China Chengxin International Credit Rating Co., Ltd.
Building 6, Galaxy SOHO, No.2 Nanzhugan Lane, Chaoyangmennei Dongcheng District, Beijing 100010
The Province of Quebec,
China Chengxin International Credit Rating Co., Ltd. (“CCXI”) has conducted a regular follow-up rating for the Province of Quebec. CCXI’s Credit Rating Committee decided to maintain the national scale credit rating of the Province of Quebec at AAA with Stable Outlook.
Yours faithfully,
China Chengxin International Credit Rating Co., Ltd. August 28, 2020
This is a translation of CCXI’s Rating Confirmation Letter “CCXI Credit Rating Committee Notice No. [2020]跟踪3536”. If there is any disparity between the Chinese and English versions, the Chinese one shall prevail.
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Rating Opinion: China Chengxin International Credit Rating Co., Ltd. (hereinafter referred to as “CCXI”) maintains the national scale credit rating of the Province of Quebec, Canada (hereinafter referred to as “Quebec”) at AAA, with a stable outlook. CCXI affirms that Quebec had a robust economic performance in 2019, and enjoys sufficient fiscal management mechanism, flexible fiscal policies and ample liquidity. However, CCXI also notices that the COVID-19 pandemic will impose negative impacts on Quebec’s economic and
fiscal strengths, and the increasingly aging population will pose challenges to Quebec’s economy in the longer term.
Overview
Economic data
2017
2018
2019
2020F
Nominal GDP
(CAD100 million)
4,192
4,394
4,587
4,405
Real GDP growth (%)
2.8
2.5
2.7
-6.5
Inflation (CPI, %)
1.0
1.7
2.1
0.7
Unemployment rate
(%)
6.1
5.5
5.1
9.5
Fiscal data
2017/18
2018/19
2019/20
2020/21F
budgetary balance
(CAD100 million)
26.22
48.03
29.63
0.00
General government
debt/GDP (%)
48.0
45.3
43.4
50.4
Debt service/fiscal
revenue (%)
8.5
7.6
6.5
7.2
Credit Strengths
Quebec’s economy experienced strong growth in 2019. Improved labor market coupled with accelerated investment growth, has contributed to a better-than-expected economic growth rate of Quebec in 2019, which outperformed the average level of Canada.
Quebec government boasts sufficient fiscal management mechanism and pursues flexible fiscal policies. Thanks to the sound economic performance, the government's effective management of fiscal expenditure, and better-than-expected revenue from the Retirement Plans Sinking Fund (RPSF), Quebec recorded a fiscal surplus of CAD2,963 million in FY2019/20, which was higher than projected.
Peer ComparisonBased on the long-term goal for debt reduction and the operation of the Generations Fund, Quebec government manages debt prudentially, and obtains sufficient liquidity thanks to pre-financing strategy and ample liquid assets. Given the accelerated early repayment of debt by using Generations Fund and the strong economic growth,
Peer Comparison
ratio of Quebec government continued to fall below 45% in FY2019/20. Quebec features ample liquidity due to the pre-financing strategy and more than CAD10 billion prudential liquid assets.
Credit Challenges
The COVID-19 pandemic will pose negative impacts on Quebec’s economic and fiscal strengths. The pandemic will plunge the Quebec economy into recession in 2020, and the fiscal balance will face greater challenges with the soaring fiscal expenditure. Moreover, affected by the mounting fiscal expenditure in FY2020/21, Quebec’s debt is expected to increase significantly.
The aging population and the potential labor shortage remain long term challenge to Quebec’s economy. The decline of birth rate highlights the aging issue and continuously reduces the labor force, posing a challenge to the mid-to-long-term economic growth and fiscal flexibility of Quebec.
