Provincial Credit Ratings in Canada: An Ordered Probit Analysis

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The author estimates the relationship between the provincial credit ratings, as assessed by Standard & Poor's, and a number of economic variables, using the ordered probit methodology. All the variables in her estimation prove to be significant. In particular, she finds that downgrades take place at almost the same speed at different levels of the debt-to-GDP ratio, based on a pooled sample of nine provinces. Based on smaller pools of provinces with similar economic charateristics, she finds that downgrades take place at different speeds at different levels of the debt-to-GDP ratio.

To assess the likelihood of further provincial government rating downgrades, the author generates probabilistic projections of the provincial credit ratings over the years 1996 to 2000 under various assumptions about government revenue and spending growth. The projections suggest that no further downgrades are likely for provinces whose policies result in only moderate increases or decreases in the debt-to-GDP ratio. Some provinces may be upgraded if they benefit from income growth or follow fiscal policies that result in a declining debt-to-GDP ratio or an improvement in other explanatory variables.

Topic(s): Financial markets
JEL Code(s): H, H6, H63