As the world watches Russia's oil-stained economic turmoil with growing trepidation, it may not have noticed that Canada has its own little Russia within its borders. And I don't mean Alberta.
Newfoundland and Labrador Finance Minister Ross Wiseman projected Tuesday that oil's plunge will add $378-million to the province's expected budget deficit for fiscal 2014-15, increasing it to $916-million.
If that figure holds, it would be the biggest deficit in the province's history, at a time when the Canadian economy is years removed from recession and is growing at a healthy 2.4-per-cent annual pace. That's decidedly in the wrong direction.
While Canadians usually think of oil as being synonymous with Alberta, the country's traditional energy giant is actually second banana among the provinces most reliant on the energy sector. Newfoundland is Canada's true oil addict.
The energy sector made up 29 per cent of Newfoundland's gross domestic product last year, topping Alberta's 26 per cent and Saskatchewan's 23 per cent. Perhaps more significantly, Newfoundland relied on oil royalties for nearly one-third of its provincial revenue last year, nearly double Alberta's 17 per cent. (Oil royalties make up about 13 per cent of Saskatchewan's budget.)
Newfoundland's dependence on oil revenue is not quite at Russia's level (more than 50 per cent of its government revenue), but it certainly puts it in the major leagues among oil-drenched Western economies. (Oil is a bigger part of Newfoundland's budget than it is for the famously oily Norway government, for instance.)
Of course, because Newfoundland shares a currency with the much bigger and more diverse Canadian economy (which has some good things going for it outside the energy sector), its currency isn't getting gutted by oil's fall the way the Russian ruble is – which could be a mixed blessing.
While oil has plunged 30 per cent since the beginning of November, the Canadian dollar has slipped a mere 3 per cent. That provides little offsetting currency benefit when selling oil in U.S. dollars (the currency for oil prices throughout the world), and gives little relief for Newfoundland's non-energy exporters in return for the province's severely eroded terms of trade. (It seems a small complaint next to a currency crisis, but it's still less than ideal. Monetary unions might offer stability, but at the expense of regional flexibility.)
But what separates Newfoundland's situation from the oil-heavy Prairie provinces – besides sheer size of its economic and fiscal exposure – is the capacity (or, rather, lack thereof) of Newfoundland's balance sheet to weather an extended storm.
While Alberta has no net debt on its books (its financial assets exceed its debt) and Saskatchewan's net debt is a minuscule 6 per cent of provincial GDP, Newfoundland is carrying a net debt of nearly $10-billion, or 26 per cent of GDP.
While that's middle of the pack among Canadian provinces, it wouldn't take many billion-dollar deficits like the one Newfoundland faces in the current fiscal year before the debt became a serious issue. It certainly gives Newfoundland much less flexibility than its Western Canadian peers to run deficits for a few years while it waits for better oil markets.
And remember that, while Alberta and Saskatchewan are coming into the oil slump from a stable fiscal base (both reported surpluses last fiscal year, and still project surpluses this year), Newfoundland arrives already in a sizable budgetary hole.
And with energy's heavy weighting in Newfoundland's GDP, its economy looks likely to be headed backward – which will compound the fiscal headache. In a research report this week, Canadian Imperial Bank of Commerce economists Avery Shenfeld, Peter Buchanan and Warren Lovely estimated that Newfoundland's real GDP will shrink 1 per cent in each of the next two years – a localized recession even as the rest of Canada's economy continues to forge a broad-based recovery.
"Newfoundland and Labrador's situation is more challenging," the CIBC economists wrote. "It will therefore face more difficult choices ahead."
When the choices are to cut spending or raise taxes to keep a swelling deficit from running out of control (which would exacerbate the province's economic slowdown), or to risk running up an onerous debt burden while awaiting an oil turnaround, the options are far from pleasant.
It's not quite Moscow on the Rock. No one is likely to echo the words of one of the Central Bank of Russia's top officials, who called the bank's decision to make an emergency middle-of-the-night interest rate hike "a choice between very bad and very, very bad." But the policy makers in St. John's are going feel their own icy chill of the Russian winter, and will have their own share of bad-or-worse dilemmas to wrestle with.