Fitch Affirms Province of Quebec, Canada's Medium Term Notes 'AA-'.

NEW YORK -- Fitch affirms the 'AA-' rating to the Province of Quebec, Canada's medium-term note programme. Fitch also affirms the 'AA-' long-term foreign and local currency ratings and 'F1+' short-term rating on other outstanding debt obligations of Quebec, Canada. The Rating Outlook is Stable.

The province is increasing the aggregate maximum outstanding amount under the medium term note programme to C$19 billion, from C$13 billion. The notes are unconditional full faith and credit obligations of Quebec, and are not subject to early redemption. Proceeds will finance general expenses of the province or advances to the Financing Fund of Quebec.

The rating is based on Quebec's continuing commitment to fiscal equilibrium, a resilient and diversified economy, and market access to liquidity for both operations and debt service requirements. The ratings also recognize that while Quebec's heavy-debt stocks continue to grow in spite of adherence to the Balanced Budget Act of 1996, total debt and the burden of debt service relative to GDP has been declining. Moreover, the Gouvernement du Quebec has established the Generations Fund, a sinking fund for retirement of outstanding debt funded by royalties on hydropower generation, among other funding sources.

Sustained economic growth, larger than planned federal transfers and continued vigilance in managing expenditures enabled Quebec to end fiscal 2006 with a small surplus, despite absorbing collective bargaining expenditure increases and modest personal tax relief. As a result, the province's net financing requirement shrank to C$209 million in fiscal 2006, from C$418 million in fiscal 2005. For fiscal 2007, the government is forecasting slower economic growth and higher spending, particularly for health and social services. Nonetheless, it expects to end the year with a surplus of C$21 million, due largely to a C$869 million one-time gain from Hydro-Quebec, C$500 million of which will be deposited to the Generations Fund. The province's debt levels remain high, with outstanding direct debt and pension fund liabilities of C$118.3 billion as of March 31, 2006, equal to 42.9% of GDP; debt service consumes 12.6% of revenues.

Quebec is the largest province in Canada by land area and second in population and economic output after Ontario. Although domestic demand remains strong, Quebec's economic growth outlook has been lowered, with real GDP growth in 2006 and 2007 now forecasted at 2% per year, compared to earlier forecasts of 2.5% and 2.4%, respectively, at the start of the fiscal year. Real GDP grew 2.2% in 2005. Housing construction demand is easing from record levels, nonresidential investment remains brisk and retail activity is high due to strong steady consumer confidence and continued employment growth. Unemployment was at a historically low 7.7% in October 2006, but remains above Canada's 6.2% rate.

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