The government, which is facing a $15-billion deficit this year, tabled a budget last month outlining a plan to re-balance the books in 2017-18. It includes limiting spending increases to just one per cent a year for the next five years.
The New Democrats allowed the budget to pass its first major hurdle in the legislature Tuesday after brokering a deal with the Liberals that included hiking taxes for the rich.
But Moody's expressed concern Thursday about the government's ability to rein in spending and stay on track to achieve a balanced budget.
"The downgrade of Ontario's rating reflects the growing debt burden and the risks surrounding the province achieving its medium-term fiscal plan given the subdued growth outlook, extended timeframe back to balance and ambitious expenditure targets," Jennifer Wong, Moody's lead analyst for Ontario, said in a release.
The province's expense growth targets appear to be "particularly ambitious," given the average seven per cent annual growth in expenses over the last five years, Moody's said.
As a result, it's downgrading Ontario's issuer and debt rating to Aa2 with a stable outlook from Aa1 with a negative outlook, affecting $202 billion in debt securities.
The downgrade came after Moody's put Ontario on credit watch last fall.
Over the last week, two other credit agencies have weighed in on the province's debt rating. DBRS maintained its "stable" outlook Thursday, just a day after Standard and Poor's revised its outlook from "stable" to "negative."
The Progressive Conservatives, who voted against the budget, warned the Moody's downgrade would have major consequences for a province that's already mired in debt.
"It means that $202 billion in paper — which means Ontario debt — could be affected very shortly by higher interest rates, and therefore larger cost and a larger piece of the budget which has not been allocated for it," said Tory finance critic Peter Shurman.
But Finance Minister Dwight Duncan said the downgrade won't have a significant impact on the province's finances — either on its ability to borrow or pay interest on its debt.
"I'm advised by the Ontario Financing Authority they don't see this as having any significant impact at all on what we pay in interest," he said.
"Both the primary and secondary markets for our bonds are very healthy. We're still in the top echelons of credit ratings, so no, we're not worried about that."
The new Aa2 rating is higher than what other agencies have set, he said.
However, if Ontario's credit rating slips below double A in a year or two, it will become more difficult to borrow money, Duncan said. The province pays about $10 billion a year to service its debt.
What the reports show is how important it is for the province to stick to its deficit-reduction targets, he said.
All three credit rating agencies agree that Ontario has "difficult targets to meet," but the government will keep working to achieve them, Duncan said.
"We embrace their recommendations and we concur that we've set very difficult targets," he said.
"As you see, we've got three ratings from three different agencies in 24 hours, all of which are a bit different but all of which have some similarities."
One analyst noted that other credit rating agencies downgraded Ontario's rating in 2009 and one could argue that Moody's is simply catching up.
"Overall, we judge that the fallout on Ontario’s credit spreads from today’s downgrade should be relatively contained," Warren Lovely of CIBC World Markets, said in an email.
"Successfully executing the fiscal plan and reversing some accumulation in the debt would be needed to see upward pressure on the rating."Suggest a correction