Provincial Credit Watch
April 04, 2024 | 10:11
Provincial Credit Watch: April 2024
Economics
Economics
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Provincial Returns |
Long provincial returns were negative in the past month as GoC yields moved higher, and spreads widened by about 6 bps. The economy continues to show improved momentum into early 2024, while a pair of soft inflation reports should leave the Bank of Canada on track to begin easing in June, although there's not a lot of urgency at the moment. The provincial budget season is now complete, with larger deficits and bigger borrowing programs the major theme. Over the past six months, long provincials are still outperforming GoCs, although just by a few basis points; and they are still outperforming by almost 4 ppts over the past year. |
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Relative Performance |
Long provincial spreads were wider across jurisdictions over the past month as the 2024 budgets were all rolled out. Alberta outperformed, and is one of only two provinces (along with New Brunswick) to project a surplus this fiscal year. Higher oil prices are also helping to tighten spreads versus Ontario and British Columbia. Quebec lagged in the past month and now trades slightly back of Ontario again (at the widest end of the 3-year range) alongside a deeper deficit and longer path back to balance. |
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Fundamentals |
The FY24/25 budget season is complete, and the theme has been deeper deficits and chunky borrowing requirements. Indeed, provincial governments have seen their fiscal path deteriorate after significant improvement through 2023. The combined provincial budget deficit is on track to widen to $28 billion (0.9% of GDP) in FY24/25 from $10.6 billion in FY23/24. The pressure is coming on multiple fronts. Revenue growth, which has been robust thanks to the post-pandemic economic recovery and high inflation, has cooled notably amid very sluggish GDP growth. The provinces underestimated growth in 2023 leading to upside surprises, but they have had to downgrade 2024 growth assumptions—though they have now gone too far on the latter. Meantime, program spending growth is strong at nearly 6%, partly reflecting upward pressure on public-sector wages, while interest costs are on the rise. Not to be outdone, torrid population growth is stressing infrastructure, necessitating large capital spending programs. Total provincial borrowing requirements will top $130 billion in FY24/25, the largest on record outside the peak pandemic year. That will leave the increase in net debt at more than $65 billion in the coming fiscal year, a record annual increase and more than twice the underlying budget deficit. |
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All Budget HighlightsThe Province of British Columbia is projecting a $7.9 billion deficit in FY24/25, or almost 2% of GDP. The FY23/24 deficit, previously pegged at $4.2 billion, has also deteriorated to $5.9 billion. Importantly, the budget does not include a path to balance—and that's with no explicit forecast allowance in the outlook. That said, B.C. retains the practice of embedding meaningful spending contingencies in the plan of $3.8 billion in FY24/25, to cover cost overruns or unforeseen expenses. The borrowing program jumps yet again, to $24 billion in FY24/25, before rising further to $30 billion in the following year. Overall, British Columbia continues to spend into a deepening deficit, pushing up its borrowing plan in a high interest rate environment. If this trend continues, B.C. could be in danger of losing its position as the only province with a AAA credit rating (from Moody's, after S&P downgraded the Province following last year's budget). Full analysis here The Province of Alberta is projecting a small $367 million surplus in FY24/25, or 0.1% of GDP, narrowing from the $5.2 billion surplus now expected for FY23/24. The latter surplus is on track to finish the year just over twice the size of that in the original budget plan. The Province sees modest surpluses through FY26/27, and builds in a $2 billion per year contingency to buffer against revenue misses or spending pressure. This falls within Alberta's new fiscal framework, that requires balanced budgets (some exceptions apply); limits operating spending growth to inflation plus population growth; avoids in-year spending increases beyond budgeted and contingency amounts; and allocates surplus cash to debt payment, savings funds or one-time (non-recurring) spending. Total borrowing requirements are expected to run at a heavy $19.8 billion in FY24/25 ($17.7 billion in term debt), although that includes pre-borrowing to cover future maturities into FY25/26. Borrowing for traditional sources totals $8.2 billion, down from $10.9 billion in the prior fiscal year. Full analysis here The Province of Saskatchewan is projecting a $273 million deficit in FY24/25 (a small 0.2% of GDP), a touch narrower than the $483 million now estimated for FY23/24. The latter is a modest downward revision from the most recent fiscal update, but well down from the initial $1.1 billion surplus projection. The deficit comes as spending pressure builds, while revenue dips alongside a drop in tax receipts and subdued potash royalties. Looking ahead, Saskatchewan expects a return to small surpluses by FY25/26 and through the forecast horizon. Full analysis here The Province of Manitoba is projecting a $796 million summary budget deficit in FY24/25, improved from the hefty $2.0 billion shortfall expected for FY23/24. The latter is deeper than the most recent forecast ($294 million), and the year-over-year improvement only comes after the FY23/24 deficit was revised sharply higher from $363 million initially. For