ECONOMIC AND FINANCIAL PROFILE OF QUÉBEC

2 0 0 4 E d i t i o n

E C O N O M I C A N D FINANCIAL PROFILE OF

QUÉBEC

• Québec ranks first in terms of area in Canada,and second in terms of population, with7.5 million people.

• With a gross domestic product of over to C$260 billion in 2003 (US$184 billion or €163 billion), Québec ranks among the top 20industrialized countries of the OECD.

• Québec's per capita GDP ranks tenth amongOECD countries, ahead of Japan, France,Germany and the United Kingdom:_ it is over 10% higher than the OECD average.

• The North American Free Trade Agreement(NAFTA) provides Québec with preferred access toa market of over 400 million consumers, 45% ofwhom live within 1000 km of its metropolis,Montréal.

2

ECONOMIC AND F INANCIAL PROFILE OF QUÉBEC

Photo acknowledgments:

Attila Dory : page 19;CAE: page 7;Hydro-Québec: page 6;Kedl Photographers: page 19;Ministère des Ressources naturelles: page 5;NASA: Page 7.

The ECONOMIC AND FINANCIAL PROFILE OF QUÉBECis produced by the Relations with Investor ServiceMinistère des Finances12, rue St-Louis, bureau 2.31Québec (Québec) G1R 5L3Phone: (418) 646-4285Fax: (418) 643-4700Email: [email protected]

This document is available on the web at: www.finances.gouv.qc.caSubscription available

ISBN 2-550-42451-4ISSN 1185-6637Legal depositBibliothèque nationale du Québec, 2004Publication date: April 2004

3


Q U É B E C

Vancouver

Toronto

MontréalQuébec

Boston

New York

Washington

Chicago

Detroit

Atlanta

CANADA

UNITED STATES

QUÉBEC

MEXICO

Mexico

1 000 km

2 000 km

3 000 km

4 000 km

Sources: Institut de la statistique du Québec and ministère des Finances.

0%

1%

2%

3%

4%

2003 2004 2005

3

4

2

1

0

1.7

2.72.9

4


E C O N O M Y

RECENT ECONOMIC DEVELOPMENTSAND OUTLOOK

ECONOMIC GROWTH ACCELERATES

• Québec's economy grew by 1.7% in 2003:_ sustained by high consumer and business confidence and

low interest rates, domestic demand remained vigourous:

- increasing by 3.5%._ residential housing starts continued to rise with 50 300

new units, the best performance in fifteen years;_ business non-residential investments grew by 2.3%;_ Québec's exports declined 0.9%:

- reflecting the strength in the Canadian dollar whichmade foreign products more affordable while makingproducts made in Québec more expensive in othercurrencies.

• Employment continued to grow: _ 57 200 new jobs were added, an increase of 1.6%.

• In 2004, economic growth is expected to accelerateto 2.7%:_ this forecast is consistent with the average private sector

forecast of 2.6%;_ exports will rebound with a rise of 3.2%;_ job creation will remain strong with the addition of

54 000 new jobs;_ the inflation rate will stay relatively low at 1.5%.

• The economy should also be vigorous in 2005 with anexpected GDP growth of 2.9%.

ECONOMIC INDICATORS(AS A PERCENTAGE CHANGE)

2003 2004 2003 2004

Québec Canada

Real GDP growth 1.7 2.7 Interest rates1

Consumption 4.9 4.1 − Treasury bills (3-month) 2.9 2.2Housing starts (in thousands) 50.3 44.4 − Bonds (10-year) 4.8 4.8International exports of goods(1997 $) -0.9 3.2

Exchange rate (¢US) 71.4 76.5

Unemployment rate1 9.1 9.1Employment (in thousands) 57 54Consumer price index (Canada) 2.8 1.5

REAL GROSS DOMESTIC PRODUCT (CHANGE IN PERCENTAGE)

1 Level in percent.

5


E C O N O M Y

A CHANGING ECONOMY

A CONSTANTLY ADVANCING ECONOMY

• Québec's economy has undergone major changes inrecent decades:_ long known for its natural resources, the economy now

has a developed service sector that accounts for 71%of GDP.

• High-technology industries play an increasinglygreater role: _ in particular, Montréal ranks fourth in North America

regarding number of jobs per capita in high-technologysectors.

NATURAL RESOURCES:REMARKABLE WEALTH

• Québec is noted for the abundance and variety of its natural resources, making it a major player at theglobal level.

