Wildfires Singe Saskatchewan Bonds Amid Lowest Returns in Canada

  • Region hit by `double whammy' of oil plunge and forest fires
  • Diverse economy may aid Saskatchewan as it weathers downturn

There’s only one thing worse than plunging crude prices for investors in Canadian provincial bonds: plunging crude prices plus raging wildfires. 

Such a combination has erased Saskatchewan’s budget surplus and made its bonds the worst performers among its peers this year, behind even Alberta.
Saskatchewan’s bonds have returned 0.79 percent this year, the least among the nation’s 10 provinces in the Bank of America Merrill Lynch index.

While both regions have struggled amid falling commodity prices that have pushed the nation into recession, Saskatchewan suffered a “double whammy” as it had to spend more than forecast to combat forest fires, according to Heather McOuatt, portfolio manager with Franklin Bissett Investment Management.

Saskatchewan is in a “small deficit position after several years of a balanced budget,” McOuatt said in a Sept. 18 telephone interview. “That’s obviously going to take the shine off further.”

With a population of 1.1 million, Saskatchewan is located in Canada’s prairies and is the nation’s largest producer of wheat and canola. It’s Canada’s second-largest oil-producing region behind Alberta and is also known for its deposits of potash and uranium. The slump comes after the province’s five-year run with the second-best growth rate next to Alberta.

‘Facing Challenges’

“Because of the longer-term nature of Saskatchewan’s borrowing, there can be pressure on returns when volatility occurs,” James Parker, a spokesman for the Saskatchewan ministry of finance, said in an e-mail. “While the government is facing challenges this year, we are focused on taking measures to bring our finances to balance by year-end. Saskatchewan’s fiscal position is very strong. We have a resilient and diverse economy, a triple-A credit rating and a low debt-to-GDP ratio.”

Revenue in the province is expected to fall to C$14 billion for the fiscal year that began in April, amid declining oil prices, the province said in an Aug. 31 statement. At the same time, expenditures are forecast to rise by $161 million after more than 13,000 people had to be relocated from their homes due to wildfires this year, Jay Teneycke, a government spokesman, said in an e-mail.

The province expects a deficit of $292 million, its first in four years. In March, Saskatchewan forecast a surplus of $107 million.

“It was partly due to expectations from the start of the year,” Robert Kavcic, senior economist with the Bank of Montreal, said in a Sept. 17 telephone interview. “They were still looking at a balanced budget in the spring, and that has since deteriorated.”

Oil Impact

While Saskatchewan’s outlook may soften if oil prices remain low, its economy is more diverse and can probably weather the downturn better than Alberta, Kavcic said.

The drop in crude prices means oil royalties will account for 5.2 percent of total government revenue, the lowest level in a decade and about half the average during that time, Jeff Welke, a finance ministry spokesman, said in a Sept. 21 telephone interview. The province will collect C$734.8 million in oil royalties in the fiscal year, down from C$1.3 billion a year earlier, according to its latest financial forecast.

“The price of oil has had an impact,” Welke said.

High Ratings

Weakness in oil and gas and reduced energy-sector investment will keep the province’s growth modest in 2015 and 2016, Paul Ferley, assistant chief economist at Royal Bank of Canada, said in a June 2015 report. RBC cut its outlook for Saskatchewan’s gross domestic product to 1.6 percent this year and 1.9 percent in 2016, from previous forecasts of 2.1 percent and 2.3 percent, as the slump drags down manufacturing and retail sales, according to the report.

Saskatchewan’s real GDP will rise 0.4 percent in 2015, according to the average of nine private forecasters in an Aug. 31 government report. It will grow by 2.1 percent in 2016, the third-highest growth among provinces, according to the report.

Saskatchewan is one of three Canadian provincial debt issuers rated AAA, along with Alberta and British Columbia. Saskatchewan has 34 total bond issues totaling C$11.8 billion, according to data compiled by Bloomberg.

In addition to the strong credit rating, the province has a healthy debt-to-GDP ratio, and investors may find its bonds attractive as prices fall, Franklin Bissett’s McOuatt said. 

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