a summary of Ontario’s current credit ratings as well as some general background on the significance and implications of credit ratings.

Following the tabling of Ontario’s 2016 Budget, each of the four rating agencies affirmed their current rating of Ontario’s debt.  While S&P, DBRS and Fitch maintained a stable outlook on the Province’s rating, Moody’s revised its outlook back to stable from negative.   A “stable” outlook indicates that each of the agencies believes that Ontario’s rating is unlikely to change over the next two years.

 Source: S&P, DBRS, Fitch and Moody’s
* Based on a standardized scale that includes 10 levels for investment grade debt. See Appendix for each agency’s rating scale.

If Ontario’s fiscal balance were to return to deficit beyond 2017-18, either through an easing of expenditure management restraint or through unexpected weakness in revenues (as a result of slower than expected economic growth), the agencies would be expected to revise Ontario’s credit outlook to negative followed by a potential credit rating downgrade. A credit rating downgrade could lead to higher borrowing costs for Ontario and a more difficult fiscal position.

Ontario’s Credit Quality Remains High

Despite Ontario’s fiscal challenges, the Province’s credit rating remains relatively high compared with other Canadian provinces. The rating agencies view Ontario’s credit quality as being supported by a number of key credit strengths including a large and well-diversified economy, a strong record of prudent financial management and the high degree of fiscal flexibility inherent in Canada’s federal-provincial framework.  In general, Ontario’s credit rating is comparable to those of Manitoba and Quebec, but lower than Saskatchewan or British Columbia.

Credit ratings represent an independent opinion on the ability of an individual corporation or government to meet all financial obligations on a timely basis. A credit rating is a relative measure of the probability of default by a government or corporation, based on forecasts of economic and financial variables and an assessment of future developments and risks.

Rating agencies typically also assign “outlooks” to credit ratings.  The outlook of a credit rating indicates the likely direction of a borrower’s credit rating over the next two years. An outlook can either be stable, negative or positive. A stable outlook indicates that the borrower’s rating, all else equal, is unlikely to change in the short term, while a negative or positive outlook indicates that the rating is likely to be lowered or raised over the same period. A change in a credit rating outlook does not necessarily indicate a change in the current credit rating.

Credit Ratings Are an Important Determinant of the Cost of Borrowing

Credit ratings are used by investors to assess the risk of default of a particular borrower, which is used to determine the incremental cost (“credit spread”) for a borrower. This credit spread is reflected in the interest rate paid by borrowers, such as Ontario. Generally, all else equal, higher credit ratings result in lower borrowing costs, while lower ratings typically lead to higher borrowing costs.

Debt issuers (governments and corporations) are charged a fee by credit rating agencies to issue a credit rating while investors (purchasers of debt) also pay a fee to access credit reports.  The critical importance of an agency’s reputation ensures that credit rating agencies strive to provide unbiased and accurate assessments of credit risk.

Appendix

Ratings Agency Translation Matrix