• Québec's forests are immense:_ they cover almost half its territory, the equivalent of

Sweden and Norway combined;_ the wood products and pulp and paper industries are

significant components of Québec's manufacturing sector;_ Québec is the world’s leading exporter of newsprint.

BREAKDOWN OF REAL GDP BY MAJOR SECTOR - 2003

Source: Institut de la statistique du Québec.

• Québec's mineral wealth is recognized worldwide:_ according to the Fraser Institute 2003-2004 survey of

the mining sector, Québec ranks fourth in the world interms of its mineral investment attractiveness.

• Québec is the fourth-largest producer of aluminiumin the world.

• Fresh water covers 10% of Québec’s huge territory:_ 130 000 waterways and a million lakes have

been listed;_ making it one of the largest reservoirs in the world.

2.5%70.7%

26.8%

- Manufacturingindustries 21.7%

- Construction 5.1%

- Finance, insurance, real estateand leasing 17.1%

- Education and healthservices 11.3%

- Commercial services 11.7%

- Trade 11.9 %

- Information and culture 4.4%

- Transportation andwarehousing 4.3%

- Other 10.0%Secondary Sector

Primary SectorService Sector

100

169

219198

352

535

188

228

Montréal Belgium Chicago Boston New YorkGermany UnitedKingdom

Toronto

600

500

400

300

200

100

0

6


E C O N O M Y

HYDRO-QUÉBEC, A MAJOR ASSETFOR QUÉBEC

• Created in 1944, Hydro-Québec is a government corporationwhose sole shareholder is the Québec government.

• The primary mission of Hydro-Québec is to supply electricityto its 3.7 million subscribers in Québec.

• Hydroelectricity can be developed thanks to Québec'sextensive reserves of fresh water:_ in 2003, 97% of Hydro-Québec's production was from

waterpower: a clean and renewable energy source;_ the hydroelectric developments include 25 major

reservoirs, having a capacity of 172 TWh.

• With an average price of 3.2 cents US per kilowatt-hour,Québec boasts one of the lowest electricity costs inNorth America:_ a major attraction for industries.

• Hydro-Québec operates the biggest electricity transmissionnetwork in North America and delivers high-quality energyto a clientele in Québec, Canada and the United States:_ the network has been designed to transmit

simultaneously the maximum power of all Hydro-Québec's power stations and to ensure a reliablesupply, taking into account the harsh climate conditions.

• To support its growth, Hydro-Québec is continuing thedevelopment of its commercial activities:_ delivery to Hydro-Québec Distribution of a volume of

heritage electricity for the Québec market, representing amaximum of 165 TWh per year, at a fixed price of 2.79cents per kilowatt-hour;

_ lucrative arbitrage and purchase-resale activities on markets outside Québec.

• Hydro-Québec's expertise is recognized throughout theworld in the hydroelectricity production and high-voltagetransmission sectors:_ particularly in Central America, South America, Australia

and the United States.

• Over the next five years, Hydro-Québec expects to increaseits production capacity, in particular by commissioning newhydroelectric generating facilities in Québec:_ to adequately meet domestic demand that should grow

by 1.3% per year;_ to take advantage of business opportunities in Québec

and in neighbouring markets.

HYDRO-QUÉBEC 2003 HIGHLIGHTS

Sales $11.4 billion

Net income $1.9 billion

Net assets $57.7 billion

Number of employees Over 20 000

Installed power 33 616 MW1

COMPARATIVE INDEX OF ELECTRICITY PRICES - INDUSTRIAL CUSTOMER ACCOUNTS(MONTRÉAL=100)

Note: Monthly bill for a demand of 10MW, a consumption of 5760 MWh and a load factor of 80%. Sources: Hydro-Québec, Comparison of Electricity Prices in Major North American Cities, May 1, 2003 and

EURELECTRIC, Electricity Tariffs as of 1 January 2003 (Published Tariffs).

1 Hydro-Québec also has access to most of the output of the Churchill Falls generating station with nominalpower of 5 428 MW and to the production of the Matane and Cap-Chat wind farms consisting of 133wind-power generators with total installed capacity of 100 MW.

7


AN ECONOMY FOCUSED ON HIGH TECHNOLOGY

E C O N O M Y

QUÉBEC SUCCESS STORIES

• Mobile phones work because of algorithms developed byresearchers at the University of Sherbrooke, 150 km southeast of Montréal.

