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Rating agency downgrades Ontario’s debt, upgrades overall outlook

Ontario Finance Minister Charles Sousa said the province remains committed to eliminating its $12.5-billion deficit by 2017-18.

Sean Kilpatrick/The Canadian Press

A major credit rating agency has downgraded Ontario's debt, warning that the province may have trouble meeting its goal of balancing the budget in 2018.

New York-based Fitch Ratings said on Friday the province faces "difficult actions" if it wants to eliminate its $12.5-billion deficit on schedule.

Fitch cut its rating on Ontario bonds to double-A-negative from double-A on Friday.

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The agency expressed "concern" that Ontario's deficit is going up, rather than down, for the second consecutive year.

The big risk for Ontario is the long time the province will take to get back to balance, explained Douglas Offerman, a Fitch analyst.

"To achieve that zero [deficit], they are going to have to constrain spending pretty significantly and pretty consistently from year to year, and that becomes difficult because there are so many moving parts," Mr. Offerman said.

Ontario, he said, has a "difficult road to travel."

Fitch shifted its outlook for the province to "stable" from "negative," an indication that another downgrade is unlikely in the short term.

Ontario Auditor-General Bonnie Lysyk warned earlier this month that the province's debt is growing faster than the overall economy, leaving the government vulnerable to changes in interest rates and diverting resources from program spending.

With the downgrade, Fitch is merely catching up with other major credit rating agencies, such as Standard & Poor's and Moody's, which already rank Ontario at the lower end of high-grade bonds, said Sébastien Lavoie, assistant chief economist at Laurentian Bank Securities in Montreal.

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He predicted the downgrade would have little impact on the province's borrowing costs.

"There is no market reaction so far," Mr. Lavoie said, adding that the difference in the interest rates on Canadian and Ontario government bonds has actually narrowed in recent days.

Ontario is in a pretty good spot economically right now and is poised to lead the country in growth in 2015 and 2016, Mr. Lavoie said. And that bodes well for tax revenue.

The province is getting a lift from a combination of cheaper oil, a lower Canadian dollar and the rapidly improving U.S. economy, according to Mr. Lavoie. "All the macro factors are good for Ontario."

Even Fitch acknowledged there is "upside potential" to the province's own growth forecast of 2.4 per cent for next year.

Ontario Finance Minister Charles Sousa said in a statement the province remains committed to eliminating the deficit by 2017-18. He said Ontario will continue to "manage and control spending," including keeping a lid on compensation costs and delivering services more efficiently.

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He also pointed out that the province's interest costs remain below the target set in the last budget. "We will continue to be mindful of how we spend each dollar and are focused on eliminating the deficit while making the necessary investments to grow our economy."

Moody's currently rates Ontario's bonds Aa3, and Standard & Poor's at double-A-negative.

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