Ratings agencies are waiting to see coherent budgeting
Province has already suffered downgrades, now financial observers expect a plan
Finance Minister Joe Ceci will be under a glaring spotlight when he unveils the new provincial budget later this month, not only from taxpayers, but also credit rating agencies and economists.
They will be looking for a credible plan from Alberta on how it can bridge the chasm between how much money the government spends versus how much it collects. And the gap is mammoth. Ceci announced last week the province is on track for a $10.8-billion deficit for the fiscal year ending March 31.
He also reiterated the NDP government plans to return to a balanced budget in 2023-24, several years down a rocky, debtstrewn road.
“If that (time frame) remains, then for us that means it’s a prolonged time period back to surplus ... which of course will increase the debt load,” says Adam Hardi, a vice-president with Moody’s Investors Service.
“Our expectation certainly is that they have a fairly comprehensive plan, not just for the next two years, but a little bit further out.”
Last year, Alberta’s sterling triple-A credit rating took it on the chin, pummelled by a series of downgrades.
A lower credit rating makes it more expensive for the province to borrow money on financial markets, which ultimately drives up costs for the government.
The downgrades weren’t a big surprise as global oil prices tanked, provincial revenues were in free-fall, the recession deepened and the NDP government forecast a record deficit.
In fact, Alberta governments have run a string of deficits in eight of the past nine years, dating back to the global recession in 2008-09.
Ceci’s budget last spring originally called for a $10.4-billion deficit, with another $18 billion waiting in the wings for the following two years.
Last April, Moody’s downgraded Alberta’s triple-A credit rating to double-A1, with a negative outlook.
With the upcoming budget to be released in mid-March, all eyes will be on the province’s long-term blueprint to get back into the black while energy prices rebound and the economy returns to growth.
Hardi says he’ll focus on how quickly the annual deficit situation is expected to improve, the anticipated increase in overall debt levels and “whether they can and are willing to rein in spending.” He’s not the only one. One day after last year’s budget, rating agency DBRS cut the province’s long-term debt rating from triple-A to double-A (high), with a stable outlook.
Travis Shaw, DBRS vice-president of public finance, says a contributing factor to last year’s downgrade was a projected rise in Alberta’s long-term debt, with the overall debt burden set to exceed 15 per cent of GDP by 2018-19.
In this new budget, he hopes to get a sense of the government’s mid- to long-term financial strategy.
“We want to see the government is taking some action to gradually reduce the deficit in a modest fashion, such that it will help to slow the increase in debt.”
At Canada’s largest bank, RBC senior economist Robert Hogue says it’s clear Alberta will have another budget deficit and that when a province faces economic adversity, the strategy can make sense.
However, the challenge for Alberta is that not only does it have a cyclical deficit caused by low commodity prices, but it likely also has a structural deficit “and we need to get a sense how this government intends to balance things out over the longer term,” he says.
That would mean cutting spending, boosting revenues or a combination of the two.
Thankfully, the province’s economic situation is stabilizing, with crude oil prices closing Tuesday at US$53.20 a barrel and Alberta poised to return to growth this year.
In its third-quarter report, the province noted its revenues for the current budget year grew by $1.5 billion, in part due to stronger energy royalties. However, spending also rose by $2.6 billion.
The province’s annual debt servicing costs now top $1 billion, up one-third from 2015-16 levels — and that’s projected to double within two years.
In Edmonton last week, Ceci told reporters the province expects to get back into balance by maintaining expenses at below the annual rate of inflation plus the province’s population growth, a goal previous PC finance ministers also pursued.
But economists such as Ron Kneebone remain skeptical that is much of a plan.
The University of Calgary professor says Alberta appears to be “hoping and praying” oil prices will rebound sharply to swell provincial coffers in the future.
He’s worried if that doesn’t happen, deficits will keep climbing, debt levels will expand and Alberta’s credit rating will fall — again.
“I think it’s inevitable a downgrade will happen and this will contribute to pushing up interest costs, which are the real danger here,” he says.
“All this debt is obligating us to pay a lot of interest payments.”
Now, none of the credit rating agencies are predicting Alberta faces a post-budget downgrade. With new pipelines in the wings and improving commodity prices, the province’s financial fortunes are brighter than a year ago.
And Alberta is starting from a stronger financial position than any other province.
But make no mistake, those who set the credit ratings are scrutinizing the situation.
And like last year’s budget, another 12 months without a clear roadmap to get back in the black could prove costly.