• The magnificent pictures of Mars taken by the rovers Spiritand Opportunity since January 2004 were transmitted bysensors developed by Dalsa in Bromont, 100 km south ofMontréal.

• Ubisoft Montréal received the award for best console gameof the year in 2003 and 2004.

SECTORS OF EXCELLENCE

• Biopharmaceutical industry:_ some 50% of shipments and 45% of investments of the

Canadian biopharmaceutical sector are based in Québec;_ Québec is home to six of the seven research centres of

multinational pharmaceutical companies in Canada;_ the Montréal region ranks fourth among major North

American metropolitan regions in terms of job density inthe biopharmaceutical sector;

_ clinical research companies known the world over arebased in Québec.

• Aerospace:_ Québec ranks sixth in the world:

- Montréal is the second-largest aerospace centre inthe world, behind Seattle but ahead of Toulouse.

_ one person in 180 works directly in the aeronauticsmanufacturing industry in Québec;

_ over 80% of production is exported.

• Information technologies :_ 70% of production is exported;_ many software and multimedia companies are known

the world over for their creativity and know-how.

0% 100% 200% 300% 400% 500% 600% 700%

260

240

197

79

68

42

179

687

0 100 200 300 400 500 600 700

0%

10%

20%

30%

40%

50%

60%

70%

45

1988 2003 1988 2003 1988 2003

54

22

34

2320

70

60

50

40

30

20

10

0

8


E C O N O M Y

AN OPEN ECONOMY

QUÉBEC: PARTICIPANT IN THE WORLDECONOMY

• The North American Free Trade Agreement (NAFTA) openeda huge market to Québec:_ in 1988, before NAFTA, exports accounted for 45% of

Québec's GDP;_ they now account for 54% of GDP.

• Since 1988, international exports of merchandisehave tripled, from 22% to 35% of GDP:_ roughly 85% are shipped to the United States.

QUÉBEC: A MAJOR BUSINESS PARTNER OF THE UNITED STATES

• The strong trading relationship between the United Statesand Québec is confirmed by the ranking of economicpartners of the United States.

• Québec is the sixth-largest exporter on the U.S. market:_ ahead of the United Kingdom and South Korea.

• Québec is also an excellent customer of the United States:_ it is the fourth-largest export market:

- ahead of the United Kingdom, Germany, China andSouth Korea.

HIGH VALUE-ADDED EXPORTS

• Québec's international exports reflect its diversifiedindustrial structure in which high-value-added products are growing in importance.

• Capital goods as a proportion of exports have risen sharply,from 23% in 1988 to 38% in 2003.

• The growth of international merchandise exports between1988 and 2003 was driven chiefly by the followingcapital goods:_ aircraft and parts: 687%;_ machines, tools and office equipment: 260%;_ chemical products and petroleum derivates: 240%.

CUMULATIVE GROWTH OF MERCHANDISE EXPORTS -1988-2003(AS A PERCENTAGE)

RANKING OF THE ECONOMIC PARTNERS OF THE UNITED STATES - 2003

QUÉBEC’S EXPORTS(AS A PERCENTAGE OF GDP)

Sources: US Census Bureau, Statistics Canada, Institut de la statistique du Québec and ministère des Finances.

Source: Statistics Canada.

Source: Institut de la statistique du Québec.

Total exports

Interprovincialexports

Internationalexports

Aircraft and parts

Machines, tools andoffice equipment

Chemical products andpetroleum derivates

Telecommunications equipment

Total

Manufactured goods relating tonatural resource processing

Primary products

Transport equipment excludingaircrafts and parts

Exporters to the Export markets ofUnited States the United States

1

2

3

4

5

6

7

8 8

7

6

5

4

3

2

1Canada

Mexico

China

Japan

Germany

Québec

United Kingdom

South Korea

China

South Korea

Germany

United Kingdom

Québec

Japan

Mexico

Canada

1,0

1,5

2,0

2,5

3,0

1986 1989 1992 1995 1998 2001

2.0

1.5

1.0

2.5

3.0

9


R&D: A STRATEGIC INVESTMENT

• Over the last 15 years; R&D as a proportion of GDP hasbeen rising.

• 63% of R&D is carried out by companies:_ 24 companies with their head office in Québec are

among the 100 Canadian companies that invested themost money in R&D during their last fiscal year(Research Money, 2003).

GROSS DOMESTIC EXPENDITURE ON R&D - QUÉBEC(AS A PERCENTAGE OF GDP)

Sources : Institut de la statistique du Québec.

