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Prudence May Pay for British Columbia Bondholders After Status Quo Budget

British Columbia’s prudent budgeting and better-than-expected fiscal results could help Canada’s third-most populous province eliminate its budget deficit ahead of schedule and spur a rally in its debt.

Finance Minister Colin Hansen yesterday presented a “status quo” fiscal plan that forecast a C$925 million ($936 million) deficit in the fiscal year that begins April 1, down from a C$1.27 billion gap in the current year that is C$450 million smaller than forecast a year ago.

While Hansen’s budget doesn’t project a return to surpluses before the 2013-14 fiscal year, conservative growth forecasts and allowances for slower revenue and emergency spending leave so much cushion that the end of deficits could come sooner, which would support the province’s bonds, analysts said.

“In a world of significant concern about government deficits, I think it’s a source of comfort for investors that B.C. can close its budget deficit in short order,” said Douglas Porter, deputy chief economist at Bank of Montreal’s capital markets unit in Toronto. “There is some scope for B.C. spreads to tighten further on this positive news.”

Hansen is projecting 2 percent economic growth in 2011, while the province’s Economic Forecast Council -- a 14-member independent group that advises the government -- is calling for 2.7 percent growth. Each additional percentage point in growth adds up to C$250 million to revenue, the finance ministry says.

The budget has also built in a C$350 million “forecast allowance” for slower growth, which was increased by C$50 million from last year, and a C$600 million emergency spending fund that is one-third larger than the year before.

‘Within Reach’

“I wouldn’t rule out a return to balance in the upcoming fiscal year,” Porter said by telephone. “It’s definitely within reach.”

Hansen forecasts government spending to grow 2.2 percent to C$41.9 billion, while revenue will expand by 3.6 percent to C$41.3 billion, buoyed by increased income from commodities such as coal and lumber even as natural gas prices remain relatively low. Commodities make up about two-thirds of the province’s exports, which represent about 40 percent of the British Columbia economy, according to Statistics Canada data, supporting companies such as Teck Resources Ltd., Canada’s largest-diversified miner, and West Fraser Timber Co., North America’s largest maker of lumber for home building.

The government plans to sell C$9 billion of debt in the 2011-12 fiscal year, up from an estimated C$8.1 billion this year. The province may still borrow up to C$750 million before the end of March, Finance department documents show, capping a year in which it sold its first U.S.-dollar global bond in seven years.

Higher Debt

British Columbia’s debt will rise to C$53.4 billion at the end of March 2012 from C$47.3 billion this year, figures from the finance department show, reaching C$60.4 billion by April 2014. The province’s debt is rated AAA by Standard & Poor’s, Aaa by Moody’s and AA high by DBRS.

Provincial debt will rise to 25.4 percent of gross domestic product from 23.4 percent by April 2012, the budget projects. Excluding the debt of self-supporting agencies such as B.C. Hydro, which generate their own revenue, the taxpayer-supported debt-to-GDP ratio will rise to 17.5 percent from 16.5 percent.

Today’s budget was issued less than two weeks before the province’s ruling Liberal Party elects a new leader to replace retiring Premier Gordon Campbell. “I’ve described it as a status quo budget,” Hansen said, adding it would give the next premier “flexibility” in starting a new administration.

‘Lots of Options’

“The new premier will have lots of options,” Hansen told reporters, adding that balancing the province’s budget ahead of schedule is “always an option.”

The Liberals hold a majority of seats in the provincial legislature, with the pro-union New Democratic Party forming the main opposition. The next provincial election is scheduled for May 2013.

Campbell said Nov. 3 he would step down as leader of the Liberals and voting for a new leader is scheduled to begin Feb. 26. Campbell announced his resignation after his popularity in opinion polls fell following his government’s decision to merge the province’s sales tax with the federal Goods and Services Tax.

Hansen reiterated that the Liberals are committed to reversing the 12 percent harmonized sales tax, or HST, if British Columbians vote in favor of scrapping the levy in a referendum scheduled for September.

Major Impact

A vote in favor of ending the tax would have a major financial impact on the province, Hansen said, including requiring it to pay back C$1.6 billion British Columbia is receiving under an agreement with the federal government.

Hansen began his budget speech by saying he couldn’t describe the document as “exciting.” Malcolm Jones, a portfolio manager with Edmonton, Alberta-based Adroit Investment Management, agreed with the assessment.

“We know that there is going to be a change in leadership and a referendum on the HST,” said Jones, who manages about C$400 million in assets, including Canadian government bonds. “An unexciting budget isn’t such a bad thing.”

To contact the reporter on this story: Christopher Donville in Victoria, British Columbia t .

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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