Ontario credit ratings affirmed with stable trend

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Ontario credit ratings stable

Highlights

Morningstar DBRS affirmed Ontario's AA credit ratings with a stable trend, citing explicit support for the Ontario Electricity Financial Corporation and diversified economic base.
Ontario's 2026-27 deficit is projected at C$13.8 billion and debt-to-operating revenues to rise to about 229%, delaying balanced budget targets to 2028-29.
Stronger revenues are offset by higher program spending and rising interest costs, with continued ratings constrained by persistent deficits and elevated debt levels.

Budget outlook and rating rationale

As reported by Morningstar DBRS, the rating agency confirmed Ontario's Issuer Rating and Long-Term Debt rating at AA, along with its Short-Term Debt and U.S. Commercial Paper rating at R-1 (high). It also confirmed the Ontario Electricity Financial Corporation's Long-Term Obligations rating at AA, citing explicit support from the province, with stable trends on all ratings.

The agency says Ontario's 2026 budget marks a setback for the province's fiscal recovery plan, with a deficit of C$13.8 billion expected in 2026-27. Although sector-specific tariffs on steel, autos, and auto parts affect manufacturing, the economic hit is less severe than earlier feared and growth holds up better than prior budget assumptions.

Morningstar DBRS says stronger revenue performance is being offset by higher program spending and rising interest costs, leaving the near-term deficit largely unchanged. The province now expects to return to balance by 2028-29, one year later than projected in last year's plan, while adjusted debt-to-operating revenues is expected to rise to about 229% in 2026-27.

Economic resilience and fiscal pressures

Ontario remains Canada's largest provincial economy, accounting for just under 40% of national GDP, and the agency views it as reasonably well diversified. After real GDP growth of 1.3% in 2025, the province projects expansion of 1.0% in 2026, 1.7% in 2027 and 1.8% in 2028, despite ongoing uncertainty tied to U.S. trade policy and tariffs that continue to weigh on business investment and hiring plans.

Morningstar DBRS says Ontario benefits from a moderate institutional framework, prudent debt management and strong access to funding markets in Canada, the U.S., Europe and Australia. The agency adds that Ontario's budget process is generally based on conservative assumptions and supported by timely financial reporting.

At the same time, the agency warns that ongoing deficits, rising interest expense and elevated debt continue to constrain rating flexibility. It says an upgrade would require a material and sustained improvement in operating results and debt metrics, while a downgrade could follow weaker fiscal management, deteriorating liquidity or broader pressure from a sovereign rating cut.

Our earlier coverage of Morningstar DBRS’s review of the Salus (European Loan Conduit No. 33) DAC transaction explained why ratings were affirmed while negative trends were maintained. We noted that CityPoint’s collateral performance improved on rents, occupancy and arrears, but a sharp drop in valuation pushed the loan-to-value ratio higher and kept refinancing risk elevated, alongside a prior restructuring that extended maturity and tightened protections.

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