A LEADER AMONG INDUSTRIALIZEDCOUNTRIES

• In 2001, Québec allocated 2.67% of its GDP to R&D:_ higher than the OECD, G7 and European Union averages.

• Québec's objective is to invest 3% of GDP in R&D by 2008.

AN INNOVATIVE ECONOMYE C O N O M Y

0,6% 0,7% 0,8% 0,9% 1,0%

INTERNATIONAL COMPARISON OF THE TAX TREATMENTOF AN R&D EXPENDITURE1 2

Québec

Ontario

Canada

United Kingdom

United States

France

Japan

Germany

Italy

0.6 0.7 0.8 0.9 1.0 1.1

0.76

0.83

0.90

0.94

0.99

1.02

1.03

0.93

0.72

1 Revenue needed by a large company to cover an R&D expenditure of $1. The lower the ratio, the moreattractive the tax measures

2 Rates applicable in 2001-2002 in countries. Rates applicable as at April 1, 2004 for Québec and Ontario.Source: Based on a study by the OECD, Tax incentives for research and Development: Trends and issues,

Septembre 2002.

,0%

,5%

,0%

,5%

,0%

Sources: OECD, Main Science and Technology Indicators, 2003-2, January 2004, Statistics Canada and Institut dela statistique du Québec.

Québec G7 OECD Canada

GROSS DOMESTIC EXPENDITURE ON R&D - 2001(AS A PERCENTAGE OF GDP)

2.0

1.5

1.0

2.5

3.0

2.7

2.5

2.3

2.0

TAX TREATMENT THAT FAVOURSINNOVATION

• R&D spending by companies receives preferential taxtreatment:_ the most competitive in Canada for SMEs.

• The government made a commitment to maintain fiscalmeasures pertaining to R&D in the last Budget.

20%

30%

40%

50%

45.6

41.2 40.8

36.1

33.6

31.0

New York California OntarioMassachusetts Alberta Québec

50

40

30

20

20% 40% 60% 80% 100% 120% 140%

London

New York

Tokyo

Zurich

Boston

Paris

Toronto

Montréal 59

126

101

65

76

84

100

100

20 40 60 80 100 120 140

60% 70% 80% 90% 100% 110% 120% 130%

Québec

Canada

United Kingdom

Australia

Italy

France

United States

Germany

Japan

89.0

91.0

91.5

97.6

98.7

99.1

100.0

113.9

123.8

60 70 80 90 100 110

10


E C O N O M Y

A COMPETITIVE ECONOMY

LOW BUSINESS LOCATIONAND OPERATING COSTS

• The most recent study from KPMG (2004) confirms onceagain that Québec has the lowest business location andoperating costs among the major industrialized countries.

• Unit labour costs in Québec are almost 22% lower than inthe United States.

A COMPETITIVE TAX SYSTEMFOR COMPANIES

• Companies in Québec operate under a tax system that is onthe whole competitive with other North American jurisdictions.

• Tax rates on business profits in Québec are among thelowest in North America.

• Companies can obtain a rebate of Québec sales tax onvirtually all their purchases.

COST OF LIVING

• According to a study by Mercer Human ResourceConsulting covering 144 business centresworldwide, Montréal ranks among the cities with thelowest cost of living:_ it ranked 120th in 2003.

• In international comparisons, Montréal and Québec standout with their low housing costs.

COST OF LIVING INDEX OF CERTAIN CITIES1

(NEW YORK=100)

INDEX OF BUSINESS LOCATION AND OPERATING COSTS1

(UNITED STATES=100)

1 Results obtained from the Competitive Alternatives 2004 cost model under license from KPMG. The lower acountry’s index, the lower its business location and operating costs.

Sources: KPMG and ministère des Finances.

COMBINED CORPORATE INCOME TAX RATES - AS AT APRIL 1, 2004(AS A PERCENTAGE)

Note: Maximum tax rates applicable to the active income of corporations by all levels of government.Source: Ministère des Finances.

120 130

1 The higher the index, the higher the cost of living.Source: Mercer Human Ressource Consulting (2003).

11


HIGH-QUALITY LABOUR FORCEE C O N O M Y

A HIGHLY EDUCATED AND BILINGUALLABOUR FORCE

• Québec has a highly educated labour force:_ 83.1% of workers have a high school diploma or better;_ almost 20% have a university diploma.