Rating Outlook
CCXI holds that the credit rating of Quebec will remain stable for the next 12-18 months. Impacted by the coronavirus crisis, Quebec will be in economic contraction in 2020, struggled to maintain the fiscal balance, and dealt with the mounting debt burden. However, the Quebec’s economy is well-founded, with sufficient fiscal management mechanism and ample liquidity, which could underpin its debt solvency.
Possible triggers to a downgrade: CCXI will consider downgrading the credit rating of Quebec, if the economy runs into a sharper-than-expected recession and the continuous deterioration of fiscal strength leads to debt unsustainability.
Peer review by key data in 2019
Name
GDP (USD100
million)
Real GDP growth (%)
Fiscal revenue (USD100 million)
Proportion of tax revenue
Government debt burden
Quebec
3,440
2.7
882*
61%*
43%
Shanghai
5,466
6.0
1,592
56%
15%
Tianjin
2,021
4.8
642
36%
35%
Note: Figures followed by “*” are available in FY2019/20, RMB/USD=6.98:1, CAD/USD=1:0.75.
Macro Environment of Canada
Canada boasts very strong economic strength, while economy has entered a downward cycle in recent years. Affected by the coronavirus pandemic in 2020, the stalled economic activity coupled with the sluggish demand for oil worldwide will lead to the worst economic contraction of Canada since the Great Depression.
Canada is world’s Top10 economies and the nominal GDP totaled USD1.73 trillion with the GDP per capita standing at USD46,000 in 2019, a forefront level globally. Plagued by the decelerated consumer spending growth, the weakened energy sector investment, and the slowing US economy since 2018, Canada registered an economic growth of 2.0% and 1.7% in 2018 and 2019, a remarkable fall from 3.2% in 2017. Canada’s household debt level has kept rising in recent years and the disposable household income was limited by the interest rate hikes, making consumer spending growing at a slower pace; however, consumption still remains the primary driving force of the national economy, by contributing 0.9% to the economic growth in 2019. Owing to the sluggish investment growth in the energy sector, the gross capital formation made negative contribution to GDP in 2019. The declining oil and gas imports of the US have slowed down the growth of Canadian exports. However, since imports decelerated at a pace faster than exports, the contribution of net exports to the growth of national economy went up to 0.2% in 2019.
As the national economy enters a downward cycle, the outbreak of coronavirus has severely impacted production and consumption activities, and dented the demand for crude oil and other commodities significantly in 2020. Since the economic growth potential of Canada is closely related to the US, the
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shrinking US economy has deteriorated the external environment of the Canadian economy. Meanwhile, the service sector accounts for 70% of the Canadian economy, which is severely pummeled by the lockdown measures, causing a significant decline in consumption and investment. To deal with the impact of the pandemic, the Bank of Canada cut interest rate three times urgently, with its benchmark interest rate lowered by 150 basis points to 0.25%, and announced plans to purchase commercial papers and government securities. If the pandemic does not recur on a large scale, the Canadian economy is expected to bounce in the third and fourth quarters, 2020. The economy is forecast to decline by more than 6% in 2020 and recover to more than 5% in 2021. On the whole, the Canadian economy has entered a downward cycle, which has been exacerbated by the severe shocks caused by the globally sweeping pandemic and the falling oil prices.
The Canadian government has eased its debt burden constantly in recent years. Crippled by the COVID-19 pandemic, the economic contraction and the fiscal stimulus policy will push up its fiscal deficit sharply. However, thanks to the smooth financing channels and low interest burden, the fiscal risk is still relatively low.
