Another day, another downgrade
Joe Ceci travelled to Bay Street on Monday to meet with credit rating agencies.
The trip didn't start well for Alberta's finance minister.
Before sitting down with Moody's Investors Service, the agency pulled the rug on Alberta's final triple-A credit rating, lowering it to double-A1. It's the third time this has happened since December, and the second downgrade since he released a new budget earlier this month.
“I was disappointed, of course. I believe that the things we've built into our fiscal plan addressed the risks they've identified,” Ceci said later from his hotel room near Toronto City Hall.
“It was kind of a respectful disagreement.”
Ceci's $5,700 trip had been billed as a journey to the financial centres of New York and Toronto to meet with international investors, and a chance to sit down with credit rating firms “to promote the Alberta Jobs Plan.”
Here's the thing: Agencies such as Moody's, DBRS and Standard & Poor's aren't really looking at whether Alberta's plan helps create jobs or protects core services.
They want to see the creditworthiness of Alberta's finances, the stronger, the better.
As the credit rating sinks, it will cost the treasury more in borrowing costs to support the province's growing debt levels.
Moody's critique was particularly cutting.
It bluntly said the downgrade reflects the “increased risk stemming from the deep deficits and long return to balanced budgets” forecast by Ceci, something the minister says likely won't happen until 2024. The rapid increase in Alberta's overall debt levels — hitting $57.6 billion within two years, up from just $12.9 billion in 201415 — was also cited as a factor.
“The downgrade of Alberta's credit rating, along with our negative outlook, reflects the province's growing and unconstrained debt burden, extended time frame back to balance, weakened liquidity, and risks surrounding the success of the province's mediumterm fiscal plan,” said Moody's Adam Hardi in a statement.
Ouch. Looking deeper into the report card, the agency highlighted other concerns that have made many Albertans nervous.
First off, the deficit is expected to hit $10.4 billion for the new budget year.
In a recent interview, Hardi noted the province’s own oil price projections of US$42 a barrel for West Texas Intermediate crude this year — and US$54 in 2017-18 — are well above Moody’s forecast of US$33 in 2016, and US$38 next year.
Missing the oil-price projection by even a few bucks would have huge ramifications for the province: $130 million in lost revenue to the treasury for every US$1-abarrel miss. It’s of some comfort, however, to note oil prices closed at US$42.64 a barrel on Monday.
But it’s not just this year’s deficit that’s so concerning.
The deficit is projected to hit the $10.1-billion mark next year and $8.4 billion in 2018-19 — a total of $28.9 billion of red ink flowing over three years.
The agency notes low oil prices, the recession and lagging economic activity will hamper revenue growth in the province, making the hole that much deeper to dig out of if things don’t improve as expected next year. And then there’s the borrowing. The province will borrow $5.3 billion to fund operating expenses this year, increasing to $6.9 billion in 2018-19, even as the economy and oil prices are expected to rebound.
Moody’s expects Alberta’s direct and indirect debt will increase to almost 17 per cent of GDP within two years.
“Given the lengthy period of deficits, potential for weaker economic activity and continued revenue dependence on volatile oil royalties, the negative outlook reflects Moody’s view that the province’s fiscal health could deteriorate further,” the agency concluded.
Critics had a field day with the timing of the bad news.
“This is not an academic exercise. A credit downgrade has real-world consequences,” said Wildrose MLA Derek Fildebrandt. “A larger proportion of every tax dollar we send to the government will go to pay interest to the banks.”
Progressive Conservative Leader Ric McIver called the downgrade alarming and said the NDP has shown an unwillingness to control government spending.
“Just as Finance Minister Joe Ceci was planning to deliver a message to credit agencies in Toronto and New York, they delivered a message of their own,” he said in a statement.
Ceci, however, insists he’s not changing course.
All oil-producing jurisdictions are being faced with similar downgrades. The province must protect jobs and invest in capital infrastructure during the economic downturn, he added.
He’s still aiming to balance the books by 2024, and plans on trying to convince bankers and credit agencies the NDP government has the right strategy to deal with the economic tumult.
“I was able to present them a clear understanding of why we believe our fiscal plan is in the best interest of Alberta.”
Defending a plan is one thing. Convincing them to take action — or not take action — is another.
And this was only Day 1 of Ceci’s trip. A journey to Wall Street awaits.