• More than 40% of Quebecers speak French and English:_ this proportion reaches 53% in the Montréal region;_ in addition, 13% speak a third language.

QUALITY OF LIFE

• Québec is known for its quality of life.

• One of the best known quality-of-life indices (Mercer) ranksMontréal 4th among major North American cities:_ internationally, Montréal ranks among the top 25 cities

out of a total of 244.

BREAKDOWN OF LABOUR FORCE BY LEVEL OF EDUCATION IN QUÉBEC

Postsecondary certificate or diploma

Partial postsecondary

High school partiallycompleted

0 to 8 years ofeducation

University degree

High school completed

37.7%

8.9%

16.8%

11.3%

5.6%

19.7%

Source : Statistics Canada.

98% 99% 100% 101% 102% 103%

Seattle

New York

London

Paris

Montréal

98.5

100.0

100.5

101.5

102

QUALITY OF LIFE INDEX(NEW YORK=100)

Source : Mercer Human Resource Consulting, 2004.

98 99 100 101 102 103

PRIORITIES OF THE GOVERNMENT

• Maintain a balanced budget.

• Control the debt.

• Review the state's role and how it operates.

• Spending increases in health and education.

• Reduce the personal income tax burden.

• Maintain a competitive business environment.

12


RESPONSIBLE MANAGEMENT OF PUBLIC FINANCES

P U B L I C F I N A N C E S

BALANCED-BUDGET ACTBALANCED BUDGET

• The government intends to maintain a balanced budget.

• This policy complies with the Balanced Budget Act:_ unanimously passed by the National Assembly in 1996;_ stipulating that a deficit cannot be incurred other than

in exceptional circumstances.

• Unanimously adopted by the National Assembly in 1996

• Requires the government to maintain a zero deficit

TIGHTER CONTROL OVER THE DEBT

• More rigorous debt management will be implemented.

• Starting in 2003-2004, certain investments in governmentcorporations and certain investment projects were reviewed.

• The 2004-2005 Budget announced two types of action:_ investments in government corporations will be held to a

minimum;_ a new capital-spending policy will be formulated:

- in particular, public-private partnership will beencouraged.

• The total debt-to-GDP ratio should reach 42.5% in 2006, adrop of almost 20% since 1998. 40%

42%

44%

46%

48%

50%

52%

54%

TOTAL DEBT(AS A PERCENTAGE OF GDP)

1998 1999 2000 2001 2002 2003 2004 2005 2006

52.251.5

48.4

46.646.1

45.4

44.4

43.5

42.5

40

42

44

46

48

50

52

54

Note: Fiscal year ending March 31. Preliminary results for 2003-2004 and forecasts for 2004-2005 and 2005-2006.

2003-2004 2004-2005

1991 1994 1997 2000 2003 200616

18

20

22

24

PRIORITY ON HEALTH AND EDUCATION

• The government is committed to making health and educationits top priorities.

• Spending increases in the 2004-2005 Budget areconcentrated in those two sectors:_ health and social services: 5.1%;_ education: 2.7%;_ other sector: 0.5%.

• Total program spending growth is limited to 2.9%

• The downward trend in program spending in relation toGDP continues:_ in 2005-2006, this ratio should reach 17.3%, its lowest

level since 1970-1971.

13


P U B L I C F I N A N C E S

REDUCTION OF THE TAX BURDEN

• The government intends to cut the tax burden to the Canadian average during its mandate.

• A reduction of $1 billion was announced in the 2004-2005 Budget.

RESPONSIBLE MANAGEMENTOF PUBLIC FINANCES

22.8

19.3

18.2

17.3

PROGRAM SPENDING(AS A PERCENTAGE OF GDP)

SUMMARY OF CONSOLIDATED FINANCIALTRANSACTIONS(IN MILLIONS OF DOLLARS)

Budgetary transactions of theConsolidated Revenue FundOwn-source revenue before exceptionallosses of SGF 42 824 45 358Federal transfers 9 377 8 476Total revenue 52 201 53 834Program spending -45 800 -47 151Debt service -6 668 -6 939Total expenditure -52 468 -54 090Net results of consolidated organizations 267 256Budget balance before exceptionallosses of SGF 0 0Exceptional losses of SGF -364 —Consolidated budgetary balance -364 0Consolidated non-budgetrequirements -1 069 -464

Consolidated net financial requirementsConsolidated Revenue Fund -200 500Consolidated organizations -1 233 -964Total -1 433 -464

OTHER MEASURES ANNOUNCEDIN THE 2004-2005 BUDGET

• A work premium will be introduced to assist low-incomeworkers and encourage participation in the labour market.