Canada has maintained a relatively low fiscal deficit rate in recent years, which was lower than 1% in 2019. The relatively high level of government debt continues to decline, and the ratio of general government debt to GDP fell from 81.3% in 2016 to 78.6% in 2019. Meanwhile, the proportion of Federal Government debt is relatively low, with local currency debt making the bulk of the total, and the general government debt is mainly comprised of provincial and municipal government debt, accounting for about 46% of GDP in 2019. As Canadian local governments
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generally feature a sound credit standing and smooth
Due to the dropping imports caused by the slowdown
financing channels, their insolvency risks are controllable. In response to the pandemic, the Canadian government has launched a program worth CAD317 billion in 2020, accounting for about 15% of GDP, which offers medical support, direct assistance to families and businesses, and liquidity support through tax deferrals. The contraction of the Canadian economy will lead to declining government revenue in 2020, and the massive rescue plan puts pressure on the Canadian government’s fiscal balance. It is projected that the proportion of fiscal deficit to GDP will rise sharply to above 12% in 2020 and the ratio of government debt to GDP will climb to over 100%, which will negatively impact Canada’s fiscal strength. However, thanks to its smooth financing channels and relatively low interest burden, the fiscal risk of Canada is still relatively low.
Figure 1: Fiscal and Debt Position of Canada in 2017-2021
G
General government debt/GDP
General fiscal deficit ratio (right axis)
Source: Quebec’s Ministry of Finance, compiled by CCXI
Current account of Canada has been in deficit continuously, with the deficit potentially lifted to a higher level under the impact of the pandemic. However, the diversified financing channels and international net creditor status could provide a strong guarantee for its external solvency.
The rise in US shale oil production in recent years has led to a decline in oil and gas exports of Canada, which partially explains the current account deficit.
of the Canadian economy, the current account deficit accounted for 2.0% of its GDP in 2019, representing a slight improvement from 2.5% in 2018. Since the economic growth potential of Canada is closely related to the US and over 70% of the Canadian exports go to the US, the shrinking American economy has deteriorated the external environment of the Canadian economy in 2020. Coupled with the falling oil prices, Canada’s current account deficit is difficult to improve in the short term and the deficit will rise to 3.6% in 2020. Benefiting from international investors’ diversified investments and stably growing demands for CAD-denominated assets, Canada enjoys smooth external financing channels, and its international creditor status would also support its external solvency. As at the end of 2019, Canada’s net international investment position to GDP reached 44%.
With sophisticated financial regulation policies, the banking industry of Canada is featured with relatively low risk.
In recent years, the Canadian government has implemented effective macro-prudential policies to protect the national economy, banking system, and households from the risks associated with rising housing prices and household debt. The Canadian banking system continues to maintain a high level of capitalization and high asset quality. The coronavirus pandemic-caused economic recession and lower benchmark interest rates will undermine the profitability of the banking industry. In response to the pandemic, the Canadian banking industry will increase loans to small and medium-sized enterprises, which may negatively affect its asset quality. However, the industry is exposed to a relatively low level of risk, and the sound financial supervision will protect asset
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quality from a severe decline.
2.7% in 2019, way higher than the overall level of
Economy of Quebec
The continuously improved labor market and accelerated investment growth resulted in a better-than-expected economic growth in 2019, which far outperformed the average level of Canada.
In 2019, Quebec’s labor market continued to improve, with the unemployment rate dropping for five consecutive years to 5.1%, the lowest annual rate ever seen. Driven by multiple measures to integrate immigrants to the labor market and encourage women’s employment, Quebec raised its labor participation rate (for population aged 15 to 64) to 80% in 2019. In addition, Quebec’s wages and salaries rose slightly in 2019, boosting household demand relatively. Household consumption, as the main driving force of the economy, increased by 1.7% on a year-on-year basis, and contributed 1.0% to the economic growth. The Bank of Canada kept the policy interest rate unchanged in 2019 after announcing three interest rate hikes in 2018. Consequently, the real estate market of Quebec has recovered somewhat, and real estate investment increased by 3.9% in 2019 contributing 0.3 percentage points with the rebound in housing sales. Meanwhile, the government spending and investment contributed
0.8 percentage points to the economy, registering a growth rate of 2.8% in 2019. Net exports drove the economy by 0.6 percentage point throughout 2019. Quebec posted an export growth rate of 1.4% in 2019 due to the slower growth in the major trading partners, Canada and the US, while Quebec’s imports recorded a year-on-year increase of 0.1% in 2019. Taken together, Quebec’s real GDP growth rate stood at
Canada.
