Finance minister warns rate hike will hurt province

Higher cost of doing business will hit energy firm hard, Doherty says

Saskatchewan’s finance minister isn’t surprised by the Bank of Canada’s decision to increase interest rates, but says it is “not great” for the province.

The move, which saw the overnight lending rate go to 0.75 per cent from 0.5 per cent, was the first increase in seven years and one that many saw coming.

Signs of economic recovery across the country were cited as one reason for the decision, but Kevin Doherty says economic growth has not been as robust in energy-producing provinces — like Alberta and Saskatchewan — as it has been in other provinces, such as Ontario and B.C.

“We’re not out of the woods by any stretch of the imagination with respect to economic recovery in the energy producing provinces,” he said.

That’s why Doherty tried making a case to the Bank of Canada against an interest hike a few weeks ago, arguing the heightened cost of doing business will be difficult to absorb for energy companies based in Saskatchewan.

“The cost of borrowing has gone up for consumers and businesses in the retail market if you will,” he said, noting the interest rate hike could counter the province’s efforts to increase private investment in Saskatchewan. “Any time you increase the cost of borrowing, that slows down that borrowing a bit, for obvious reasons.”

Doherty says there have been some good signs for Saskatchewan’s economy lately, “but oil prices are still down considerably from where anybody forecasted them just a few months ago.”

When the budget was released in March, the province forecasted the price of a barrel of WTI oil to be $56.25.

In the days since, the average price has been $48.

Every dollar below the province’s projection equals a $16 million loss to forecasted provincial revenue: if the fiscal year ended today, the province would be $132 million short of its projected oil revenue.

Countering that is the Canadian dollar.

At budget time, the province forecast the dollar to be worth US$0.74. Since budget, the average price has been right around that projection.

Every cent the province is above that projection costs the province $22 million, but every cent it falls below that target, the province gains the same amount.

Doherty isn’t letting such projections keep him up at night, though.

“It’s premature to say, ‘This is the way it’s going to be for the rest of the year’ because none of us know,” he said. “There are any number of circumstances that could change the price of oil tomorrow, good or bad. And the same with the Canadian dollar.”

He also noted the province has a $300-million cushion built into the budget that could be used to offset loss in revenues.

A fuller picture of Saskatchewan’s finances will be available in August, when the province releases its first-quarter update.