An influential credit rating agency has put Ontario on notice that it could knock down its rating if it fails to get its fiscal house in order, ratcheting up pressure for the province to take more aggressive action to rein in spending.
Moody’s Investors Service warned on Thursday that it might lower the rating if the province doesn’t take serious steps in the next budget to deal with its multibillion-dollar deficit.
Ontario’s struggles are crucial for the country because its economy is larger than that of many countries, including Sweden, Poland and Belgium, and accounts for about 40 per cent of the national economy, with a gross domestic product of $612-billion last year.
However, the province has a $16-billion deficit and a rate of growth that is slower than that of some other provinces, which makes it difficult to find ways to balance the books.
A credit rating downgrade would not only make Ontario’s government bonds – which accounted for just over half of all trading in Canadian provincial bonds in the first nine months of 2011 – less attractive to investors, it could also make it more expensive to borrow money at the very time when the debt is mounting.
Finance Minister Dwight Duncan said Moody’s action shows that the government must be “relentless” in meeting its targets to eliminate the province’s deficit by 2017-18.
Toronto-Dominion Bank chief economist Craig Alexander agreed that what markets need from governments around the world right now are credible commitments to deal with their deficits in the medium term.
“The credit rating agencies are putting pressure on governments, in Europe, the U.S., and now Ontario, to make a compelling case that over a reasonable length of time they will put their fiscal houses in order,” he said.
The need for governments in Canada to reduce debt is a message that Bank of Canada Governor Mark Carney has been hammering on for quite some time as it becomes increasingly clear that the country will not be immune to the ongoing troubles of its major trading partners.
All of the provinces are affected to some degree by the general global slowdown in economic growth, but central and eastern Canada are taking the brunt of the blow for several reasons, including their greater reliance on the United States. But there is an increasing divide between Alberta, B.C. and Saskatchewan, which enjoy the highest credit ratings, and the eastern provinces, which face greater fiscal challenges. Aside from Ontario, which has the most severe budgetary issues, credit agencies are also keeping an eye on New Brunswick. Quebec’s public sector debt continues to mount and now stands at $242.7-billion.
“What’s special about Ontario is they’re still facing very sizable deficits and they have the slowest path to recovery,” said Eric Beauchemin, an analyst at DBRS.
Ontario is the only province that DBRS has downgraded in the past couple of years, but Mr. Beauchemin said none are immune from the effects of the European sovereign debt crisis and other global problems.
The province’s consumers have continued to spend since the financial crisis, helping to support economic recovery. But exports have been sluggish. As Mr. Carney noted this week, the United States, Canada’s largest trading partner, is grappling with its own debts, and U.S. demand for exports from this country are $30-billion lower than usual.
Ontario’s exporters have a heavy reliance on the U.S. market. As a result, the province’s economic growth is forecast to be slightly below that of the country as a whole.
It is against this backdrop that the government is examining all aspects of the province’s spending, including health care and education, which together account for 70 cents of every dollar allocated to programs. Former Toronto-Dominion Bank chief economist Don Drummond is expected to issue a paper with suggestions on how to deal with the deficit next month.
