Provincial Credit Watch
January 09, 2024 | 09:47
Provincial Credit Watch: January 2024
Economics
Economics
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Provincial Returns |
Long provincial returns were little changed in the past month as a continued early-December rally in GoC yields gave way to a modest backup into the new year. The Bank of Canada remained on hold on December 6th, and the market is currently pricing in a full 25 bp rate cut by April. Meantime, long provincial spreads were very little changed in December alongside a stable risk appetite in financial markets. Spreads come into 2024 trading at the low end of the range seen since late-2021. Over the past six months, long provincials are still outperforming GoCs by just over a full percentage point; and they are outperforming by 2.6 ppts over the past year. |
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Relative Performance |
Long provincial spreads were mixed across jurisdictions over the past month. British Columbia outperformed with 30-year spreads tightening by 0.5 bps versus Canadas. That continued the prior-month momentum after the province laid out a mid-year fiscal update that showed a smaller deficit and reduced borrowing requirements. Alberta underperformed, widening by a modest 1.5 bps despite a stable fiscal outlook and largely steady oil prices. All remaining provinces saw a very modest widening versus Canadas over the past month. |
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Fundamentals |
It has been a quiet few weeks on the provincial front. The following is a recap of some of the major fiscal updates recently released: 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. The Province of British Columbia is estimating a $5.6 billion deficit for FY23/24 (1.4% of GDP), better than the $6.7 billion deficit projected in the Q1 fiscal update. Recall that the 2023 budget expected a $4.2 billion deficit this year, so this still marks a slight deterioration from the February estimate. The Province does not lay out a medium-term forecast in this update, unlike in Q1. But, recall that the previous update showed the deficit shrinking meaningfully over the next couple of years. Total gross borrowing requirements are now pegged at $17.7 billion for FY23/24, less than the $19.0 billion expected in the budget. About $8.0 billion remains to be completed, with the Province expecting roughly a third to be funded through long-term issuance. The net debt-to-GDP ratio is now tracking at 18.3%, about 0.5 ppts higher than the early-year estimate. The Province of Alberta is looking at a larger FY23/24 budget surplus, now pegged at $5.5 billion (just over 1% of GDP) compared to $2.4 billion estimated in the Q1 update and 2023 budget. While this year's surplus is down from the massive $11.6 billion windfall last fiscal year, the province continues to run the budget in the black. The medium-term projection is also updated in this document, but there is only modest improvement to the forecast of small surpluses through FY25/26 as both revenues and spending track higher. This update is based on an unchanged assumption of $79 for WTI; $17 for the light-heavy differential (down from $19.50); and $74.1 US cents for the loonie (down from 76.2 US cents). While WTI has held as expected, a tighter differential and weaker currency is a favourable combination for the province. More broadly, the detachment of the loonie from oil prices (i.e., a weak currency relative to oil) has been a significant revenue tailwind. At the same time, Alberta's royalty structure gets more favourable for the province as more oilsands projects reach ‘payout’ status. |
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Ottawa's Fall Economic Statement ReleasedFiscal updates have now been rolled out by the federal government and a few provinces, with these mid-year updates delivering refreshed medium-term fiscal outlooks and serving as a platform for new policy announcements. Overall, the fiscal backdrop has evolved somewhat better than expected, but Finance Ministers are aware that more challenging conditions lie ahead into 2024. Here we’ll focus on a few big themes at the federal level: The full report, Themes from Ottawa’s Fiscal Update, is available here. |
Recent Publications of InterestThemes 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. 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. |
Budgets and Major Fiscal Updates (FY23/24)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 British Columbia mid-year fiscal update: 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 Alberta mid-year fiscal update: Full analysis here 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 |