Provincial Credit Watch
November 09, 2023 | 09:14
Provincial Credit Watch: November 2023
Economics
Economics
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Provincial Returns |
Long provincial returns benefited from a late-October/early-November rally in Treasuries and GoCs. With the Bank of Canada and Federal Reserve staying on hold in recent weeks, sluggish economic data in Canada, and a cool U.S. payrolls report on November 3rd, yields have backed off their recent highs. For example, the 10-year GoC yield stepped down by more than 50 bps at one point coming into early-November. Meantime, long provincial spreads were little changed over the course of the past month, leaving total returns roughly in-line with GoCs. Over the past six months, long provincials are still outperforming GoCs by roughly 3 ppts; and they are outperforming by almost 4 ppts over the past year—total returns for provincials are now positive on a one-year basis. |
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Relative Performance |
Long provincial spreads were mixed over the past month. Ontario outperformed despite a mid-year fiscal update that showed modestly-deeper deficits and a larger borrowing program. Quebec also fared well, with a mostly stable budget projection that carved into the contingency allowance (more details on both below). On the flip side, Alberta underperformed, and still trades about 6 bps back of Ontario and near the middle of the 3-year range. Alberta's Q1 fiscal update was based on $75 for WTI, so the recent slide in prices to the high-$80 range is not going to wreak any havoc on the near-term fiscal outlook. The mid-year fiscal update is still pending, which will offer a more complete refresh of the outlook. |
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Fundamentals |
Mid-Year UpdatesThe Province of Ontario is projecting a $5.6 billion deficit for FY23/24 (roughly 0.5% of GDP), larger than the $1.3 billion shortfall estimated in the initial budget plan. Indeed, it's looking more and more like the era of persistent upside fiscal surprises is now over, with a cloudier economic outlook weighing on the revenue forecast. Downward revisions also carry through the forecast horizon, with the deficit persisting at $5.3 billion in FY24/25, before returning to balance ($0.5 billion surplus) in FY25/26. Cumulatively, this represents a combined $7.1 billion deterioration in the bottom line over the three-year forecast period relative to the 2023 budget. And, this almost entirely reflects a softer revenue growth profile as program spending and debt service costs are little changed by FY25/26. Total long-term borrowing requirements are now estimated at $34.7 billion for FY23/24, up from $27.5 billion assumed in the spring ($15.0 billion has been completed to date). The increase comes largely as a result of the deeper deficit. Borrowing also holds at a higher level next fiscal year and through FY25/26, at $37.4 billion and $37.0 billion, respectively (both higher than the budget plan). The Province of Quebec is projecting a $1.8 billion deficit for FY23/24(0.3% of GDP) on a public accounts basis, little changed from the 2023 budget estimate. In the medium-term fiscal plan, Quebec continues to target a return to surplus in FY25/26, after a smaller $678 million deficit in FY24/25. That path is also little changed from the spring outlook. Revenues are tracking modestly higher, with the updated estimate now $1.3 billion above the budget plan thanks mostly to higher federal transfers. Total spending is tracking $2.4 billion higher, largely the result of some new measures announced in this update, but also some upward creep in debt service costs. The difference between the larger spending boost and the revenue increase is offset by a shrinking of the contingency reserve. So, while the margin for error in the fiscal outlook is now reduced given the carving down of the contingency, the overall near-term fiscal path is little changed. |
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Mapping Canada’s Economic ConditionsThe Canadian economy is struggling under the weight of inflation and higher interest rates, with growth expected to stagnate into 2024. While the Bank of Canada could be done raising rates, past increases will continue to weigh, and consumer spending is expected to weaken as households adjust to rising mortgage costs. Business investment is choppy, while government stimulus is adding modestly to growth. Even the very tight job market has softened, a theme that should continue into next year. We look deeper into a few areas and make some provincial comparisons: Growth, inflation, housing and the fiscal situation. The full report, Mapping Canada’s Economic Conditions, is available here. |
Recent Publications of InterestMapping 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. 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. 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. |
Budget Reports (2023)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. 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 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 Ontario mid-year fiscal update: 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 Quebec mid-year fiscal update: 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 |