• The government anticipates revenue of $880 million fromsales of assets as part of its review of the role of the state.

• Tax assistance for research and development is maintained:_ Québec's system is the most competitive in Canada

for SMEs.

• Interventions in the economy will be better targeted andmore effective:_ the government will act as a partner supporting private

sector developers.

• The exemption from the tax on capital is raised from$600 000 to $1 million:_ 75% of Québec companies will no longer pay tax on

capital.


Note: Preliminary results for 2003-2004 and forecasts for 2004-2005.

10

15

20

25

30

1986

20

15

10

25

30

13.4

28.5

19.3 14.7

1990 1994 1998 2002 2006

14

FEDERAL TRANSFERS(AS A PERCENTAGE OF BUDGETARY REVENUE)


RESPECTIVE POWERS OF THE FEDERALAND PROVINCIAL GOVERNMENTS

CONSTITUTIONAL POWERS

• Canada is a federation of ten provinces.

• The 1867 constitution defines the powers of the two orders of government, federal and provincial.

• The federal Parliament is essentially responsible for:_ national defence, unemployment insurance, the postal service, Aboriginal people, currency, international trade

and criminal law.

• The provinces’ responsibilities include:_ health, education, social services, infrastructures, municipal affairs, natural resources, administration of

justice and private law.

• Overall, the total revenue collected by the various orders ofgovernment in Canada amounts to 43% of GDP.Of this amount:_ 55% is collected by provincial governments and

local administrations;_ 45% is collected by the federal government.

• Federal transfers will account for 14.7% of Québec'sbudgetary revenue in 2005-2006.

TAXATION POWERS

• The federal and provincial governments have their owntaxation powers.

• The provinces and the federal government both use thefollowing taxation instruments:_ personal and corporate income tax;_ sales taxes; and_ specific taxes, such as the fuel tax.

• Other sources of income are reserved for a single order ofgovernment, for instance:_ customs duties, which can only be imposed by the

federal government;_ revenue from natural resources, which belong to the

provinces within the territory where they are located.

55%

45%

Federal

Provinces and local sector


PROPORTION OF REVENUES COLLECTED BY EACH ORDER OF GOVERNMENT

C A N A D I A N C O N T E X T

15


F I N A N C I N G

FINANCING PROGRAMS

GOVERNMENT AND FINANCING FUND

• In 2004-2005, the government's financing program willamount to $8.2 billion.

• The financing program is designed essentially to:_ repay maturing borrowings;_ contribute to a sinking fund that will eventually be used

to pay public-sector employees' retirement benefits;_ make loans to consolidated organizations and

government corporations through the Financing Fund.

FINANCEMENT-QUÉBEC

• Financement-Québec is a government corporation that hasborrowed on financial markets since 1999 to meet theneeds of health and education network institutions: _ by pooling their financing in this way, these

organizations benefit from advantageousborrowing costs.

• The Québec government guarantees the borrowings ofFinancement-Québec.

• In 2004-2005, Financement-Québec's financing programstands at $2.5 billion.

HYDRO-QUÉBEC

• Hydro-Québec's financing program for 2004 amounts to$2.3 billion.

• Loans contracted by Hydro-Québec are guaranteed by theQuébec government.

2003-2004 2004-2005

Consolidated Revenue Fund

Net financial requirements1 200 -500

Repayment of borrowings 4 842 5 303

Change in cash position -4 110 -1 644

Retirement Plans Sinking Fund2 2 364 2 545

Pre-financing 1 644 ⎯

4 940 5 704

Financing Fund3 2 500 2 500Total 7 440 8 204

2003-2004 2004-2005

1 508 2 500

2003 2004

2 612 2 300

Note: Preliminary results for 2003-2004 and forecasts for 2004-2005. A positive entry indicates a financingrequirement and a negative entry, a source of financing.

1 Excluding consolidated organizations.2 Deposits to the Retirement Plans Sinking Fund are optional.3 Borrowings are made out of the Financing Fund to certain consolidated organizations and government

corporations.

Note: Preliminary results for 2003-2004 and forecasts for 2004-2005. A positive entry indicates a financingrequirement and a negative entry, a source of financing.

Note: Preliminary results for 2003 and forecasts for 2004. A positive entry indicates a financingrequirement and a negative entry, a source of financing.

