Provincial Credit Watch
April 05, 2021 | 09:39
Provincial Credit Watch: April 2021
Provincial bond returns were negative in March, as longer-term interest rates continued to back up. Economic growth in North America remains resilient, including Canada through the depths of the winter lockdown measures, while inflation expectations continue to rise. Meantime, long provincial spreads widened modestly in the month, edging up roughly 6 bps. From a year ago, the long provincial index was down 1.6%, outperforming GoCs by a wide margin. Keep in mind that one year ago marked almost precisely the peak in long provincial spreads at the height of the pandemic.
All provinces saw spreads widen over the past month, with Alberta underperforming along the curve. Budget season is well underway, with few major surprises so far among the largest names. Each of Alberta, Ontario and Quebec laid out relatively conservative budget assumptions. The BoC's Provincial Bond Purchase Program is set to wind down in early May, on the initial 1-year schedule. The BoC has already tapered the program to one tender per week (two previously) along with a reduced maximum size. As the program end date nears, the spread impact from here could be relatively small (and contained to 10-yr and under, where the buying has been). If anything, there could be some curve flattening in the absence of BoC purchases, and some relative weakness in smaller names (see the Atlantic provinces, ex-Newfoundland & Labrador, near the tightest end of their three-year ranges).
Budget Season in Full Swing
The FY21/22 budget season is well underway, with a number of provinces tabling their documents in recent weeks. After a tumultuous year, provincial governments look to re-set longer-term fiscal plans now that there is more certainty on the economic outlook and vaccination program. We recently published a report covering some of the key themes to watch: Report available here.
The following provinces tabled their 2021 budgets in April:
The Province of Ontario is projecting a $33.1 billion deficit for FY21/22, right in line with the estimate published in the November budget. That will weigh in at about 3.7% of GDP, and is down from the $38.5 bln (4.5% of GDP) shortfall still expected for FY20/21. Indeed, there has been precious little change in the near-term fiscal picture, with a modest bump in revenues offset by higher spending.
So, what is new? The Province updated its economic outlook to reflect more resilience than expected around the turn of the year. Real GDP is estimated to have fallen 5.7% in 2020 (6.5% previously) before rebounding 4.0% this year, though the latter is actually a downgrade from 4.9% previously. There is clearly some substantial caution built into the 2021 growth forecast. That said, the Province also lays out two alternative scenarios, and their 'faster-growth scenario' looks more in-line with our own current outlook. That is, real GDP rebounds a stronger 5.9% in 2021, and runs at 4.7% in 2022. In that case, the deficit is cut by about $4 billion per year over the next two years.
The Province also laid out a long-term recovery plan showing a path back to balance. While this is more or less a sketch beyond the upcoming few years, the baseline scenario doesn't see a balanced budget take shape until FY29/30. In the faster growth scenario, that occurs two years earlier but, maybe more importantly, the deficit shrinks to about 1.5% of GDP by FY23/24. That's a decently quick move to a much more sustainable level, and is certainly a less-dire picture than the initial headlines might lead one to believe.
A full analysis is posted here.
The Province of Quebec is projecting a $9.2 billion deficit in FY21/22, before transfers to the Generations Fund (for debt reduction). That's notably deeper than the $5.3 billion projected in the November fiscal update, largely because COVID-related spending is running higher than the amount previously set aside.
That said, the deficit is narrower than $12.0 billion expected for FY20/21 (that figure is a touch better than expected in the latest update), and it weighs in at a very reasonable 2.0% of GDP. The reported headline $12.3 billion deficit for FY21/22 comes after $3.1 billion in transfers to the Generations Fund.
Looking further ahead, the Province expects steady deficit reduction in the coming years, with the shortfall fading to $5.3 billion in FY22/23 before the budget is effectively balanced by FY24/25. In the meantime, net debt peaks at 45.5% this coming fiscal year. While that ratio is, of course, higher than the pre-COVID trajectory, it remains below Ontario and, as another distinction, begins to decline in the very near term.
This budget rolls out more COVID-related spending and a few modest business tax reductions. Total measures announced come in at $5.2 billion for FY21/22.
A full analysis is posted here.
The Province of Nova Scotia is projecting a $584.9 million deficit in FY21/22 (1.2% of GDP), lower than the $705.5 million deficit now expected in FY20/21. The latter was an improvement from the $778.8 million estimated in December's update, thanks to lower-than-expected spending. Nova Scotia expects to post successively smaller deficits until the end of the fiscal plan, when it estimates a $10.5 mln surplus for FY24/25. Still, net debt will increase each year as a share of GDP after falling steadily in each of the previous six years—the Province has brought down the ratio by five percentage points over that period. While the ratio remained relatively modest at 37.4% in the fiscal year that ends next week, this is a noteworthy turnabout that comes on the back of a ramped-up infrastructure spending program. Net debt is expected to rise to 40.1% of GDP by the end of the forecast in FY24/25.
A full analysis is posted here.
The Province of New Brunswick released its FY21/22 budget, almost exactly a year after its previous outlook was published at the beginning of the pandemic. Of course, the outlook has changed considerably since then, with the estimated $92.4 million surplus in FY20/21 now expected to be a $12.7 million deficit. Despite an economic recovery beginning in 2021, the government expects the deficit to rise to $244.8 million this upcoming fiscal year and linger at $220 million by FY23/24. That said, New Brunswick's nearly-balanced budget in FY20/21 is a feat considering the shortfalls across the rest of Canada, and the FY21/22 deficit will remain relatively small, at just 0.6% of GDP.
The Province of Prince Edward Island is projecting a $112 million budget deficit for FY21/22, almost $8 million smaller than the previous year. That will weigh in at modest 1.6% of GDP, only a 0.1 ppt better than last year. The good news is that the FY20/21 deficit forecast improved by over $50 million from the June estimate to $120 million. Still, that's the largest deficit since FY03/04. We're likely to see similar improvements in provincial fiscal accounts over the coming months as governments close the books on early- or mid-pandemic estimates. The Province has also projected that the deficit will decline to just under $46 million next fiscal year and shrink to $28 million by FY23/24.
Upcoming budgets: Saskatchewan (April 6); Manitoba (April 7); Canada (April 19); B.C. (April 20th week TBC).