Provincial Credit Watch
November 04, 2024 | 10:27
Provincial Credit Watch: November 2024
Economics
Economics
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Provincial Returns |
Long provincial returns were modestly weaker in October, as a backup in GoC yields was partly offset by tighter spreads. The 30-year GoC yield rose by 14 bps and, despite a 50 bp rate cut by the Bank of Canada, most yields were higher in the month. Firm U.S. economic data and the approaching U.S. election drove Treasury yields higher. Provincial spreads, however, continued to tighten, with the 30-year narrowing by 3.5 bps in October. Provinces continue to run well ahead of schedule on their FY24/25 borrowing programs. Long provincial total returns are now running at a hefty 15% on a 12-month basis, or a few basis points ahead of Canadas. Recall that long GoC yields peaked just over a year ago, while spreads have narrowed somewhat in that period. |
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Relative Performance |
Long provincial spreads were tighter across the board in October with a few notable events among the provinces. Ontario's mid-year fiscal update came with a notably improved underlying fiscal position and, despite more than $3 billion in new spending, a narrower budget deficit. On the political front, the B.C. NDP secured another majority mandate, albeit in an extremely close vote that warranted recounts in some ridings. The NDP has settled at 47 seats versus 44 for the Conservative Party and 2 for the Greens. Meantime, Saskatchewan delivered another majority for the Saskatchewan Party, while New Brunswick power swung to the Liberals. |
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Fundamentals |
The three provincial elections in October have settled with some changes and some status quo. Here's a quick rundown of the winning parties and a few of their major platform promises: British Columbia (narrow NDP majority): Incumbent Premier David Eby has promised some middle-income tax cuts; a downpayment sharing plan for home purchases; and, a raft of new spending priorities. The NDP platform projected a wider $9.6 billion budget deficit in FY24/25 (versus $6.7 bln in the budget) and $7.6 billion for FY25/25 (versus $6.1 billion). Deeper deficits and a larger capital spending plan suggest a higher borrowing path for a province that has already seen significant increases. Saskatchewan (Saskatchewan Party re-election with majority): Premier Scott Moe takes another mandate, and the party has promised reduced personal income taxes through a higher exemption; and, various benefits to retain graduates and support active families. This is largely a status quo outcome with potentially a slightly weaker fiscal path. New Brunswick (Liberal majority): Susan Holt enters with promises to remove the PST on electricity; remove the gas tax; implement rent control; and, explore various basic-income and social assistance programs. The party projected balanced budgets thorough the forecast horizon, in part by avoiding a full-scale sales tax reduction that was promised by the incumbent PC party. From a fiscal perspective, this likely sets New Brunswick on a somewhat weaker path, but less so than under the PC platform. |
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The Province of Ontario kicked off the mid-year fiscal update season for the large provinces on October 30th. Ontario is projecting a $6.6 billion deficit for FY24/25 (roughly 0.6% of GDP), notably smaller than the $9.8 billion shortfall estimated in the initial budget plan. Considering that this update comes with a strong dose of new spending measures, it speaks to the large improvement in the underlying fiscal situation—on the back of both higher revenues and lower interest costs. The improvement also carries through the forecast horizon, with the deficit shrinking to $1.5 billion in FY25/26 (previously $4.6 billion) and then settling at an $895 million surplus by FY26/27 (previously $500 million). Combining a better-than-expected finish to FY23/24, and this improved outlook, the cumulative bottom line over the four-year (FY23/24 through FY26/27) period has improved by a hefty $9 billion. There are a few new measures incorporated into this update, which have already been announced in recent days. The real headline grabber is a $200 cheque that will be sent directly to all Ontarians, and for all children. That will flow in early 2025 and cost $3 billion. The temporary gas tax cut will also be extended by an additional six months to June 30, 2025. An additional $1 billion will flow into health care supports in FY24/25, and compensation settlements in the public sector will cost a further $607 million. Lower debt service costs help, down $1.2 billion versus the budget plan. Total long-term borrowing requirements are now estimated at $37.5 billion for FY24/25, down from $38.2 billion assumed in the spring ($31.4 billion, or a large 84%, has been completed to date). |
