Varcoe: Balanced budget could stem tide of credit rating downgrades

A weaker credit rating makes it more expensive for Alberta to borrow money from capital markets, driving up costs for the government

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What goes up must come down, but Alberta is about to find out if the reverse is true.


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After years of seeing the province’s credit rating downgraded due to falling energy revenues, deadly recessions and rising debt levels, that trend may be coming to an end.

However, an upgrade probably won’t happen quickly.

As the UCP government unveils a new fiscal plan, Alberta “should be looking at a balanced, if not better, budget” with reasonable oil price assumptions, BMO senior economist Robert Kavcic said Wednesday.

“It’s quite a dramatic change from two years ago,” Kavcic said. “The negative or downward pressure on ratings is gone now. The downgrades to ratings we saw early in the pandemic for Alberta and a few other provinces were premature . . .

“Alberta also had the biggest swing of the group. So I think there is evidence that for sure the credit rating is stable. »


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A sea of ​​red ink has swept the province since the last reported budget surplus in 2014-15, leading to a disheartening string of rating agency downgrades in recent years.

A lower credit rating makes it more expensive for Alberta to borrow money from capital markets, which drives up costs for the government.

In November’s mid-year fiscal update, the Kenney government said it was on track to run a deficit of $5.8 billion for the year ending March 31, a substantial drop compared to the $18 billion crater originally projected in last February’s budget.

Yet debt levels were expected to continue to rise.

Total taxpayer-funded debt is expected to reach $102 billion by the end of March, up $8.5 billion from a year earlier.


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Debt servicing costs have been set at $2.5 billion for the year, which exceeds the operating budgets of all key departments except a handful: health, education, kindergarten to grade 12, post-secondary education, and community and social services.

For some perspective, the total costs of servicing the debt are now higher than the combined operating expenditures of the departments of energy, environment, transportation, seniors and housing.

The province’s total debt levels (including debt from self-governing bodies like Agriculture Financial Services Corp.) have soared since the last time oil prices traded above $100 a barrel. It fell from $30 billion in 2014 to an expected level of nearly $119 billion for the current fiscal year, according to the mid-year update.


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Analysts point out that Alberta has lower debt levels than other provinces (dating back to the Klein era), but growing deficits in recent years and the lack of a realistic plan to restore the balance have become an anchor point.

Last May, S&P Global Ratings downgraded Alberta’s long-term credit rating from A+ to A, saying the fiscal shock from the COVID-19 pandemic had exacerbated the financial situation.

At the height of the pandemic in June 2020, Fitch Ratings downgraded the province. Moody’s Investors Service and DBRS Morningstar also downgraded the province’s credit rating in the previous six months.

But throughout the past year, the situation has started to improve as the economy recovers from the grueling recession of 2020.


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Oil prices are up more than 20% this year, closing Wednesday at US$92.10 a barrel amid rising energy demand and heightened tensions between Russia and Ukraine. Other sectors of the economy are also showing growth.

In Thursday’s budget, rating agencies will examine the near-to-medium term outlook for Alberta’s finances and the pressure to increase spending in areas such as health care and education.

“While it will be a good thing if we see a return to balance and supported by demonstrably robust revenues, we want to see how those revenues are distributed and how the province handles those pressures,” said Travis Shaw, vice president. main. president of DBRS Morningstar, said in an interview.

“How sustainable is this improved fortune? »


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Despite some spending restraint, this critical issue is still tied to the ups and downs of unstable energy markets.

In fiscal year 2020, oil prices averaged just $42 a barrel. Last week, a report from RBC Capital Markets forecast West Texas Intermediate crude to average $98.30 a barrel this year, falling slightly to $96.50 in 2023.

“Revenues will obviously be significantly higher because of these windfalls from higher oil prices,” said RBC economist Carrie Freestone.

“You could definitely see an upgrade (in credit) if the situation stabilizes in the medium term.”

A short-term spike in commodity prices will help the bottom line this year.

However, it is the longer-term outlook surrounding income and spending that economists and analysts will be scrutinizing on budget day.


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“A surplus result would obviously help to stem the erosion that we have been experiencing for several years,” added Shaw.

“I wouldn’t say that should immediately translate into positive rating actions. . . We want to look to the medium term and understand what this more sustainable path is going forward. »

Ron Kneebone, an economist at the University of Calgary’s School of Public Policy, has studied the province’s finances closely and said rising oil prices are another reminder that Alberta governments must “stop to rely on income that we know we cannot rely on”.

“The most important thing for government is not to have a balanced budget, I don’t think, but rather to have a credible plan moving forward,” Kneebone added.

“If this plan is credible, the credit rating agencies will reward them.”

Chris Varcoe is a columnist for the Calgary Herald.

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