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
"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
"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
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
- 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
- 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:
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For further information:
For further information: Warren Lovely, Senior Economist, CIBC World
Markets at (416) 594-7359, email@example.com or Kevin Dove,
Communications and Public Affairs at (416) 980-8835, firstname.lastname@example.org