Provincial Credit Watch
March 05, 2024 | 09:16
Provincial Credit Watch: March 2024
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Provincial Returns |
Long provincial returns were negative in the past month as GoC yields edged higher, and spreads widened modestly. The economy has held up well into 2024, and BMO Economics has modestly upgraded the real GDP growth outlook for the year, while we expect the BoC to remain on hold at the March 6 meeting. Budget season is also underway, and we are seeing come clear differences in fiscal policy shaping up among the provinces. Over the past six months, long provincials are still outperforming GoCs by a full percentage point; and they are outperforming by 2 ppts over the past year. |
Relative Performance |
Long provincial spreads were mixed across jurisdictions over the past month as 2024 budgets begin to roll out. British Columbia underperformed, widening by 2.5 bps in the 30-year sector. That came alongside a budget that was filled with new spending, higher borrowing and no plan to balance the books. On the flip side, Alberta spreads were steady, with the 2024 budget forecasting balanced books for the forseeable future, and spending plans limited to inflation plus population growth. The budget was built on $74 WTI oil, which is a reasonable planning assumption at this stage. Despite two budgets moving in very different directions, long Alberta spreads continue to trade back of B.C. by roughly 6 bps, which is about the middle of the range seen over the past three years. |
Fundamentals |
The FY24/25 budget season is underway, and so far the trend seems to be toward deeper deficits and chunky borrowing requirements. It's early in the season, and Alberta is the exception, but others like B.C., Nova Scotia and PEI have turned deeper into the red. Is this a trend for the year? We'll see more clearly when Ontario and Quebec table their documents, but even the latter has hinted at a weaker fiscal path ahead. Meantime, given a stronger handoff into 2024 for the Canadian economy, we've revised up most provincial real GDP growth forecasts for this year. 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 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 |
Recent Publications of InterestExtraordinary 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. Provincial Monitor: In-depth look at provincial growth trends. Full publication here. |
Budgets and Major Fiscal Updates (FY24/25)The 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. 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. 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. 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. Full analysis here Ottawa's Fall Economic StatementOverall, the fiscal backdrop has evolved somewhat better than expected, but Finance Ministers are aware that more challenging conditions lie ahead into 2024. Here we’ll focus on a few big themes at the federal level: The full report, Themes from Ottawa’s Fiscal Update, is available here. Upcoming Budget DatesQuebec: March 12, 2024 New Brunswick: March 19, 2024 Saskatchewan: March 20, 2024 Manitoba: April 2, 2024 Canada (federal): April 16, 2024 Ontario and Newfoundland & Labrador: TBD |