Lower crude prices have some businesses biting their nails in the key producing provinces of Alberta and Saskatchewan, but a new report suggests citizens who rely on oil fortunes to fund government programs shouldn’t worry.
Credit watchdog Moody’s says both provinces have low debt and the financial cushion required to sit through a long period of low oil prices without threat of losing their high grades that are the envy of other provinces. Both provinces carry Moody’s highest Aaa rating, with stable outlooks.
“Their enhanced creditworthiness reflects their substantial financial reserves, low debt levels and fiscal strength, which provide flexibility to cope with external shocks,” says the report.
“Alberta and Saskatchewan both have financial assets that far exceed the median of Canadian provinces.”
In fact, Moody’s says Alberta’s financial assets are more than three times higher than its debt, covering two-thirds of its annual consolidated expenditures.
“[This will] provide a substantial buffer should there be a protracted decline in oil prices”, states Moody’s analyst Kathrin Heitmann.
The report also says Saskatchewan’s debt burden could fall below its sister province since Alberta is spending a lot more on infrastructure.
“If both provinces execute their budgeted capital plans, Saskatchewan’s debt could fall below Alberta’s in the next two to three years,” the report says.
If the two provinces face any challenges, it will be prioritizing and accommodating increased spending amid growing populations while maintaining their enviable financial positions, Moody’s says.
The price of oil has fallen by about 40 per cent in the past six months to around $60 (U.S.) per barrel, its lowest level in five years. That has led to a steep slide in oil stocks and the energy-heavy SP/TSX Composite Index, which has fallen by more than 10 per cent since its 2014 highs over the summer. The energy sector is down about 42 per cent since mid-June.
In its recent second-quarter budget update, the province of Alberta said plummeting oil prices wouldn’t stop it from reporting an operating budget surplus for the current fiscal year. The surplus will take a small hit, by Alberta standards.
Alberta finance minister Robin Campbell said the surplus is expected to drop to $933 million for 2014/2015, down from the $1.1 billion forecast in March.
“Oil revenues are down right now but understand the Alberta economy is doing great,” Campbell told reporters on a conference call, according to a report from Reuters. “We have some challenges in revenue at the government level but the province from an economy point of view is doing quite well.”
Federal Finance Minister Joe Oliver said late last month that low oil prices will put a strain on the nation’s budget, but claimed his government factored lower prices into its fiscal forecast.
In a recent report, BMO Capital Markets called slumping oil prices, “perhaps the single most important development for the Canadian economy.”
Economists Douglas Porter and Robert Kavcic said lower oil prices “are widely seen as a significant negative for Canadian GDP growth.”
The energy sector account for 37 per cent of non-housing private capital spending in Canada, the economists note. They say the biggest risk is that energy companies won’t spend money on capital improvements, which generates a range of economic spinoffs from jobs to business investment.
While consumers and exporters in other industries could benefit from lower prices at the pumps, the BMO economists are expecting lower oil prices to take a bite out of Canadian GDP next year.
Capital Economics economist David Madani calls the current slump in oil prices “a serious threat to domestic business investment and future oil production.”
In a report, Madani says the longer oil prices stay between $60 and $80, the more likely new oil projects will be placed on the backburner.
“The slump in oil prices is a big negative for domestic business investment because of the impact it will have on Alberta’s costly oil sands,” he said.
“If sustained, the collapse in oil prices will constrain economic growth and it is hard to see the Bank of Canada giving any serious consideration to raising interest rates in that environment.”