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Where the Population Caps Hit HardestOttawa released its annual Immigration Levels Plan, with some significant changes that will curb net inflows in the coming years. Annual permanent resident (PR) targets will be cut to 395k in 2025, slowing further to 365k by 2027. That’s down from an expected 485k this year, and a meaningful shift down from previously-planned levels of 500k per year going forward. For the first time, Ottawa is also putting temporary resident targets in the official Immigration Levels Plan. This plan aims to reduce the share of TRs to 5% of the population by 2026 from just over 7% today. This is where the really significant impact lands as it implies net TR outflows of roughly 445k per year over the next two years. Hitting these targets might prove to be a challenge, but it implies that overall Canadian population growth will run at about zero for the next two years. That would be a dramatic shift from above 3% today. TRs have accounted for the bulk of the explosion in the population, adding almost 2 ppts to Canadian population growth in the past year, or about 800k people. Immigration target changes are likely to weigh heavier in British Columbia and Ontario over the coming three years. Perhaps not surprisingly, B.C. (9.3%) and Ontario (8.5%) carried the largest share of temporary residents as of 2024Q3, well above the announced 5% national target. These two provinces have each seen their shares surge by roughly 4 ppts over the past two years. For temporary foreign workers specifically (which carry more weight than students), B.C. currently holds the largest share by a wide margin at 4.8%. At the other end of the spectrum, parts of Atlantic Canada and Alberta have relatively low temporary resident shares and should see a more muted impact. These regions are also drawing in interprovincial migration flows as an added buffer. Suffice it to say that rental markets in Ontario and B.C., which have a pipeline of supply coming to market, will also likely see their demands curves impacted most. Watch for that to play out in lower rent (immediately) and cooling housing starts (eventually).
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Recent Publications of InterestWhat Canada’s Immigration Shift Will and Will Not Do: Ottawa’s dramatic about-turn on immigration will turn Canada’s fiery 3%+ population growth of the past two years to an icy near-zero pace in coming years. This may have some important economic effects, but there are already many misleading narratives that have emerged since the announcement. Full analysis here. Canada’s Housing Market in Charts: The following is a chart-based tour of the market as it stands now, and where it might be headed. Full analysis here. Slicing the Provincial Growth Pie: Economic growth remains slow across the country, and some provinces have seen their job market soften more than others. But the dispersion of unemployment rates has never been tighter. Full analysis here. Provincial Monitor: The Canadian economy is grinding out moderate growth as past interest rate hikes weigh and the job market softens. Full analysis here. Canadian Job Market: “We’ll Be in Touch”: The job market has gone from extremely tight to exhibiting some clear signs of weakness. We explore some of the reasons why, and the implications for policy. Full analysis here. Pathways to Affordability for Canada’s Housing Market: You would need to go back to the era of double-digit mortgage rates in the early 1990s to see the last time buying a home in Canada was as expensive as it is today. The workout last time involved a major price correction followed by a long period of stagnation. Is there a less painful route back to affordability this time, and, if so, how long will it take? Full analysis here. Federal budget: Raising the Roof on Spending: The 2024 federal budget lands at a time when the economy is struggling to grow, the Bank of Canada is still leaning on inflation pressures, the loonie is under stress, and the impact of torrid population growth pervades across much of the country. 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. |
2024 Budget ReportsThe 2024 Canadian federal budget lands at a time when the economy is struggling to grow, the Bank of Canada is still leaning on inflation pressures, the loonie is under stress, and the impact of torrid population growth pervades across much of the country. Full analysis here The Province of British Columbia is projecting a $7.9 billion deficit in FY24/25, or almost 2% of GDP, with a hefty borrowing program. 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 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. 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. 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. Full analysis here Province of Ontario mid-year fiscal update. 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. 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. 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. 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. Full analysis here |