Fall­ing loonie

Slide not all bad news for At­lantic Canada

The Guardian (Charlottetown) - - PROVINCE - BY FINN POSCHMANN Finn Poschmann is Pres­i­dent & CEO of the At­lantic Provinces Eco­nomic Coun­cil

Global stock mar­kets greeted 2016 with a deep har­rumph.

Oil prices re­sumed a funk that is driv­ing the price of a bar­rel of crude to early cen­tury lows.

The loonie is slid­ing into ter­ri­tory that it hasn’t seen in 13 years.

The new year is off to an in­aus­pi­cious start.

But is this all bad news for At­lantic Canada? A good ques­tion.

The drop in oil con­tin­ues as record highs in crude out­put from Saudi Ara­bia and Rus­sia meet record in­ven­to­ries in Ok­la­homa. The re­sult? Fu­tures mar­kets do not see the price of a bar­rel of crude above $50 un­til 2021.

Low en­ergy com­mod­ity prices are good for driv­ers, or pro­duc­ers who de­pend on en­ergy in­puts, but they are clearly bad for the oil com­pa­nies like those op­er­at­ing in New­found­land, and cer­tainly for the New­found­land govern­ment that counts on off­shore roy­al­ties to meet its bud­get obli­ga­tions.

Petrocur­rency Prob­lems

The loonie has emerged as a petrocur­rency over the past cou­ple of decades, and it tracks down as en­ergy com­modi­ties slip. For ex­am­ple, when oil prices trended down in fall 2014, so too did the ex­change rate, with the loonie los­ing eight cents against the U.S. dol­lar to mid-Jan­uary 2015.

As Canada as a whole is an en­ergy ex­porter, and fall­ing en­ergy prices de­press do­mes­tic in­vest­ment and in­come, Bank of Canada Gov­er­nor Steven Poloz a year ago pushed in­ter­est rates down. The rea­son­ing is, or was, that be­cause a lower in­ter­est rate de­presses the ex­change rate, our ex­ports get more com­pet­i­tive abroad, and non-en­ergy sec­tors of the econ­omy fare bet­ter.

In any event, when the in­ter­est rate-shock dust had set­tled, the loonie had given up an­other five cents.

With an­other rate drop from the Bank by sum­mer 2015, a rate rise from the US Fed­eral Re­serve at the end of the year, and oil prices con­tin­u­ing to fall, it’s no sur­prise the loonie has since lost an­other seven cents against the green­back — and the end is not in sight.

Win­ners and Losers

So who wins from the fall­ing ex­change rate?

Key do­mes­tic ben­e­fi­cia­ries are peo­ple whose prod­ucts are priced in US dol­lars but whose costs are in­curred mostly in Cana­dian dol­lars. In the At­lantic Provinces, that means agri­cul­tural ex­porters and seafood pro­duc­ers, for in­stance.

Other ser­vice pro­duc­ers are in the same cat­e­gory: fi­nan­cial in­ter­me­di­aries, busi­ness ser­vices, and tech­ni­cal trades­folk who mar­ket their ser­vices abroad. Their costs are mostly in Cana­dian dol­lars; that means most of their value-added is do­mes­tic as op­posed to im­port con­tent.

Tourism oper­a­tors are helped too, as Cana­dian va­ca­tions be­come cheaper for US tourists.

Some in­dus­tries’ prod­ucts em­body a lot of im­ported value added, so when the ex­change rate goes down, their in­put costs go up. On the other hand, for com­pa­nies that need to im­port spe­cial­ized man­u­fac­tur­ing equip­ment or parts, their busi­ness model is tak­ing a hit.

The dis­tinc­tion is sharp for auto pro­duc­ers, where Canada’s im­pres­sive par­tic­i­pa­tion in global value chains means that the im­ported con­tent share is re­ally high, and the do­mes­tic value-add low and fall­ing.

Chang­ing Eco­nom­ics

An in­ter­est­ing case is the pe­tro­leum sec­tor, which in dol­lar terms makes up a big share of the At­lantic provinces’ ex­ports. Fall­ing oil prices do not do much good or bad for East­ern re­fin­ers, whose fi­nan­cial health de­pends on pro­cess­ing mar­gins.

The div­ing oil price, in com­bi­na­tion with the sink­ing loonie, changes the eco­nom­ics of an “En­ergy East” oil pipe­line, which would give re­fin­ers and con­sumers here ac­cess to usu­ally lower Western Cana­dian Se­lect prices.

Still, the global oil sup­ply glut makes Al­berta’s oil­sands an ex­pen­sive re­source to tap, com­pared to Middle East­ern oil, ex­ist­ing New­found­land and Labrador off­shore oil and, per­haps be­fore the end of this decade, Nova Sco­tian off­shore fields.

The En­ergy East route could yet fall into place and Western sup­plies could be­come eco­nom­i­cal.

Al­berta’s Cen­ovus re­cently shipped crude to Europe, af­ter all, by way of Texas.

All is pos­si­ble. None­the­less, chang­ing trade pat­terns, and our ever deeper en­trench­ment in global sup­ply chains, mean the im­pact of ex­change rate shocks — and of mon­e­tary pol­icy — is not what it was in the past.

On bal­ance, a div­ing loonie is prob­a­bly good for At­lantic Canada, in the cir­cum­stances. But it is de­cid­edly a mixed bless­ing, and none at all for those of us mulling a south­ern va­ca­tion.

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