Figure 2: Economic Growth Rate of Quebec and Canada
in 2017-2021 (%)
Quebec Canada
Source: Quebec’s Ministry of Finance, compiled by CCXI
The COVID-19 pandemic will plunge the Quebec economy into contraction in 2020. However, it is expected to bounce back rapidly in 2021. In the longer term, the increasingly aging population will pose challenge to Quebec’s economy.
On March 13, 2020, just two days after the World Health Organization (WHO) officially announced the coronavirus outbreak a global pandemic, Quebec government declared a public health emergency, and promptly promulgated measures such as border control, closure of school and entertainment venues. As a result, economic activities stagnated for nearly two months. In May, Quebec government started to relax or lift some anti-epidemic measures, and got its work resumption plan into operation step by step. Due to the quite stringent lockdown measures adopted by Quebec, the pandemic has dealt a heavy blow to the service industry and exerted a severe impact on the local job market. The unemployment rate surged to 17.0% in April, then back to 13.7% in May with the reopening of the economy, and expected to reach 9.5% throughout 2020. Under pessimistic expectations, household spending will be pent up, and business and real estate investment will fall sharply. Although the
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government’s upcoming efforts to increase
population growth rate in the future, and the
infrastructure investment will partially slow down the investment decline, the investment will fall overall. The net exports will have a limited impact on the economy as both imports and exports fall sharply. Export growth will be hindered with weaker external demand caused by global trade tensions and the contraction of the US economy.
In response to the pandemic crisis, Quebec government has launched an economic stimulus plan worth CAD28.3 billion, accounting for 6.2% of its GDP. The measures under the plan include the provision of medical equipment funding, wage subsidies, tax cuts, and public infrastructure investments to alleviate the impact caused by the pandemic on local families and residents. In addition, the Federal Government has also introduced measures in support of businesses and individuals, including Canada Emergency Response Benefit (CERB) and wage subsidies. The Bank of Canada has adopted proactive monetary policy by three interest rate cuts urgently, with benchmark interest rate to 0.25%, and announced plans to purchase commercial papers and government securities. If the pandemic does not recur on a large scale, the Quebec’s economy is expected to bounce back in the second half of 2020, while the economy is forecast to decline by 6.5% throughout the year. With the resumption of economic activities and labor market, the Quebec’s economy in 2021 is predicted to bounce back by 6%, a rate higher than the Canadian average.
As Quebec’s population becomes increasingly aging, the contribution of population growth to the economy will continue to decline in the mid-to-long run. Since 2009, the fertility rate has started to go down in
increasingly aging population is expected to result in a potential labor shortage, which will affect the future development of the provincial economy. In the view of CCXI, attention should be paid to the uncertainties brought by the pandemic in the short run, and issues as population aging and potential labor shortage in the mid-to-long run.
Fiscal Strength
Sound economic performance, more rights and permits revenues, and better-than-expected investment income from the Generations Fund drove the growth of Quebec’s fiscal revenue in the FY2019/20. With the lower-than-expected fiscal expenditure, Quebec government achieved a fiscal surplus of CAD2,963 million in the FY2019/20.
Quebec government’s revenue consists of three parts, own-source revenue 1 , revenue from government enterprises, and federal transfers. In FY2019/20, Quebec generated the total consolidated revenue in CAD117,544 million, a year-on-year increase of 2.4%. Quebec’s own-source revenue in FY2019/20 stood at CAD87,831 million, a year-on-year rise of 2.0%, accounting for 74.7% of the total consolidated revenue, which was credited to more rights and permits revenues, higher wage and salary driven by the sound economic performance, and growing household consumption expenditures under rapidly expanded residential construction. In addition, the investment income from the Generations Fund and resource and energy capital revenue2 were beyond expectation. The revenue from government enterprises