August 27, 2020 | 13:52
Alberta FY20/21 Fiscal Update
The Province of Alberta is projecting a $24.2 billion deficit for FY20/21, meaningfully larger than the $7.3 billion expected in the pre-COVID budget tabled early this year. That weighs in at a hefty 8.1% of GDP, the largest in Canada and the widest shortfall on record for the province going back to the mid-1980s. In fact, that would be largest deficit recorded by any province over the past 35 years. There is not a plan beyond the current year, but suffice it to say that some decisions will have to be made (the Finance Minister again hinted at spending efficiencies, to start).
Side note: The Province of Saskatchewan also released a fiscal update, showing a $2.1 billion deficit for FY20/21 (2.9% of GDP). That's a touch smaller than the $2.4 billion expected in the budget plan (which did incorporate the COVID impact), in part because of higher federal transfers. The Province seeks to balance the budget by FY24/25.
Alberta's revenues are expected to plunge by more than $10 billion versus the original budget plan, to $38.4 billion, as resource revenues have almost completely dried up (just $1.2 billion this year versus $6 billion in FY19/20). That assumes WTI oil will average $35.60 for the fiscal year, with the loonie at 73 US cents. Real GDP is expected to contract 8.8% this year (deeper than our -7.0% call) before rebounding 4.6% next year (slower than our +6.2% call).
Total spending is pegged at $62.6 billion, up 7.2% from last fiscal year alongside COVID-related support spending. The capital program has also been increased, by $1.4 billion versus intial estimates, to $8.4 billion. Combined with the deficit, that lifts borrowing requirements to a hefty $28.6 billion for FY20/21 ($4.5 billion of that is for provincial corporations and GBEs). Net debt will jump by more than 10 ppts, to 22.4%. While still well below the 40%-plus levels in Ontario and Quebec, that has now moved above its peers in B.C. and Saskatchewan.
The Bottom Line: Alberta's deficit figure is certainly massive, but not entirely unexpected--we had been politely assuming $20 billion. So, it remains to be seen if there is a meaningful market response to this, while keeping in mind that all provinces are facing an acute shock at the moment. Alberta 30-year spreads are near the middle of their 3-year range versus Ontario. The challenge for Alberta will really show itself over the medium term, with the energy sector likely to remain restrained and some fundamental issues (like revenue sources) possibly needing to be addressed.