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Moody's changes Ontario debt outlook to negative from stable amid deficit fears

TORONTO - Moody's credit rating agency changed Ontario's debt rating Wednesday to negative from stable, citing concerns about the province's ability to eliminate a $12.5 billion deficit by 2017-18 as scheduled.

"After several years of weak to moderate economic growth, and higher than previously anticipated deficits projected for the next two years, the province is facing a greater challenge to return to balanced outcomes than previously anticipated," Moody's Investors Service said in a statement.

The change in outlook affects approximately $250 billion in debt securities, Moody's said as it reaffirmed Ontario's Aa2 ratings.

The ratings agency didn't wait for the Liberals to introduce their budget July 14 before lowering the outlook to negative, but Premier Kathleen Wynne has said it will be identical to the May 1 fiscal plan that was rejected by the opposition parties, triggering the June 12 election.

"Although the province has not yet tabled a new budget following its June election, indications are that it will be little changed from the May budget, which Moody's indicated was credit negative for the province," said Moody's vice president Michael Yake.

"Failure to redress the fiscal challenges would add further pressures to a debt burden that has worsened in recent years."

Finance Minister Charles Sousa said the recently re-elected Liberal government remains committed to eliminating the $12.5 billion budget shortfall in three years, and blamed a weak economy and the federal government for the fact Ontario had to "adjust" its deficit targets for the next two years.

"Due to lower revenue growth and federal cuts to transfers, we have adjusted short-term deficit targets but remain on track to balance the budget by 2017-18," Sousa said in a statement.

"We have cut expenses, and Ontario has become the leanest government in Canada with the lowest per-capita spending of any province."

But Moody's said Ontario is facing a greater challenge to return to balanced budgets than previously anticipated, and warned the Liberal government will need to make "a considerable shift from recent trends" on spending if it is to meet its deficit targets.

"Ontario's rating could be downgraded if the province fails to provide clear signals of its ability and willingness to implement the required measures to redress the current fiscal pressures," said Moody's.

"The outlook could return to stable if the province demonstrates through concrete measures that it will be able to achieve the very constrained expenditure growth rates and expected revenue growth over the term of its fiscal plan."

The Liberals were re-elected with a majority and the 2014 budget detailed plans for hundreds of millions of dollars in spending cuts, added Sousa.

"I will be working with our new President of Treasury Board to further manage and control expenses and reduce our debt and deficit through a responsible plan that ... includes new annual program savings targets of $250 million for 2014-15 and $500 million for each of the next two years," he said.

The Progressive Conservatives had warned in May and June that credit rating agencies were holding back on negative comments about the Liberal's budget until after the June 12 election to avoid interfering in the campaign.

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