FINANCING PROGRAM - CONSOLIDATED REVENUEFUND AND FINANCING FUND(IN MILLIONS OF DOLLARS)

FINANCING PROGRAM - FINANCEMENT-QUÉBEC(IN MILLIONS OF DOLLARS)

FINANCING PROGRAM - HYDRO-QUÉBEC(IN MILLIONS OF DOLLARS)

2006 20072005

5 578

6 377

4 480 4 5864 806

5 917

3 5433 978

3 658

2 281

768 721

2008 2009 2010 2011 2012 2013 2014 2015-2025

2026-2043

AnnualAverage

16


F I N A N C I N G

FINANCING STRATEGY

Pound sterling 1874US dollar 1879Deutsche mark 1968French franc 1972Yen (Samurai) 1972Swiss franc 1972Spanish peseta (Matador) 1997Swedish crown 1998Euro 1999Australian (Kangaroo) 2001

Québec’s first issues on foreign marketsDIVERSIFICATION BY MARKETS

• Financing operations are regularly carried out on mostmarkets: in Canada, the United States, Europe, Asiaand Australia.

• Québec has been present on foreign financial markets sincethe end of the 19th century, more specifically in Londonin 1874.

• In 2001, the Bank for International Settlements (BIS) ruledthat foreign central banks could assign a risk-weighting of0% to Québec securities, which means that financial insti-tutions are not required to maintain reserve capital to holdQuébec securities:_ Luxembourg, Belgium, France, the Netherlands, Australia

and Italy now assign a 0% risk-weighting to Québec securities:

- which facilitates financing activities in these countries.

DIVERSIFICATION BY INSTRUMENT

• A whole range of financial products is used in the course offinancing operations.

• Long-term instruments:_ traditional negotiable and real-return bonds,

medium-term notes, private borrowings and retailsavings products.

• Short-term instruments:_ Treasury bills and Treasury notes.

• Lines of credit:_ syndicate (US$3 500 million available) and bank

($1 165 million available).

DIVERSIFICATION BY MATURITIES

• Maturities on borrowings are spread over time to avoidlarge refinancings within a given year.

• The average term to maturity of the debt hovers around11 years.

DIRECT DEBT BY INSTRUMENT AS AT MARCH 31, 2004 1

Note: Preliminary results.1 Direct debt of the Consolidated Revenue Fund.

Note: Preliminary results. Fiscal year ending March 31.1 Direct debt of the Consolidated Revenue Fund.

Bonds

Medium-term notes

Other instruments

Treasury bills

Saving bonds

68.4%

20.2%

2.7%

5.6%

3.1%

LONG-TERM DIRECT DEBT MATURITIES AS AT MARCH 31, 20041

(IN MILLIONS OF DOLLARS)

17


F I N A N C I N G

FINANCING STRATEGY

ENSURE LIQUIDITY

• Financing strategy: _ regular presence in major markets:

- with large issues; and

- re-opening of existing issues._ long-term relations with Québec's financial partners;_ satisfaction of investors' needs;_ promotion of Québec securities:

- promotional documents;

- meetings with investors;

- involvement of banks and brokerage firms in those activities.

HIGH-QUALITY CREDIT

• Moody's changed its outlook for Québec's credit from stableto positive in August 2002:_ "The outlook was revised from stable to positive to

reflect the fiscal improvements achieved thus far."

Moody's report, August 2002

• Standard and Poor's:_ "The ratings reflect […] Québec's large and diversified

economy and continuing good performance this year inspite of the sluggish North American economic environment."

Standard & Poor's report, October 2003

Market Coupon % Maturity

Amount issued(in millions of units of

the local currency)Can$ 5.50 2009 2 498

5.25 2013 2 152

5.75 2036 1 083

US$ Global 5.5 2006 1 000

5.0 2009 750

6.125 2011 1 000

7.5 2029 1 500

Euro 5.625 2011 1 500

4.25 2013 1 000

Swiss Franc 3.5 2008 500

Yen 1.6 2013 50 000

Australian$ 5.75 2006 280

Floating 2006 120

6.00 2009 200

Credit ratings

Agency Rating OutlookStandard & Poor’s A+ StableMoody’s A1 PositiveFitch AA- StableDominion Bond Rating Service A PositiveJapan Credit Rating Agency AA Positive

Some issues on foreign markets

RECOGNITION OF THE QUALITY OFQUÉBEC'S CREDIT BY FINANCIAL MARKETS

• Since 2001, Québec has received four prizes from theprestigious financial magazine, EuroWeek:_ in 2001:

- first prize for a bond issue of €1.5 billion maturingin 2011;

- third prize for a global bond issue of US$1 billionmaturing in 2011.

