The financial rating firms Moody’s and DBRS Morningstar are turning on yellow lights regarding the extent of the budget deficit in the Quebec government which was presented in the budget tabled Tuesday by the Minister of Finance, Eric Girard.
In this budget, the Legault government anticipates a record deficit of 11 billion for the 2024-2025 budget year, more than three times more than its previous estimate of 3 billion, and almost twice more than the average deficits of 6 billion which were recorded for the previous two years.
However, the day after the submission of this heavily deficit budget, analysts from the firm Moody’s produced a preliminary report which gave an initial “negative” opinion regarding the credit rating of the Quebec government.
“The drop in budgetary results is a negative credit finding [credit negative] which highlights the pressures that the Quebec government is facing both on revenues and on expenditures”, write Moody’s analysts in their report obtained by The Press.
“These budgetary pressures are such that the province is limited in its ability to use fiscal flexibility [hausses de taxes et d’impôts, réductions de dépenses] that we usually attribute to the Canadian provinces. »
At the firm DBRS Morningstar, we note that “the financial outlook [du gouvernement du Québec] have clearly deteriorated, reflecting a stagnant provincial economy, higher than expected salary increases in the public sector and a drop in Hydro-Québec revenues. In the medium term, this gloomy outlook could affect the evolution of the provincial government’s credit ratings.
Such preliminary opinions of negative credit from Moody’s and potential impact on “credit ratings” at DBRS due to the sudden deterioration of the budgetary situation in the Quebec government do not yet represent the equivalent of a revision or, worse, a reduction credit rating by these rating firms.
They nevertheless constitute warnings for the many investor and financial clients of Moody’s and DBRS who intervene in the multi-billion dollar market for debt securities and bonds issued by the Quebec government.
Their perception of the situation of public finances in Quebec and the ratings assigned by financial rating firms – “Aa2 stable” at Moody’s and “AA low stable” at DBRS – is also determining for the evolution of the government’s borrowing costs. provincial.
In this regard, in their analysis of the Quebec budget, the economists of Mouvement Desjardins point out that “the rate spreads of Quebec’s long-term bonds have widened slightly [détériorés] immediately after the publication of the budget. Investors appear to have been surprised by the extent of the deterioration in the province’s financial situation and the increase in its borrowing needs, despite communications [antérieures] of the government “.
Desjardins economists also highlight the strong growth in borrowing needs of the Quebec government for this 2024-2025 budget year and the following ones.
Essentially, in order to meet its budgetary needs and refinance part of its maturing debt, Quebec plans to need to borrow 36 billion on the financial markets during its 2024-2025 budgetary year, or almost 70% more. than the amount of borrowings made the previous year.
Subsequently, these borrowing needs are anticipated at 32 billion for the 2025-2026 budget year, and 27 billion on average for the three subsequent financial years until 2029.
“Over the coming months, we expect Quebec bond yield spreads to evolve in line with the appetite for risk on global markets. But in the longer term, the expanded borrowing program could accentuate bond rate spreads,” point out Desjardins economists.