Moody's: Canadian Provinces Face Diverging Credit Challenges After Oil Price Drop

The diverging credit challenges faced by Canada's oil and non-oil producing provinces are highlighted by the 2016 provincial budgets, says Moody's Investors Service. While the majority of non-oil producing provinces continue to move towards balanced budgets, the oil-producing provinces - notably Alberta (Aa1, negative) and Newfoundland and Labrador (Aa2, negative) - face significant fiscal headwinds.

"As oil prices are expected to recover only modestly over the next few years, both provinces face several years of significant deficits," said Michael Yake, a Vice President and Senior Analyst at Moody's.

Oil royalties are expected to measure CAD 989 million for Alberta in 2015-16, down from CAD 7.3 billion in 2014-15. Similarly, Newfoundland and Labrador is expected to record only CAD 485 million in oil royalties in 2015-16, down from CAD 1.6 billion in 2014-15. This loss of revenue, combined with the inability to lower spending quickly enough, has led to expected deficits for both provinces.

Still, there appears to be little direct spillover from low oil prices to the non-oil producing provinces, "Canadian Regional Governments - Canadian Provinces: 2016 Budgets Show Oil Producing Provinces Face Continued Fiscal Challenges." For these providences, the weakness of the Canadian dollar, which is boosting tourism and exports, and a strengthening US economy are having a greater impact.

Three provinces, British Columbia (Aaa stable), Québec (Aa2 stable) and Nova Scotia (Aa2 stable) are forecasting balanced budgets in 2016-17, with Ontario (Aa2 stable), Saskatchewan (Aaa stable) and Prince Edward Island (Aa2 stable) forecast to join them in 2017-18.

Although the budgets for many provinces show a declining debt burden, absolute debt levels will remain elevated and could continue to grow as important capital infrastructure spending is financed using debt. Some provinces are also planning on reducing their respective tax burdens, which were increased in recent years, which will put downward pressure on revenue growth.