Ontario’s current Aa2 ratings and stable outlook continue to be supported by a large and diverse economy, and a manageable debt burden, Moody’s Investors Service says.

In its annual report on the province, Moody’s also says there is sufficient “budgetary flexibility” for the Ontario government to meet the challenges posed by medium-term fiscal pressures.

“With output in excess of 40% of Canada’s GDP, the province has an abundant tax base to support government requirements,” the report says. “Per capita income here has long exceeded the Canadian average and, in recent years, Ontario has outperformed the nation by many economic-growth measures.”

Ontario’s new government is forecasting real economic growth of 2.3% in 2004, increasing to 3.2% in 2005.The province’s debt ratios have fallen from highs experienced in 1996-97.

“Presently, increased fiscal pressures are leading to some increases in debt ratios, but these ratios should stabilize within one to two years,” says David Rubinoff, a vice president and senior analyst with Moody’s in Toronto and author of the report. “Ontario’s debt profile should remain manageable and consistent with its Aa2 rating.”

Moody’s says there are some potential risks for the medium-term. The new government’s first budget, presented in May of 2004, revealed an anticipated deficit of $6.2 billion for the year ended March 31, 2004 and a deficit of $2.2 billion in the current fiscal year. This budgetary imbalance, reflecting ongoing spending pressures, especially for health care, is leading to increased recourse to debt financing. The rating agency notes, however, that the new government’s multi-year fiscal plan calls for declining deficits in 2005-06 and 2006-07 before achieving a balance in 2007-08.

“The forecast for an improving fiscal outlook will require significant expense restraint — scheduled to begin in 2005-06,” Moody’s says.

In a separate report, Moody’s said it was upgrading New Bunswick’s debt rating to Aa3 from A1. It also raised to Aa3 from A1 the debt rating of New Brunswick Power Corp., whose bonds are guaranteed by the Province. The rating outlook is stable.

The rating upgrade is based on the province’s prudent exercise of fiscal control over an extended period, as reflected in the attainment of budgetary targets that produce only modest additions to debt and steady progress in reducing key debt ratios, Moody’s said.