Fitch Affirms Province of Quebec at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'AA-' long-term and 'F1+' short-term ratings on senior unsecured obligations of the Province of Quebec, Canada (Province), 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, 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

COMMITMENT TO BALANCE: The Province has a demonstrated commitment to achieving fiscal equilibrium, with solid progress in fiscal consolidation in recent years and a full embrace of the multi-year budget balancing targets by the new government. The Province expects to achieve budget balance in the current fiscal year.

HIGH DEBT: Debt is high relative to resources and has grown as the Province carried out its multi-year fiscal consolidation program. Debt management is strong and centralized, and the Province maintains ample access to liquidity for both operations and debt service requirements.

FISCAL FLEXIBILITY: Fiscal flexibility is provided by a willingness to adjust tax rates, budgeting a contingency reserve and recent progress in spending control. Although revenues have been below recent forecasts due to the weak recovery, longer term spending control remains the most persistent risk to fiscal balance.

DIVERSE ECONOMY: The economy is large and diverse. Growth since the recession has been modest. Vulnerabilities include exchange rate movements, export dependence on U.S. markets and a significant manufacturing sector.

SOVEREIGNTY MOVEMENT REMAINS: The sovereignty movement has been a source of uncertainty in the past although it is not a current issue.

FINANCEMENT-QUEBEC'S RATING LINKED TO PROVINCE: The rating for Financement-Quebec reflects the credit strength of the Province given the Province's unconditional guarantee.

RATING SENSITIVITIES

BALANCED OPERATIONS AND DEBT REDUCTION: Failure of the Province to improve fiscal and debt metrics in line with current forecast expectations would result in downward rating pressure. The Province's debt metrics limit the likelihood of upward rating changes.

CREDIT PROFILE

Quebec's long-term 'AA-' and short-term 'F1+' ratings are based on its careful financial management, a demonstrated commitment to achieving fiscal balance and reduced debt as the economy recovers, a diversified economy, and ample market access to liquidity for operations and debt service.

The rating level is tempered by the Province's high debt burden. Quebec has had considerable success since the recession in implementing a multi-year framework to return to fiscal balance in fiscal 2014, and it benefits from a decade of actions prior to the downturn to lower its debt burden. Despite a change of government in the September 2012 provincial elections, there has been no change in the Province's commitment to returning to balance and lowering debt. These factors lent credibility to the Province's policy target of achieving its multi-year consolidation and resuming debt 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. 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 fiscal 2010 budget articulated a comprehensive, multi-year approach to return to balance by fiscal 2014, and the Province has remained on track with this plan since then.

The Province's high debt level remains its most significant long-term credit challenge, in Fitch's view. Outstanding gross debt, including debt of consolidated entities and pension liabilities, was C$193.6 billion in fiscal 2013, equal to approximately 54.2% of GDP. Debt service consumes 11.4% of fiscal 2013 budgetary revenues, a high but manageable level. Much of the current debt burden stems from accumulated deficits built over prior decades and since the recession, amounting to C$117.8 billion in fiscal 2013 or 32.9% of GDP. Total public sector debt, at C$258.6 billion, equals 72.3% of GDP.

The government continues to forecast that gross debt will begin to decline as a percent of GDP in fiscal 2014, and its debt burden target includes achieving a gross debt to GDP ratio of 45% and accumulated deficit to GDP of 17%, in fiscal 2026. Debt figures are net of the Generations Fund balance, a reserve for debt reduction, funded at about C$5.2 billion in fiscal 2013. Despite its high debt metrics, the Province has demonstrated broad market access for borrowing and is a sophisticated debt manager.

Despite a change in government and a notably weaker than expected economic recovery affecting revenue collections in fiscal 2013, the Province has remained on track to achieve balance in fiscal 2014, which began on April 1. In each year since the consolidation framework was announced in fiscal 2010, budgetary measures have been adopted to raise revenues and reduce spending growth. The Province has repeatedly demonstrated the flexibility to raise additional revenues through tax law changes, although phased-in higher sales tax rates may now be affecting consumer spending. Program spending growth, which historically had often exceeded revenue growth and remains a long-term risk, has been lowered considerably.

Preliminary results for fiscal 2013 show the year ending with a deficit of C$1.5 billion, as targeted in the framework. Total budgetary revenues are estimated at almost C$68.7 billion, 4.8% higher than fiscal 2012 budgetary revenues. The fiscal 2013 estimate incorporates two downward forecast revisions (in November 2012 and March 2013) related to economic underperformance, totaling C$345 million; resulting gaps were mostly addressed by drawing from the contingency reserve established for this purpose. Total program spending is estimated to have risen 1.9%, to C$62.6 billion, a rate considerably below historical trends. The new government opted to close the Hydro-Quebec (HQ) Gentilly-2 nuclear facility, resulting in a C$1.9 billion extraordinary charge, which is excluded from the budgetary figures noted above; future HQ savings from the closure have been dedicated to the Generations Fund.

The government tabled the fiscal 2014 budget four months early, in November 2012, and updated its outlook in March 2013. Fiscal 2014 is expected to end in balance following the deposit of C$1.1 billion in surplus revenues to the Generations Fund. Budgetary revenues rise 5%, to C$72.1 billion, while program spending rises 1.9%, to C$63.8 billion. The Generations Fund balance ends the fiscal year at C$5.6 billion, after C$1 billion is applied to repaying maturing debt.

The new government has implemented various changes to spending policies and tax rates (including a higher top marginal personal income tax rate and a progressive health contribution), with little impact on the overall budget framework. Positively, in Fitch's view, its response to economic under-performance has included broader cuts to capital spending, program efficiencies, and other measures to maintain the framework targets.

Quebec 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 continues to affect the Province. Real GDP rose 1% in 2012 and is forecast by the Province to rise 1.3% and 1.8% in 2013 and 2014, respectively, below the growth rates forecasted in November 2012, when the fiscal 2014 budget was tabled. Labor market gains have continued; the unemployment rate, at 7.8% in 2012, is forecast by the Province to drift lower, to 7.5% and 7.4% in 2013 and 2014, respectively. The strength of the economic recovery in the U.S., Quebec's main international trading partner, remains a key uncertainty to achieving forecast expectations.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', Aug. 14, 2012;

--'International Local and Regional Governments Rating Criteria,

Outside the United States', April 9, 2013.

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

International Local and Regional Governments Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704438

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790170

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Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com