the upcoming fiscal year, the deficit weighs in at a manageable 0.9% of GDP, versus 2.2% in FY23/24. The province sees a return to balance in FY27/28, but that is a number of years (and many spending priorities) out into the future. Net debt also continues to rise, pushing above 39% of GDP by next fiscal year, when it will challenge for the highest outside Newfoundland & Labrador. Full analysis here The Province of Ontario is projecting a $9.8 billion deficit for FY24/25, substantially deeper than the $5.3 billion last forecasted in the fall fiscal update, and the $3.0 billion shortfall now estimated for FY23/24. While FY23/24 is tracking somewhat better than expected, the near-term fiscal outlook has clearly deteriorated on a combination of weaker revenues and firm spending demands. Ontario is certainly not alone on this front, as this has been a common theme across the country this budget season. Over the coming few years, the Province now sees a $4.6 billion deficit for FY25/26, before a return to balance in FY26/27, a year later than previously planned. At the same time, the net debt-to-GDP ratio rises 1.2 ppts to 39.2% in FY24/25, before peaking at 39.5% in the following year, slightly higher than previously planned. Full analysis here The Province of Quebec is projecting a much deeper $8.8 billion deficit in FY24/25 (1.5% of GDP), before transfers to the Generations Fund. That compares to the small $678 million shortfall last expected in the fall fiscal update, and would mark the deepest deficit on record for Quebec in dollar terms (the deepest since the mid-1990s as a share of GDP). Looking ahead, Quebec will run deficits right through the subsequent four-year forecast horizon, a notable shift from prior plans to balance the books by FY25/26. While the Province builds in a $1.5 billion per year contingency through the forecast, it also will need to find $2 billion in savings by the end of the horizon. Full analysis here The Province of New Brunswick is projecting a small $41 million surplus for FY24/25, in a pre-election budget that largely stays the course. That compares to a $247 million surplus in FY23/24, and would mark eight consecutive years in the black—impressive considering the ups and downs of recent years. Small surpluses persist through FY26/27. Full analysis here The Province of Nova Scotia is projecting a $467 million deficit in FY24/25 (0.8% of GDP), a notable turn after three consecutive years in the black. The FY23/24 balance is now pegged at small $40.3 million surplus, improved from the latest quarterly estimate of a $264 million deficit. Nova Scotia has seen strong revenue upside through the fiscal year, but will turn that momentum around by ramping up spending in a number of priority areas. Looking further ahead, Nova Scotia shows no plan to balance the books, instead allowing deficits averaging $515 million to persist through FY27/28. Full analysis here The Province of Prince Edward Island is projecting an $85 million budget deficit for FY24/25, little changed from the prior fiscal year. That will weigh in at a manageable 0.8% of GDP, but marks a second consecutive shortfall after a run of five surpluses over the preceding six years. The good news is that the FY23/24 deficit is on track to come in $12 million better than expected. Looking further ahead, deficits persist through the forecast horizon, with no plan to balance the books by FY26/27. Full analysis here The Province of Newfoundland & Labrador is projecting a small $152 million deficit in FY24/25 (0.4% of GDP), an improvement from the worse-than-expected $433 million shortfall now estimated for FY23/24. The return to deficit is expected to last for just two years, with the Province anticipating a surplus in FY25/26 and through the rest of the medium-term outlook. Revenues and expenditures are expected to remain relatively stable over the forecast horizon, though the Province builds in an oil risk adjustment that starts at $20 million in FY25/26 and gradually rises to $70 million by FY28/29. Full analysis here Upcoming Budget DatesCanada (federal): April 16, 2024 |
Recent Publications of InterestFive Pre-Budget Questions, Concerns (Federal budget): Expectations are muted, especially given Finance Minister Freeland’s remark that the thrust will be to help set the conditions for lower interest rates. Below is a distilled version of some of the top questions. Full publication here. Extraordinary Population Delusions and the Trouble with Crowds: Canada’s population has exploded by 1.3 million people in the past year, or 3.2%, the fastest pace since the 1950s. This surge is rooted in sound principles, but has clearly run amok. Indeed, the narratives around the population boom have, in our view, been off the mark. Here are five pieces of the narrative that are worth challenging. Full publication here. Housing Outlook: Laying the Floor: The Canadian housing market should enter a period of overall stability this year. Full publication here. Themes from Ottawa’s Fiscal Update: The fiscal backdrop has evolved somewhat better than expected, but Finance Ministers are aware that more challenging conditions lie ahead into 2024. Full publication here. Mapping Canada’s Economic Conditions: Some deeper provincial comparisons on growth, inflation, housing and the fiscal situation. Full publication here. Provinces: We’re All in This Together: A key feature right now is the relatively uniform conditions across the country. We focus on five key areas that are worth some deeper exploration. Full publication here Catch-’23: Canada’s Affordability Conundrum: Canada’s housing affordability problem is not easing, despite a significant correction in home prices across much of the country, and the problem is unlikely to go away. Full publication here. |