Overview -- In our view, Quebec has good prospects to achieve a balanced budget by fiscal 2014 and has demonstrated its commitment to reducing debt in the medium-to-long term. -- We are affirming our ratings, including our 'A+' long-term and 'A-1+' short-term issuer credit ratings, on the Province of Quebec. -- The stable outlook reflects our expectation that Quebec's revenue and spending initiatives will lead to a larger operating surplus (in Standard & Poor's adjusted terms) and a material improvement in the province's after-capital deficit as a percent of total revenues in the next two fiscal years. Rating Action On July 11, 2012, Standard & Poor's Ratings Services affirmed its ratings, including its 'A+' long-term and its 'A-1+' short-term issuer credit ratings, on the Province of Quebec. At the same time, Standard & Poor's affirmed its 'A+' senior unsecured debt rating on Financement Quebec and Hydro-Quebec (the provincially owned and guaranteed electric utility). The outlook is stable. The affirmation reflects our view of the province's prospects for achieving a balanced budget by fiscal 2014, its commitment to debt reduction in the medium-to-long term, its good economic growth prospects in the next two years, adequate liquidity levels, and support from the federal government. Rationale The ratings on Quebec are supported by what Standard & Poor's views as the province's large, wealthy, and well-diversified economy, which remains resilient in the face of continuing global economic challenges, ongoing support from the federal government, and exceptional access to capital markets that provides for positive liquidity support for the rating. The provincial government estimates real GDP growth to have slowed to 1.7% in 2011 from a 2.5% gain in 2010. The government is forecasting real GDP growth to advance by 1.5% in 2012 and a further 1.9% in 2013. While recognizing that the tenuous recovery in the U.S. and the European sovereign debt crisis pose risks to Quebec's economic outlook, we believe that the government's forecast for real GDP growth underpinning its fiscal plan is reasonably cautious. In our view, a further credit strength is the ongoing support from the federal government. The Government of Canada provides significant and predictable transfers to the provinces through the key Equalization, Canada Health Transfer, and Canada Social Transfer programs. In Quebec, transfers represented more than 22% of total revenues in fiscal 2012 (year ended March 31), up from the 19% share recorded in 2007, prior to the onset of the global economic recession. This increase mainly reflects higher federal equalization payments, federal compensation related to the Harmonized Sales Tax, and higher funding for labor market programs. We believe that Quebec's credit profile also benefits from adequate liquidity levels and exceptional access to global financial markets for refinancing needs, thanks in large part to a well-entrenched secondary market for its debt. At the end of fiscal 2012, the province had estimated cash and temporary investments of about C$4.4 billion and a further C$4.3 billion in its Generations Fund. The purpose and sole use of the Generations Fund is to reduce the province's debt burden. Deposits come mainly from water power rentals from Hydro-Quebec, the province's wholly owned electric utility. The province also has a large sinking fund balance of C$6.1 billion, which is available for repayment of maturing debt issues. As well, in our opinion, Quebec, together with other large provincial borrowers, has benefited from a flight to quality in the past few years of global market turmoil. We believe the province's main credit challenges include the already-high tax-supported debt burden and its relatively large after-capital deficits. In fiscal 2012, the province's tax-supported debt as a percent of consolidated operating revenues increased further to about 189% of operating revenues or 48% of GDP. We believe that Quebec's tax-supported debt burden, which is high compared with peers', will begin to decline in fiscal 2013 to about 183%. The province's after-capital deficit rose further to 6.8% of total revenues in fiscal 2012 (Standard & Poor's adjusted) from about 5.4% of total revenues in fiscal 2011. We expect that Quebec's after-capital deficit will improve to about 4.7% of total revenues in fiscal 2013. However, we believe that the province's progress toward a balanced budget and significant improvement in its after-capital deficit may face headwinds from the slowdown in the global economy in the latter part of 2012 stemming from the European sovereign debt crisis and lackluster recovery in the U.S. Any delay to Quebec's fiscal recovery would likely result in increased debt issuance beyond our expectations and exacerbate an already-high debt burden. Outlook The stable outlook reflects our expectation that Quebec's revenue and spending initiatives will lead to a larger operating surplus (in Standard & Poor's adjusted terms) and a material improvement in the province's after-capital deficit as a percent of total revenues in the next two fiscal years. We also expect the province to maintain its commitment to debt reduction through additional deposits to its Generations Fund. We believe that Quebec's tax-supported debt as a percent of consolidated operating revenues will stabilize this fiscal year at about 189% of revenues and decline in the medium term. A return to after-capital surpluses and a decline in its tax-supported debt burden, continued Generations Fund deposits, and faster economic growth in the next two fiscal years could lead to a positive outlook. Conversely, we believe that failing to maintain the debt reduction commitment, substantial operating and after-capital deficits beyond fiscal 2013, or the inability to stabilize debt burdens beyond fiscal recovery in 2014 could put downward pressure on ratings. Related Criteria And Research Methodology For Rating International Local And Regional Governments, Sept. 20, 2010 Ratings List Ratings Affirmed Quebec (Province of) Issuer Credit Rating A+/Stable/A-1+ Senior Secured A+ Senior Unsecured A+ Commercial Paper Global scale A-1+ Financement-Quebec Senior Unsecured A+ Commercial Paper Canada scale A-1(HIGH) Hydro-Quebec Senior Unsecured A+ Senior Unsecured AA-/Stable Commercial Paper Canada scale A-1(HIGH) Global scale A-1+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.