Despite challenges, Canadian governments will remain in the black, predicts new CIBC World Markets report
TORONTO, Aug. 3 /CNW/ - CIBC (CM: TSX; NYSE) - A continued strong domestic economy is keeping Canadian governments in the black despite unsettled financial markets and a challenging external environment, finds a new CIBC World Markets report. "Facing sluggish U.S. demand, jittery credit markets, higher domestic interest rates, and an elevated loonie, Canadian finance ministers would be forgiven for viewing such forces as something akin to the four horsemen of the apocalypse," says Warren Lovely, a senior economist with CIBC World Markets. But Mr. Lovely finds that Canadian governments, benefiting from generally resilient economies, remain in solid financial shape. As a result, he sees little risk of an unplanned escalation in borrowing to cover unexpected budget deficits. "While weathering a notable slowdown in its largest trading partner - one exacerbated by unrelenting currency appreciation - Canada has churned out surprisingly solid economic growth. Nominal GDP growth - a proxy for own- source revenue trends - is poised for a 5 1/2 per cent advance this year, landing more than a percentage point ahead of the weighted average forecast. Economic prospects pose no serious threat to Canada's fiscal performance." The report notes that Canada's governments are working from a very strong fiscal base. Ottawa's surplus in 2006/07, estimated at $9.2 billion, was three times that initially pledged, building on an already outsized 2005/06 tally. At the provincial level the numbers are even stronger. The combined provincial surplus - keyed by Alberta - has trumped the federal balance for three years running. The total provincial surplus shot to record heights last year, and at $13.6 billion, bettered original projections by more than $10 billion. "Official projections put the 2007/08 federal and aggregate provincial budget balances at $3 billion each," adds Mr. Lovely. "However, robust nominal income growth hints that planning targets could again be too modest, particularly at the provincial level, where fiscal results are traditionally more tightly correlated with underlying economic conditions than at the federal level. "Early-year figures out of Ottawa are also encouraging. Hearty employment gains and rising wage rates have bolstered personal income tax receipts, while robust earnings have seen corporate remittances soar 27 per cent above prior- year levels. Enthusiastic consumers are also lending support to sales tax revenues, while spending pressures on the health, education and infrastructure fronts have been well-anticipated." The report finds that Alberta will again account for a disproportionate share of the provincial surplus, but as in 2006/07, every jurisdiction could be in the black. Only Ontario is projecting a deficit for 2007/08, but the government's fiscal plan incorporates a $750 million reserve, which if not needed would see Ontario remain in a modest surplus position. While higher interest rates will increase debt servicing costs, at the provincial level, these are expected to eat up less than nine per cent of total revenues in 2007/08, down from a peak of nearly 15 per cent in the mid- 1990s. For the federal government, which has paid off some $55 billion of marketable debt in the past decade, debt-servicing costs are at a 30-year low as a share of GDP. In terms of marketable bonds and medium term notes (MTNs), provincial government issuance is pegged at $31 billion for 2007/08, with roughly another $5 billion required for utilities and other provincial authorities. Together, direct and guaranteed provincial issuance is projected to be down roughly $10 billion versus 2006/07. One third of the way through fiscal 2007/08, more than $13 billion, or 37 per cent, of planned provincial-related borrowing had been carried out, implying a combined borrowing program that was running slightly ahead of schedule.Borrowing highlights across Canada: - Ontario has carried out $5.6 billion in borrowing towards a $17.5 billion target (excluding the annual savings bond program), with future funding needing to work around an October provincial election; - Québec is the province most responsible for the planned reduction in provincial issuance. The province is nearly 50 per cent funded (excluding Financement-Québec), although its borrowing target assumes no pre-funding; - British Columbia has been a more active issuer than in recent fiscal years, but the province's funding requirements for 2007/08 could ultimately fall below plan if growth remains robust and a forecast allowance goes untapped; - Manitoba's bond/MTN program is well in hand, with more than 70 per cent of non-retail issuance already complete; - Newfoundland & Labrador has also completed a majority of planned borrowing, and above-target oil prices imply buoyant resource revenues that could lessen the need for borrowing through fiscal year-end; - Saskatchewan's Q1 update slashed planned borrowing, with just $250 million in gross bond/MTN issuance anticipated this year, down from the $900 million foreseen in the province's 2007 budget; - Nova Scotia's limited financing needs reflect earlier pre-funding. Borrowing will be carried out via retail markets, with no public bond/MTN issuance foreseen this fiscal year; - New Brunswick, which borrows on behalf of New Brunswick Electric Finance Corporation, had completed $300 million through early August, leaving roughly $1.3 billion of a combined requirement to be funded. - The federal government has thus far directly issued $12.9 billion of nominal bonds, leaving $20 billion to go. With maturities and buybacks again outstripping gross issuance, the stock of federal bonds is in its tenth straight year of decline. "While the coming months are likely to be characterized by relatively high interest rates, we expect a more favourable rate environment in 2008/09 to coincide with a likely pick-up in provincial issuance," notes Mr. Lovely. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/cfqaug07.pdf CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.