Calgary Stampede festivities aside, Alberta’s economy has been hurt by low oil prices.Jeff McIntosh/The Canadian Press
The bad financial news won't let up in Alberta, not even for a parade.
Alberta Premier Rachel Notley and her Finance Minister, Joe Ceci, smiled for a selfie as 10 days of Stampede kicked off with a parade through downtown Calgary on Friday. But a busy summer stumping schedule this month that includes pancake flipping and marching bands may only provide a brief respite from dour financial news that follows the NDP government everywhere it goes.
At the same time as the annual Stampede parade began, oil prices took another tumble, and the rating agency DBRS Ltd. lowered its long-term outlook to negative, even as it confirmed its rating on Alberta's debt at double A (high). The move only added to deficit and debt worries that other rating agencies have expressed.Relate
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"The negative trend reflects the fact that Alberta continues to erode its low debt advantage through sustained deficit spending. Moreover, the province has yet to provide a credible plan to restore balance," the note from the credit rating agency said.
With the oil-price downturn nearing its fourth year, the government has not backed away from its commitment to maintain public-sector jobs and stimulus spending to help carry the province through tough times – using debt to fund increasing amounts. The province's economy shrunk in both 2015 and last year, and the deficit for the past fiscal year came in at $10.8-billion.
This past week, Ms. Notley announced a $1.53-billion contribution to a new leg of Calgary's light-rail transit system, the latest in a series of big-ticket infrastructure investments. It is the single biggest infrastructure spending announcement in Alberta's history, and the province says its contribution will come entirely from revenues from the province's new carbon tax.
But even with new revenues from the carbon levy, questions remain about how the province will crawl out of its financial hole. DBRS said it is concerned with what it calls "Alberta's track record of weak fiscal discipline."
"While Alberta's debt burden is low and the economy is showing signs of recovery, the fiscal plan demonstrates a lack of willingness to contain debt growth, which is likely to lead to a one-notch downgrade of the long-term ratings."
In May, Standard & Poor's Financial Services LLC said it expects Alberta will post after-capital deficits in excess of 26 per cent of total revenues for the next two years. That means the debt could ratchet up to hit $94-billion by 2020, according to the Standard & Poor's projection. The agency downgraded the provincial debt by two notches to single A-plus from double A.
The rating agency shifts have given plenty of fodder to Alberta's right-leaning opposition parties, who want the left-of-centre NDP to cut public-sector spending in significant part by putting a freeze on government wages and hiring. Albertans are scheduled to go to the polls in 2019, and parties on the right have started the process to merge as a way to avoid vote splitting, bolstering their chances in the next election.
A main point of contention is whether the government is simply hoping for a return to higher oil prices to get the province out of debt. Mr. Ceci has faced tough questions regarding his statements that Alberta would be out of debt by 2024, while providing no budget details beyond the next three years.
Travis Shaw, DBRS's vice-president of public finance, pointed out in an interview that oil revenues and investment income were higher than expected in 2016, as oil prices strengthened, but the money went to program spending rather than deficit reduction. This raises concerns if oil prices stay on a downward track this year, Mr. Shaw said.
Oil's collapse has battered the provincial economy since late 2014. It has forced the energy industry into spending and job cuts. It has also exposed just how dependent Alberta remains on its main industry even after decades of efforts to diversify the economy.
In its March budget, the government projected revenue from oil-sands production at $2.5-billion and conventional crude revenues at $476-million for the 2017-18 fiscal year, though that was assuming an average West Texas Intermediate oil price of $55 (U.S.) a barrel.
Crude has not climbed to that level in the current budget period, which started at the beginning of April. Since then, WTI is down 15 per cent, settling on Friday at $44.23 a barrel, despite a pact by the Organization of the Petroleum Exporting Countries and its allies to limit output as a way to prop up the market. Partly offsetting the impact of the slide has been an unusually narrow discount on Canadian heavy oil versus WTI.
University of Alberta economist Stuart Landon said Alberta's provincial debt-to-GDP ratio is still the smallest in Canada, and it will take more years of deficits for lenders to actually pull back from lending the province money.
Mr. Ceci also defended his government's economic record on Friday, pointing out that Royal Bank of Canada, Toronto-Dominion Bank and Conference Board of Canada place Alberta at or near the top in projected economic growth in 2017.
But Prof. Landon said the lack of a plan to get out of deficit is a worry. And given recent oil-price weakness and plentiful North American supplies, Alberta government estimates of $68 a barrel of West Texas Intermediate oil by 2019-20 look "wildly optimistic."
Oil forecasters have already been forced to temper their projections. Brokerage Raymond James reduced its forecast for 2017 to $46.68 a barrel from $51.54, and its 2018 outlook to $45.32 from $52. And Deloitte, the global consulting firm, said this week that the growth in U.S. production, and expected oil-sands output increases, will keep a lid on prices.