Provincial Credit Watch

August 03, 2023 | 09:47

Provincial Credit Watch: August 2023

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Provincial returns mostly steady
Risk assets and spreads holding up well
Economic forecast upgrades with resilient economy

Provincial Returns

Long provincial bond returns were negative in the past month, largely driven by a backup in GoC yields. The Bank of Canada raised interest rates as widely expected, with the overnight rate hitting 5% for the first time since 2001, but that could mark the end of this tightening cycle if inflation cooperates. The Federal Reserve also moved in-line with market expectations (25 bp rate hike), which kept risk assets in solid shape, at least until Fitch's U.S. downgrade. Long provincial spreads were very little changed in the month. Long provincials continue to slightly outperform GoCs over the past six and 12-month periods, but remain well in negative territory.

Relative Performance

Long provincial spreads were modestly tighter across the board in July, with no major standout moves. Ontario continues to outperform on a one-year basis in part due to continued better-than-expected fiscal results, but also thanks to a move to larger and more liquid names (Quebec remains the second best spread performance over the past 12 months). At the other end of the spectrum, Alberta has lagged despite strong fiscal results—this largely coincides with a selloff in oil prices (compared to highs above $100 last summer).

Fundamentals

Forecast Tweaks

A resilient first half of the year for the Canadian economy has prompted some near-term forecast upgrades. We now see Canadian real GDP growth at 1.6% for 2023, although risk of a mild contraction remains for around the turn of the year. Alberta is expected to lead the pack with 2.5% growth, while Ontario is holding up well (1.5% expected) despite an early-year real estate correction. Torrid population flows are helping to flatter growth estimates. Indeed, that is also keeping Atlantic Canada above the national average, while Quebec fades below that benchmark with 1.0% growth expected.

The provincial landscape normally displays starkly different conditions. For example, booming oil-producing provinces have, in the past, forced tighter policy settings and a stronger currency that weighed on Central Canada. Today, perhaps the most interesting feature is the relatively uniform conditions across the country.

With that backdrop, we recently published a report focusing on five key areas at the provincial level that are worth some deeper exploration. These include: Tight labour markets across the country; migration flows from province-to-province; capital spending plans; the fiscal position; and current housing market conditions.

The full report, Provinces: We’re All in This Together, is available here.

Provincial Budget Reports

The Province of British Columbia is projecting a $4.2 billion deficit in FY23/24, or just over 1% of GDP. While hardly deep or concerning, B.C. is seemingly doing its best to run deficits at this stage, with the FY22/23 surplus, previously pegged at $5.7 billion, now down to $3.6 billion. Full analysis here

The Province of Alberta is projecting a $2.4 billion surplus in FY23/24, or 0.5% of GDP, narrowing from a hefty
$10.4 billion surplus now expected for FY22/23. Full analysis here

The Province of Saskatchewan is projecting a $1 billion surplus in FY23/24 (1.0% of GDP), a touch smaller than the $1.1 billion now estimated for the fiscal year just ended. Full analysis here

The Province of Manitoba is projecting a $363 million summary budget deficit in FY23/24, roughly in line with the $378 million shortfall now expected for FY22/23. Full analysis here

The Province of Ontario is projecting a small $1.3 billion deficit for FY23/24, roughly in line with the $2.2 billion shortfall now expected for FY22/23. Full analysis here

The Province of Quebec is projecting a $1.6 billion deficit in FY23/24 (0.3% of GDP), before transfers to the Generations Fund. That's little changed from the $1.7 billion shortfall now estimated for FY22/23, but also comes with an embedded $1.5 billion contingency, as well as personal income tax cuts. Full analysis here

The Province of New Brunswick expects its surplus, pegged at $863 mln in FY22/23, to narrow to $40 million this year. Full analysis here

The Province of Nova Scotia is projecting a $279 million deficit in FY23/24 (0.5% of GDP), roughly in line with the $260 million deficit now expected for the previous fiscal year. Full analysis here

The Province of Newfoundland & Labrador is projecting a small $160 million deficit in FY23/24 (0.4% of GDP), a deterioration from a larger-than-expected $784 million surplus now estimated for FY22/23. Full analysis here

Recent Publications of Interest

Provinces: We’re All in This Together: A key feature right now is the relatively uniform conditions across the country. Against that backdrop, we focus on five key areas at the provincial level 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.

Provincial Monitor: In-depth look at provincial growth trends. Full publication here.

Federal Budget Analysis: Green Energy Goals, Red Ink Realities: The 2023 Federal Budget is set against a backdrop of still-elevated inflation, disruption in the global financial sector and a likely looming recession. Full publication here.

On the Move: Assessing Canadian Population Flows (Focus): Canada’s population surged by almost 900,000 in 2022, the largest raw increase in the headcount on record, and the biggest year-over-year percentage increase since the early-1970s. There is plenty to unpack on the demographic front, but here we turn our attention specifically to the flow of people—into the country, across the country, and within particular regions. Full publication here.