Provincial Credit Watch
October 05, 2023 | 10:59
Provincial Credit Watch: October 2023
Economics
Economics
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Provincial Returns |
Long provincial returns were hit hard in the past month alongside the global bond selloff. Long provincial total returns registered -7.6% in the month through October 4th, slightly outperforming GoCs as spreads held firm. Over that period, 10-year GoC yields rose a hefty 60 bps as markets priced in higher-for-longer interest rates. While the Federal Reserve left rates unchanged on September 20th, the amount of easing by the end of 2024 (in the dot plot) was reduced, the 2025 end point was raised, and the Fed now sees restrictive policy (feds funds above the neutral rate) right through 2026. That is among the factors behind the Treasury selloff, which has pulled GoCs and provincials along for the ride. 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—though total returns over both periods are still deeply negative. |
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Relative Performance |
Long provincial spreads were mixed in September. While spreads in Central Canada widened modestly (to the tune of 3 bps in Ontario and Quebec), they tightened slightly in Alberta. Saskatchewan and Newfoundland & Labrador also outperformed on the back of strong oil prices. WTI surged to close above $93 at one point, before backing down in recent days. Alberta's Q1 fiscal update was based on $75 for WTI, so recent prices in the low-$80 range for the remainder of the fiscal year would still leave the province with a few billion dollars of revenue upside (a soft loonie is also helping). Elsewhere, spreads have been relatively stable across the country over the last six months despite economic uncertainty, swings in market sentiment and the move in rates. British Columbia continues to trade at the wide end of the 3-year range versus Ontario alongside weaker-than-expected fiscal numbers—last year's public accounts came in weaker, and this year's deficit is tracking deeper. |
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Fundamentals |
Fiscal Updates Trickling InBritish Columbia's public accounts reported a $704 million surplus for FY22/23, down sharply from the $3.6 billion surplus last expected. The downward revision came from both softer revenue and higher spending to finish the year. For FY23/24, the deficit is now pegged at $6.7 billion, wider than the $4.2 billion estimated in the budget plan. Revenues are tracking weaker across most tax categories, as well as natural gas royalties, while higher-than-expected wildfire spending (to the tune of $762 million) is also impacting the near-term outlook. Alberta's FY23/24 surplus is on track at $2.4 billion as of the Q1 fiscal update. Recent swings in oil prices leave some modest revenue upside for this fiscal year, with the weaker C$ also helping. Saskatchewan's Q1 fiscal update estimated a smaller $486 million surplus versus $1.0 billion in the budget plan. The oil prices assumption was revised down from the budget (to $74.47 from $79.50 for WTI), which carved $530 billion from the revenue forecast. Manitoba has been quiet ahead of the October 3rd election, in which the NDP secured a majority mandate. The party took 34 seats, while the Progressive Conservative Party claimed 22 and the Liberal Party 1. NDP priorities included ramped-up health care spending and some tax relief (e.g., gas tax), paid for by carrying a smaller budget contingency. Ontario posted a $5.9 billion deficit in its FY22/23 public accounts, which weighs in at a moderate 0.6% of GDP. That final figure is a bit deeper in the red compared to the $2.2 billion deficit penciled into the 2023 budget. Notably, revenues finished $7.5 billion lower than estimated at that time, although they were still up a hefty $13 billion from the original budget, and more than $7 billion year-over-year. Quebec's Q1 fiscal update shows little change in the bottom line. The public accounts deficit is pegged at $1.7 billion versus $1.6 billion in the budget plan. Revenues are down $967 million, but the contingency reserve has absorbed that change—$500 million of explicit buffer remains for the rest of the fiscal year. New Brunswick posted a larger-than-expected $1.0 billion surplus in the FY22/23 public accounts, or a hefty 2.2% of GDP. Nova Scotia is on track for a $403 million deficit for FY23/24, somewhat deeper than the $279 million deficit penciled into the 2023 budget. 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. |
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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. 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. 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. |
Provincial Budget Reports (2023)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 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 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 |