23 October 2008

Province slated to post another deficit

Dominion Bond Rating Service said on Wednesday that Newfoundland and Labrador is expected to post a current and capital account of surplus of $291 million.

DBRS did not point out in its news release that even with that current and capital account surplus, the provincial government would need to borrow about $90 million to meet all its budgeted financial obligations.

That means that for the third year running, the provincial government is on track to post a deficit at the end of the fiscal year.

The bond rating agency also did not say that the $291 million figure is well below the $544 million surplus originally included in the budget speech.  DBRS did note that:

while the recent sharp downturn in oil prices introduces uncertainty in the fiscal outlook, the Province’s conservative oil price assumption (US$87 per barrel), the recent depreciation of the Canadian dollar and the fact that oil prices were well above budget throughout the first six months of the fiscal year should help ensure that fiscal targets can still be achieved.

Of course, the DBRS version of the surplus (restricted to capital and current account, not all financial transactions), is closer to the Bond Papers version than it would be to the opinion offered recently by Memorial University economist Wade Locke.

You may recall he predicted that the province was poised to produce a surplus "even bigger than what they had forecast."

The most curious part of the DBRS assessment is this:

Despite near-term challenges, DBRS notes that the Province has accumulated a reasonable cushion to sustain a slowdown in resource activity, including another sizeable surplus foreseen next year. Nevertheless, further improvement in Newfoundland’s ratings will likely depend on the Province’s ability to turn its newly developed resource wealth into sustainable economic growth and maintain fiscal discipline.

Accumulated a reasonable cushion?

That's a bit hard to do if every nickel has been spent over the past few years. 

It's also interesting - if that's even an adequate word - to see a forecast surplus for next year, let alone one that is "sizeable". 

See if you can find any public statements by the provincial government that they will experience a surplus next year.

You might also scratch your head at the portion of the release that indicates:

A moderate rebound [ in gross domestic product growth] is expected for 2009, driven by additional oil production and further progress being made on large capital developments, although the rapid deterioration in global economic conditions maintains uncertainty in the outlook.

Large capital developments like the second refinery at Come By Chance?  Or Hebron, which is not yet sanctioned?  This sounds a bit like the TD Economics forecast that had Hebron pumping oil in 2014, a physical impossibility if ever there was one.

Something suggests this decision by DBRS will be revisited in the next quarter, as the global economic situation shifts.