Moody’s fired a shot across Alberta’s bow today, warning its big-spender budget is “credit negative.”
That’s not a change for the hub of Canada’s energy industry, but it is a rare red flag for a province that was used to rosy comments from ratings agencies before the oil shock.
“Alberta has some scope in its rating category to accommodate fiscal stimulus given its current low debt burden and substantial liquidity reserves,” Kathrin Heimann, the agency’s lead analyst for Alberta, said in a statement.
“However, at current oil prices, the lack of significant expenditure controls will maintain the province’s structural imbalances in the near term and will result in a deterioration of provincial debt and liquidity metrics over the next few years, which is credit negative.”
Yesterday’s budget was the first from the recently elected New Democratic Party government of Premier Rachel Notley. In fact, it was the first from anything but a Conservative government in about 45 years.
The government forecast a string of deficits and heavy spending, and is heading for the debt markets in a big way over several years.
“As a result, Moody’s expects Alberta’s debt burden to increase to around 60 per cent of revenues by 2016-17 from 30 per cent as of March 31, 2015, rising again to around 80 per cent by 2016-18,” Moody’s said.
“This projected debt burden is high for an oil-dependent regional government, and surpasses Moody’s previous expectations.”
Ms. Notley said today she doesn’t believe the province’s credit rating will be affected by the debt Alberta is taking on, The Globe and Mail’s Kelly Cryderman reports.
“But at the end of the day, I can’t control what different bond rating agencies will do or say. But what I will say is that the fundamentals are very, very strong.”
Here’s what other observers are saying about the Alberta budget released late yesterday, which forecasts a $6.1-billion deficit and includes plans to spend $34-billion on infrastructure over five years and push companies to hire:
“The province of Alberta is releasing a firm dose of government spending to support the economy as it adjusts to the negative oil price shock - if anyone has the fiscal capacity to make such a move at the provincial level, it is probably Alberta.” Robert Kavcic, BMO Nesbitt Burns
“While Alberta is expected to return to growth in 2016, the lagged effects of soft commodity prices will continue to restrain many sectors of the economy. The province’s forecast of 0.9 per cent growth is again on the conservative side of other estimates.” Maria Berlettano, Andrew Grantham and Royce Mendes, CIBC World Markets
“Because of the string of deficits and increased capital investment, Alberta will see its net financial assets position fall from $13-billion in fiscal year 2014-15 to $3.4-billion in fiscal year 2015-16 and then swing into net debt of $5.7-billion in fiscal year 2016-17 and $14.3-billion in fiscal year 2017-18. This swing would end nearly two decades of being in a net asset position.” Robert Hogue, Royal Bank of Canada
“So while other provincial issuers (for instance Ontario) are expected to see gross requirements moderate, Alberta is flagging its intention to be a more active borrower in the years ahead. In the years ahead. Indeed, in two years’ time, Alberta’s gross borrowing program could rival Quebec - long the No. 2 issuer in Canada’s provincial bond market.” Warren Lovely, National Bank
Bombardier in focus
All eyes will be on Bombardier Inc. tomorrow given reports of a huge shakeup and support from the Quebec government.
The Canadian manufacturer is set to take a hit on its C Seires project when it reports quarterly results, and at the same time scrap its Learjet 85 program, Reuters reports today.
According to the news organization, the provincial government will invest in the C Series via a joint venture.
With the unsurprising exception of Alberta, Canadians are going renovation mad.
So much so that renovation spending is expected to hit a record this year that will just about match that spent on new home building, according to a new study by Bank of Nova Scotia.
Spending on additions, alterations, installations and equipment renewal in the first half of the year is already up by 6 per cent from a year earlier, Scotiabank’s Adrienne Warren said in her study.
“Outlays are on track to total a record $53-billion this year, rivalling spending on new construction,” Ms. Warren said, adding that we’re also spending big on building materials and garden supplies.
Spending is up everywhere but for Alberta, whose economy has been whacked by the oil price shock.
Of note are Ontario and British Columbia, whose housing markets are similarly booming.
“In Toronto and Vancouver, in particular, the combination of strong home sales and price appreciation, increasingly strained affordability and tough competition for single-family homes makes renovating an attractive option for current owners looking to get a foothold into these high-priced markets via fixer-uppers,” Ms. Warren said.
So far, prices are stable because inflation for everything from windows and doors to carpets and couches is “contained,” although that could change if the weaker loonie drives up import costs.
(She didn’t mention the kitchen sink, but she did cite the cabinets, so I assume it’s the same for the plumbing.)
We’re still “well short” of the renovation madness of 2000-07, and there are a “few headwinds” looming amid modest employment and income growth.
But helping the reno industry is the fact that spending in that sector is “typically less volatile” than that for resales or new homes. Not only that, but interest rates are projected to remain low.
“A record high home-ownership rate of close to 70 per cent is supportive, with owners more likely to undertake upgrades than landlords or renters,” Ms. Warren added.We haven’t seen the latest results from North American home improvement chains, but they did cite better times for the second quarter.
Sales at Home Depot, for example, climbed almost 4.5 per cent in the second quarter from a year earlier as the U.S. housing market rebounded. And it raised its outlook for the full year.
Lowe’s, too, reported stronger sales.
Canada’s Rona, which reports third-quarter numbers early next month, also posted a jump in second-quarter sales and profit, though at the time it lamented the “ongoing decline in housing starts across the country and a stagnant economy.”
Stat of the day
Percentage of Canadian households with mobile phones, compared to 79 per cent for land-line: CRTC
Video: A 'Valeant' effort
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