What is a province’s credit rating and why does it matter?
Like individual credit scores, provinces too have their own credit ratings that impact the rates at which they are able to borrow when government spending exceeds revenues. Assigned annually by four main credit rating agencies,(1) provincial credit ratings can be short or long term and reflect the ability of the borrower (province) to repay their loan and interest. Ratings are based on a number of factors and are a good indicator of a government’s fiscal situation.
As consumers, we generally pay close attention to our own credit scores. As residents, we should also keep a close eye on our province’s credit rating.
Unlike personal loans where borrowers rely on loans from banks, provincial borrowing is, in part, from investors in the form of bonds. The provinces pay the investors interest on these bonds until the original debt amount is repaid at a set time in the future.
Both personal and provincial borrowing is subject to interest charges, and in both cases, riskier loans incur higher interest rates. When bonds mature, governments must either repay investors or rollover the bonds into new issues at the prevailing interest rate. If a province’s credit rating is downgraded, the new issue will have a higher interest rate, thus increasing the total cost of borrowing.
When a province’s credit rating is downgraded by one of the credit rating agencies, it generally becomes more expensive to borrow, both in absolute terms as well as relative to other provinces. For example, the government of Quebec recently maintained its credit rating, while four other provinces had theirs lowered. Quebec is also considered by investors to offer the safest 10-year bonds in Canada among all the provinces.(2)
Much like someone with an impressive credit score getting low interest rates because they represent a low risk to the lender, a higher credit rating for a province represents less risk and, therefore, lower borrowing rates. What this translates to for Quebecers is reduced spending on debt. Considering that Quebec taxpayers could each carry $57,000 in government debt by the end of the year and pay more than $1,500 per year individually in interest payments, there is some comfort in the knowledge that increased borrowing rates won’t artificially raise this debt.
Notes
1. The agencies – Moody’s, Standard & Poor’s (S&P), Dominion Bond Rating Services, and Fitch Ratings – all have their own rating grid and criteria, and a credit rating by one does not necessarily reflect the same credit rating given by another.
2. While the rating does directly impact the borrowing rate, there is much more that goes into interest rates. The author acknowledges this but it is outside the scope of this piece.