Originally posted 28 February 2019
Highlights
- Deficit falls as bitumen royalties strengthen
- Spending remains on track
- Investment income drops somewhat
- ATB projected profit falls by 35 per cent
- Financing requirements grow for pre-borrowing
- Buzz that inclusion of “Path to Balance” means no budget
- Economic growth expected to weaken in 2019
Context
This Update is the final update before the provincial election is called. In the Press Conference accompanying the release, the Finance Minister was pressed on whether there “would be a budget.” He admitted that decision rested with the Premier but there would be a 2019 budget. In an unusual departure from normal updates, the 17-page insert could be construed as a mini-budget.
The key messages from “Path to Balance” were:
- The Government will continue to press for improved market access
- The Government is unwavering in its commitment to balancing the budget by 2023-24.
- Alberta’s economy is the strongest in Canada
- The government’s record has been good the last two years in bringing in deficits below those initially projected
- Alberta’s economic predicament is largely outside the government’s hands
- A recitation of the government’s fiscal accomplishments- stable funding for public services while containing costs and “practical agreements” with public sector unions
- Alberta’s revenues are highly volatile
- Efforts to diversify Alberta’s economy
- A “fairer and more stable revenue structure” while maintaining Alberta’s “tax advantage”
- Stabilization and decline in the decline burden relative to GDP and other provinces.
In the absence of a Budget this March, expect the above messages to figure prominently in upcoming election campaign.
Spending
Alberta’s fiscal situation has stabilized somewhat with projected operating expenses up by 0.46 per cent from Budget– essentially a rounding error. A new row was added to the spending summary of $7 million for Crude-by-Rail. For the Climate Leadership Plan spending is down by $132 million or about 13 per cent from estimates. Debt servicing costs are expected to total $1.874 billion, down from a budgeted $1.921 billion, but still up 32 per cent from the previous year.
Revenue
The revenue picture continues to improve modestly from budget. The positive news is the increase in bitumen royalties of 89 per cent above the March 2018 budget figure. The main reasons are higher prices and a lower Canadian dollar. Investment income of the Heritage Fund is off $279 million from budget due to lower returns on capital markets. Investment income can fluctuate significantly from budget estimates and adds to the volatility of the province’s revenue. A significant portion of investment income is due to realized gains from movements in the security prices of investments. Income from government enterprises was flat with Balancing Pool gains offset by a reduction in ATB’s expected earnings and the delay in the start-up in production at the Sturgeon Refinery (APMC).
At ATB Financial, loan loss provisions rose significantly over the corresponding period in 2017 rising to $69.3 million from $14.6 million. Although ATB earned $178 million in the 9-month period, the Third Quarter Update suggests that ATB will book a fourth quarter loss of about $20 million for the math to work. According to Management’s Discussion and Analysis the deterioration “stems not only from an increase in the probability of default (PD) and loss given defaults (LGD), but also the macroeconomic factors used to calculate our loan losses. While economic growth is expected, uncertainty regarding Canadian oil prices and pipeline infrastructure, along with labour market challenges had an unfavourable impact on our provision for loan losses.” Deterioration was noted across the whole portfolio.
There was no mention whatsoever about the implications for ATB from the recent Supreme Court ruling on Redwater Resources. As reported in Abpolecon.ca, the Redwater loans will be a total write-off of about $4.7 million. Future write-offs may explain the reduced profit this quarter.
Financial Requirements
Alberta’s financial requirements were expected to total $26.1 billion. including maturities of $14.4 billion, with a net increase in debt of $11.7 billion. The Update revealed additional borrowing of $3.8 billion which results from “pre-borrowing” to finance the Fiscal Plan. The pre-borrowing means the province carries large cash balances deposited in the Contingency Account. Pre-borrowing takes advantage of continuing low short and long-term rates.
Click here for Press Conference