Reuters: Financial Services and Real Estate: TEXT-Fitch affirms Province of Quebec

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TEXT-Fitch affirms Province of Quebec May 24th 2012, 18:18 Thu May 24, 2012 2:18pm EDT (The following statement was released by the rating agency) May 24 - Fitch Ratings affirms the 'AA-' Long-term and 'F1+' Short-term ratings on senior unsecured obligations of the Province of Quebec, Canada, including: --Senior unsecured debt at 'AA-'; --Local currency long-term rating at 'AA-'; --Long-term issuer rating at 'AA-'; --Short-term issuer rating at 'F1+'; --Short-term commercial paper at 'F1+'. In addition, Fitch affirms the 'AA-' Long-term and 'F1+' Short-term ratings on senior unsecured debt of Financement-Quebec, in conjunction with the increase in the aggregate maximum outstanding amount under its medium term note programme to C$22 billion from C$18 billion, including: --Senior unsecured debt at 'AA-'; --Local currency long-term rating at 'AA-'; --Long-term issuer rating at 'AA-'; --Short-term issuer rating at 'F1+'. The Rating Outlook on the Long-term ratings is 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 --HIGH DEBT: Debt levels are high and growing as the province progresses on a multi-year plan to return to fiscal balance. Debt management is strong and centralized, and the province maintains ample access to liquidity for both operations and debt service requirements. --COMMITMENT TO BALANCE: The province has a demonstrated commitment to achieving fiscal equilibrium, with continuing progress returning to balance since the recession. During the decade prior to the last recession, the province made steady progress reducing its debt burden. --FISCAL FLEXIBILITY: Continued fiscal flexibility provided by conservative revenue forecasts, tax rate flexibility and success in controlling spending are enabling the province to stay on track toward achieving fiscal balance in fiscal 2014. Achieving spending targets will pose the greatest challenge despite progress to date. --DIVERSE ECONOMY: The economy is large and diverse, and has returned to growth since the recession. Vulnerabilities include exchange rate movements, export dependence on U.S. markets, and a significant manufacturing sector. --SOVEREIGNTY MOVEMENT REMAINS: The sovereignty movement has posed uncertainty in the past although is not a current issue. --FINANCEMENT-QUEBEC'S RATING LINKED TO PROVINCE: The rating for Financement-Quebec reflects the credit strength of the province. WHAT COULD TRIGGER A RATING ACTION Inability to achieve a return to budgetary balance and resumption of debt burden reduction by the province's fiscal year (FY) 2014 target. CREDIT PROFILE: The province's Long-term 'AA-' rating and Short-term 'F1+' ratings are based on its careful financial management, a demonstrated commitment, albeit temporarily suspended, to achieving fiscal balance and reduced debt, a diversified economy, and ample market access to liquidity for operations and debt service. The rating level is tempered by the province's high and rising debt burden. However, the province has achieved considerable success since the recession in implementing a multiyear plan to return to fiscal balance by fiscal 2014, and it benefits from a decade of actions prior to the downturn to lower its debt burden. These factors lend credibility to the province's multiyear goals of achieving balance and resuming debt burden reduction, and underlie Fitch's affirmation at the 'AA-' level and Stable Outlook. Prior to the 2008 - 2009 recession, successive governments over more than a decade took steps to lower the burden of debt, including balancing budgets and setting aside reserves, including the Generations Fund, a reserve for debt reduction, funded at about C$4.3 billion in fiscal 2012. The recession prompted revisions to the 1996 Balanced Budget Act and a return to deficit borrowing as the province undertook wide-ranging stimulus measures. However, the government's fiscal 2010 budget articulated a comprehensive, multi-year approach to return to budget balance by fiscal 2014, and has remained on track since then. The province's debt levels are high, with outstanding gross debt, including debt of consolidated entities and pension liabilities, of C$183.8 billion in fiscal 2012, equal to approximately 54.9% of GDP. Debt service consumes 11.4% of fiscal 2012 budgetary revenues, a high but manageable level. Much of the current debt burden stems from accumulated deficits built over prior decades, amounting to C$117.7 billion in fiscal 2012, or 35.1% of GDP. Total public sector debt, at C$248.6 billion, equals 74.2% of GDP. The government forecasts that gross debt will begin to decline in fiscal 2014, and its debt burden target includes achieving gross debt to GDP of 45% and accumulated deficit to GDP of 17%, in fiscal 2026. In its fiscal 2010 budget, the government laid out a four-year framework to return to balance by fiscal 2014. Although economic and revenue recovery has been more uneven than provincial forecasts, and the province has benefited from unexpected one-time receipts, notably the federal government's compensation for sales tax harmonization, the province has remained close to the path laid out in the fiscal 2010 budget. Revenue initiatives in the form of phased-in sales tax increases, a health care contribution, and higher planned levies intended for the Generations Fund, reflect the province's tax rate flexibility. Program spending growth, which historically had often exceeded revenue growth, has been lowered considerably. The fiscal 2013 budget, tabled in March 2012, showed fiscal 2012 estimated results better than expected. Budgetary revenues of C$65.5 billion were 4.6% higher than fiscal 2011 and 0.3% over the original budget a year before. Although revenue performance exceeded targets due in part to tax rate increases included in the framework, actual economic performance was less robust than expected. Year-over-year growth in total budgetary expenditures was held to 2.5%, the result of broad spending control measures included in the framework. The resulting budgetary deficit, prior to Generations Fund deposits, was under C$2.5 billion, compared to a target of C$2.9 billion a year earlier. The budget for fiscal 2013, which began on April 1, forecasts a considerably diminished year-end budgetary deficit of C$589 million, prior to Generations Fund deposits. Budgetary revenues grow 5.9%, to C$69.4 billion, while budgetary expenditures grow 3%. The province will benefit from an estimated C$733 million in federal compensation for sales tax harmonization, with another C$1.5 billion expected in fiscal 2014. Spending control measures remain in place, with health care and education spending rising at a higher rate even as other program spending categories rise more slowly or see reductions. At present the province assumes a modest, C$1 billion surplus in fiscal 2014, which would be deposited to the Generations Fund. Risks to the plan include achieving economic and revenue performance targets given broader macroeconomic uncertainties and the slow pace of economic recovery and maintaining progress on controlling spending. The province has a large and diverse economy, albeit historically slower-growing and less wealthy than the Canadian average. Quebec avoided the severe recessionary weakness experienced by some of its trading partners, although the slow, uneven recovery since then and broader macroeconomic risks, continue to slow the pace of growth. Real GDP rose 1.7% in 2011 on a preliminary basis and is forecast to rise 1.5% and 1.9% in 2012 and 2013, respectively, considerably below the growth rates expected a year earlier. Labor market gains have continued; the unemployment rate fell to 7.8% in 2011 from 8.5% two years earlier, but is forecast to remain near 8% through 2013. The province forecasts continued job creation through 2013, though at a more moderate level than in 2011. After a slow post-recession rebound, exports are expected to perform better in 2012 and 2013, driven largely by the gradual improvements in the U.S. economy. (Caryn Trokie, New York Ratings Unit) Link this Share this Digg this Email Reprints

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