Fitch Affirms Quebec at 'AA-'; Outlook Positive

2008-05-14 23:34:57 -

- Fitch today affirmed its 'AA-' rating on the long-term debt, and 'F1+' rating on the short-term debt of the Province of Quebec, Canada (the province). The Rating Outlook is Positive. The affirmation and Positive Outlook applies to ratings as detailed at the end of this release.

The province's 'AA-' rating is based on strong financial management, demonstrated commitment to fiscal improvement and debt reduction, a resilient and diversified economy, and market access to liquidity for both operations and debt service requirements. The rating recognizes that while Quebec's debt levels continue to grow despite adherence to the Balanced Budget Act of 1996, progress has been made in recent years in lowering debt levels relative to GDP. Moreover, the government continues to set aside resources, largely from hydropower, for the Generations Fund, established in June 2006 in order to retire provincial debt. Rating progress will be tied to continued adherence to policies that ensure budgetary balance and progress in debt reduction, even as the province faces twin economic challenges from an unfavorable exchange rate and a slowing U.S. economy.

Quebec's economy maintained solid momentum in 2007 and into 2008, which combined with growth in federal transfers is enabling the province to end fiscal year (FY) 2008 with a surplus of C$1.1 billion before transfers to the Generations Fund and the budgetary reserve. Total budgetary revenues rose 3.7%, with own-source revenues, excluding government enterprises, rising 1.8% despite phase-in of personal and corporate tax reductions. The budgetary reserve balance reached C$1.8 billion, or 2.9% of budgetary revenues. The FY 2009 budget plan maintains progress toward debt reduction despite economic deceleration. Revenue growth is conservatively forecast to grow only 0.1%, the result of continued phase-in of tax cuts and a lowered economic forecast, while spending rises 3.6%, largely for health and social service needs. The plan relies on C$1.4 billion from the budgetary reserve to maintain balance and fund a deposit of C$742 million into the Generations Fund, bringing its accumulated total to C$1.9 billion. The plan includes a C$200 million contingency against further economic slowing.

The province's debt levels are high, with outstanding direct debt and pension fund liabilities of C$144.9 billion in FY 2008 after last year's accounting reforms, equal to approximately 48% of GDP; debt service consumes 11.1% of revenues. Long-term public sector debt, at C$197.3 billion, equals 66% of GDP. Beginning in FY 2008, the province raised the dividend payable from Hydro-Quebec, an enterprise of the province, to 75% of net profits, from 50%. The dividend increase is projected to reduce government borrowing by almost C$1.8 billion through FY 2009.

Quebec is Canada's largest province by land area and second to Ontario in population and economic output. Strong labor market trends in the last decade have underpinned recent economic momentum, despite a strengthening Canadian dollar and now sagging U.S. economy. Employment rose 2.3% in 2007, while real GDP grew 2.4%. Economic slowing in the U.S., Quebec's largest trade partner, will lead to deceleration in Quebec's economy through 2008 and 2009, offset by continued strong domestic demand. Real GDP growth slows to 1.5% in 2008 and 2% in 2009. Job growth also slows, but personal income and consumption remain robust through the forecast period.

Fitch affirms the following ratings:

Province of Quebec:

--Long-term Issuer Default Rating (IDR) 'AA-';

--Short-term IDR 'F1+'

--Local Currency Long-term rating 'AA-';

--Senior unsecured debt: 'AA-';

--Commercial paper 'F1+'

Financement-Quebec:

--Long-term IDR 'AA-';

--Short-term IDR 'F1+';

--Local Currency Long-term Rating: 'AA-';

--Senior unsecured debt 'AA-';

The Rating Outlook on the long-term ratings is Positive.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Douglas Offerman, +1-212-908-0889 (New York)
Roger Scher, +1-212-908-0240 (New York)
Stephen Shevoley, +1-416-703-4824 (Toronto)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)