Provincial Credit Watch
June 04, 2024 | 09:44
Provincial Credit Watch: June 2024
Economics
Economics
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Provincial Returns |
Long provincial returns were positive in the past month, as 30-year GoC yields fell almost 20 bps in May. Long provincial spreads also tightened modestly by just under 3 bps, helping the sector slightly outperform GoCs. Provincials continue to lead GoCs, albeit slightly, on a 6-month basis, and are outperforming by almost 3 ppts over the past year. All eyes are on the Bank of Canada, with a 25 bp rate cut expected on June 5th. While there is still some uncertainty over that move, the market has more than fully priced in 25 bps of easing through the July 24th meeting, reflecting earlier and more aggressive easing this year versus the Federal Reserve. Canadian inflation has simply melted more meaningfully than that in the U.S., and the economy has proven to be more rate sensitive. |
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Relative Performance |
Long provincial spreads were mixed across jurisdictions over the past month, and we've entered a quiet period with respect to fiscal updates. Alberta and Newfoundland & Labrador outperformed in May despite a continued pullback in oil prices. Alberta assumed $74 in the FY24/25 fiscal plan, so current market conditions are still in-line with their budget assumptions. Most other provinces, including B.C., Ontario and Quebec underperformed slightly in the month. |
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Fundamentals |
We're in a quiet period for fiscal updates following the 2024 budget season. The combined provincial budget deficit is on track to widen to $28 billion (0.9% of GDP) in FY24/25 from $10.6 billion in FY23/24, with the pressure coming on multiple fronts. Revenue growth, which has been robust thanks to the post-pandemic recovery and high inflation, has cooled amid sluggish economic growth. Meantime, program spending growth is strong, partly reflecting upward pressure on public sector wages, while interest costs are on the rise. Torrid population growth is stressing infrastructure, necessitating large capital spending programs. Also, Canada’s plan to reduce nonpermanent residents to 5% of the population over the next three years is a significant move, if carried out, and should bend the population growth curve back down to around 1%. The impact at the provincial level is not yet clear, but suffice it to say that those provinces that have seen the biggest relative influxes of nonpermanent residents (e.g., Ontario and B.C.) could face the sharpest cooling in population growth. We unpack this and some key budget season themes in Winds of Provincial Change. Full report available here. |
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All Budget HighlightsThe 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. Against that backdrop, the fiscal path is little changed from that laid out in the 2023 Fall Economic Statement, but only after another significant increase in spending fully offsets revenue gains from a resilient economy and further tax increases. Full analysis here 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. 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 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. The latter is a modest downward revision from the most recent fiscal update, but well down from the initial $1.1 billion surplus projection. The deficit comes as spending pressure builds, while revenue dips alongside a drop in tax receipts and subdued potash royalties. Looking ahead, Saskatchewan expects a return to small surpluses by FY25/26 and through the forecast horizon. 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. The latter is deeper than the most recent forecast ($294 million), and the year-over-year improvement only comes after the FY23/24 deficit was revised sharply higher from $363 million initially. For the upcoming fiscal year, the deficit weighs in at a manageable 0.9% of GDP, versus 2.2% in FY23/24. The province sees a return to balance in FY27/28, but that is a number of years (and many spending priorities) out into the future. Net debt also continues to rise, pushing above 39% of GDP by next fiscal year, when it will challenge for the highest outside Newfoundland & Labrador. 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. While FY23/24 is tracking somewhat better than expected, the near-term fiscal outlook has clearly deteriorated on a combination of weaker revenues and firm spending demands. Ontario is certainly not alone on this front, as this has been a common theme across the country this budget season. Over the coming few years, the Province now sees a $4.6 billion deficit for FY25/26, before a return to balance in FY26/27, a year later than previously planned. At the same time, the net debt-to-GDP ratio rises 1.2 ppts to 39.2% in FY24/25, before peaking at 39.5% in the following year, slightly higher than previously planned. 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. That compares to the small $678 million shortfall last expected in the fall fiscal update, and would mark the deepest deficit on record for Quebec in dollar terms (the deepest since the mid-1990s as a share of GDP). Looking ahead, Quebec will run deficits right through the subsequent four-year forecast horizon, a notable shift from prior plans to balance the books by FY25/26. While the Province builds in a $1.5 billion per year contingency through the forecast, it also will need to find $2 billion in savings by the end of the horizon. 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. That compares to a $247 million surplus in FY23/24, and would mark eight consecutive years in the black—impressive considering the ups and downs of recent years. Small surpluses persist through FY26/27. 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 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. The return to deficit is expected to last for just two years, with the Province anticipating a surplus in FY25/26 and through the rest of the medium-term outlook. Revenues and expenditures are expected to remain relatively stable over the forecast horizon, though the Province builds in an oil risk adjustment that starts at $20 million in FY25/26 and gradually rises to $70 million by FY28/29. Full analysis here |
Recent Publications of InterestWinds of Provincial Change: Some provincial growth patterns could begin to shift, and there have been some notable developments on the fiscal and population fronts. Full analysis here. Provincial Monitor: All provinces have grappled with inflation and higher interest rates, but a bigger disparity in performance is beginning to show through again. Full analysis here. Federal budget: Raising the Roof on Spendign: 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. 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. 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. |