_ in 2002, Québec received second prize for its bond issueof US$750 million maturing in 2009;

_ in 2003, Québec was awarded the second prize for its€1.5 billion borrowing maturing in 2013.

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D E B T M A N A G E M E N T

MINIMIZING COSTS AND RISKS

ACTIVE DEBT MANAGEMENT

• Financing decisions are taken independently of thoserelating to debt management:_ borrowings are carried out where funds are available, at

the lowest possible cost;_ interest rate and currency swap contracts as well as

futures contracts are used to achieve the desireddebt proportions:

- by currency;

- at fixed rates and variable rates.

• A range of financial instruments is used to help minimizedebt service fluctuations.

COUNTERPARTY CREDIT POLICY

• To reduce its counterparty risk exposure, the Québec government has adopted a counterparty credit policy that includes:_ setting explicit credit limits for each counterparty;_ continuous assessment of the market value of transactions; _ an adjustment mechanism that is triggered to return within established limits, if the credit threshold is reached.

Note: Preliminary results.1 Direct debt of the Consolidated Revenue Fund and debt incurred to make advances to the Financing Fund.

Note: Preliminary results.1 Direct debt of the Consolidated Revenue Fund and debt incurred to make advances to the Financing Fund.

• As at March 31, 2004, before debt management operations,60% of the debt managed by the government was inCanadian dollars:_ including debt management, Canadian dollar exposure

rose to 85%;

- as at the same date, 62% of the debt was at fixedrates and 38% at variable rates.

CAN $

61%

US $

Euro

18%

11%

8%

Yen

2%

Other currencies

STRUCTURE OF THE DEBT MANAGED BY THE GOVERNMENT BY CURRENCY AS AT MARCH 31, 20041

(BEFORE CURRENCY SWAP AND FX-FORWARD CONTRACTS)

CAN $

85%

5%

US $

5%

Swiss franc

5%

Yen

STRUCTURE OF THE DEBT MANAGED BY THEGOVERNMENT BY CURRENCY AS AT MARCH 31, 2004 1

(AFTER CURRENCY SWAP AND FX-FORWARD CONTRACTS)

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T H R I V I N G C U LT U R E A N D T O U R I S M

QUÉBEC IN THE WORLD

FILM AND THEATRE

• Québec films have earned international recognition:_ Denys Arcand's film The Barbarian Invasions was a great

success, winning many international prizes; including theOscar for best foreign movie;

_ Seducing Doctor Lewis, by Jean-François Pouliot won thepeople's choice award at the prestigious Sundance filmfestival in the United States in 2004;

_ the soundtrack of the film The Triplets of Belleville, com-posed by Benoît Charest , won the L.A. Critic Award forbest film music in January 2004 and was nominated foran Oscar, a César and a Victoire in 2004.

• The Cirque du Soleil, founded in 1984, attracts crowdswherever it tours throughout the world and now has fourpermanent shows in the United States:_ 40 million spectators have seen a Cirque du Soleil show

in 90 cities throughout the world.

LITERATURE

• Quebecers have also achieved literary success:_ Life of Pi by Yann Martel won the coveted Man Booker

Prize in 2002.

OSCAR: BEST FOREIGN MOVIE

CANNES : BEST SCREENPLAY AND BESTACTRESS

CÉSARS : BEST MOVIE, BEST DIRECTORAND BEST SCREENPLAY

QUÉBEC : JUTRAS FOR BEST MOVIE,BEST DIRECTOR, BEST SCREENPLAY AND

BEST ACTRESS

A CHOICE DESTINATION

• Almost 11 million tourists spent more than 33 millionnights in Québec in 2002.

• In 2004, National Geographic Traveler ranked Québec Citysixth among 115 destinations.

• Montréal ranks second for the number of internationalconventions hosted:_ after Washington, D.C.;_ ahead of New York City.

• Tourists are attracted to Québec for many reasons, including its beautiful scenery, the charm of Old Montréaland Old Québec, and the numerous festivals.


The Barbarian Invasions

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N O T E S

Documents

ECONOMIC AND FINANCIAL PROFILE OF QUÉBEC