Alberta’s debt level rattles investors
Energy- dependent Alberta is becoming a bigger concern for bondholders than the more highly indebted Quebec as the fiscal fortunes of the Canadian provinces shift.
With almost 20 per cent of revenue driven by oil and natural gas this fiscal year, Alberta’s budget is feeling the brunt of a collapse in energy prices. Quebec, known traditionally as one of Canada’s biggest spenders on social services, has surprised investors with an austerity drive.
“There’s more fear about what Alberta is facing than when you look at Quebec, which has been on track to meet their fiscal targets,” said Brian Calder, senior trader at Franklin Bissett Investment Management in Calgary. “This is new territory for Alberta.”
Quebec on Thursday said it expects to balance its books for the first time in seven years, while Alberta forecast a record $4.99-billion budgetary hole for the fiscal year starting next month.
As the $7-billion drop in energy-related revenue threatens Alberta with recession, lower oil prices are a boon for Quebec, whose manufacturing- focused economy is expected to benefit from lower fuel costs and a Canadian dollar at an almost six-year low.
The reversal of fortunes means the yields on the debt of top-rated Alberta and lower-ranked Quebec are converging. Alberta can borrow at about 19 basis points less than Quebec, the least since 2012, according to data compiled by Bloomberg. That belies a gap of as much as five levels in credit ratings.
“Quebec is probably the best story here with the turnaround in their economy and separatist fears subsiding,” Dan Krieter, a fixed-income strategist at BMO Capital Markets, said by phone from Chicago. “Having that swell in separatist fears had always caused them to trade a little bit wider, but the impressive performance Quebec has put together has really helped sentiment.”
Alberta is rated Aaa by Moody’s Investors Service and an equivalent AAA at Standard & Poor’s, the highest grades. S&P rates Quebec five levels lower at A+, while Moody’s rates Quebec two steps lower at Aa2.
Quebec bonds ended last year yielding an average of 83 basis points more than government benchmarks, compared with a premium of 58 basis points for Alberta, according to Bank of America Merrill Lynch’s Canadian provincial and municipal index.
While investors such as Calder at Bissett laud Quebec’s new-found fiscal discipline, better returns may come from betting on an Alberta comeback.
Quebec has done “a good job of keeping their nose to the grindstone on austerity measures, but from an investment standpoint we don’t see a lot of opportunity for outperformance,” Calder said. “The weakness in Alberta is more of an opportunity.”