The largest domestic issuers – namely, the Provinces of Quebec, Ontario and BC as well as the federal government – have released their respective 2016 budget documents in recent weeks. This being said, the budget season is not over yet: five relevant events for the Canadian provincial bonds sector will occur during the month of April and should be on the radar of market participants.
1-To begin with, the Saskatchewan general election will be held on April 4th. According to the latest poll, the Saskatchewan Party led by Premier Brad Wall is projected to win another comfortable majority. The pre-electoral budget recently released by the Saskatchewan Party includes the return to a balanced budget in FY 2017-18 without hiking taxes, as long as WTI oil prices gradually increase to US$56 in 2018. Investors will notice that the $427M deficit estimate for FY 2015-16 represents only 0.4% of NGDP (see chart on page 2), a small burden in comparison to the two other oil-producing jurisdictions, N&L and Alberta. More precisely, the Third-Quarter Update released in late February indicates that non-renewable resources revenues are $600M lower than projected in the 2015 budget because of the plunge in WTI oil prices, a larger light-heavy crude oil price differential and lower potash revenues. Prudent expense management initiatives kept a lid on total expenditures, which are still as forecast in the 2015 budget. Otherwise, the deterioration in the public finances of the province would have been more important.
2-In Alberta, the economic downturn is deeper and longer than previously projected because of the sharper pullback in capex spending and labour income. Notably, the recent rise in the unemployment rate – 7.9% in February, on its way to 8%+ – suggests more financial distress in coming quarters for the highly-leveraged households located in the province. Besides the oil outlook, the biggest risk for the Alberta economy and the housing sector remains a larger-than-expected interprovincial migration outflow in coming years; despite the extended duration of EI benefits announced in the federal budget. All in all, a sour economic outlook will form the basis of the 2016 Alberta budget to be released on April 14th. Finance Minister Joe Ceci has already mentioned that the previous pledge to balance the books before the 2019 election is no longer possible. More precisely, theThird Quarter Fiscal Update and Economic Statement tabled in late February includes a large $6.3M deficit for FY 2015-16, representing 1.9% of NGDP (see chart on page 2). The most important downward revision is related to personal income tax revenues, down $762M from the 2015 budget (released not long ago in late October) due to the severe decline in employment and wages. In addition, Minister Ceci hinted that the deficit for FY 2016-17 could be $5B larger than initially forecast. This would imply a fiscal shortfall of $10B – the largest in the Province’s history – and a steep increase in debt issuance. Beside the budget, investors will need to closely monitor two other factors that could map out the future of Alberta’s oil industry: developments regarding the Energy East pipeline project and a growing nation-wide commitment to tackle climate change.
3-The N&L government will also release its 2016 budget on April 14th. Primarily due to the fall in Brent oil prices (the N&L offshore oil industry receives Brent prices for its oil), the deficit estimate for FY2015/16 has nearly doubled to $2B, representing 6% of NGDP (see chart on page 3). Under the status quo, the debt-to-NGDP ratio, already higher than in the two others oil-producing provinces, is projected to increase significantly every year until FY 2020-21. To avoid such a scenario, the N&L government asked departments and agencies to identify cuts totaling 30% of this year’s spending. The full set of cost-saving measures to address this challenging fiscal situation will be revealed in the 2016 budget.
4-The biggest change on the provincial scene could occur in Manitoba, where a general election will be held on April 19th. The NDP has been in power for the last 16 years and registered 8 deficits during that period; including a large $773M deficit in FY 2015-16, representing 1.2% of NGDP (see chart on page 3). The pre-electoral platform presented by the NDP in early March proposes tax increases for high-income earners, tax cuts for low-income earners and a one-year delay for the return to a balanced budget to FY 2019-20, on top of the 2-year delay announced a year ago in the 2015 budget which led Moody’s to downgrade the Province from AA1 to AA2 in July 2015. This being said, this plan may never become reality since Brian Pallister’s Progressive Conservative party is about 20 percentage points ahead of the NDP according to the latest poll. If elected, the Progressive Conservative’s approach to public fiscal management would be definitively different than the one adopted since 1999 by the NDP. Without providing a specific timeframe, Brian Pallister mentioned to the media that he would take a gradual approach to returning to a balanced budget by limiting the pace of increase in program spending to 4%; instead of the 5% average annual increase registered under the NDP government. If it turns out to be the case, the fiscal outlook would likely improve and surely catch the attention of investors and credit rating agencies as long as the economy continues to perform extremely well – we forecast real GDP growth to stay above 2% in 2016 and 2017.
5-Finance Minister Randy Delorey will table the Nova Scotia 2016 budget on April 19th, the same day as the Manitoba election. Nova Scotia’s real GDP is projected to expand by 1.9% annually in both 2016 and 2017, thanks to robust external demand from the US and fishing, food and consumer goods products. Also, the $25B contract awarded by the federal government in 2011 to the Irving Shipbuilding company in Halifax to build new naval vessels should support investment, jobs and consumption as the project advances. Despite the improvement in economic conditions, the mid-December fiscal update showed deterioration on the fiscal front. Indeed, the Province of NS is now forecasting a $240M deficit for FY 2015-16 representing 0.6% of NGDP (see chart on page 3), more than doubled the $98M shortfall projected in the 2015 budget. Most of the negative surprise is due to lower crown corporations’ revenues and an accounting prior year adjustment to revenues. Expenses are broadly in line with the budget’s expectations.
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