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Another Downgrade

On 26 May, U.S.-based Standard & Poor’s dropped the Province of Alberta’s credit rating two notches to A+.  The Report [Standard-and-Poors-2017-0526-Credit-Analysis-Report]  cites continuing budgetary deterioration and growing debt as the causes of the downgrade. The downgrade comes as no surprise although the drop to A+ from a AAA only four or five years ago is distressing for Alberta taxpayers.  This distress is manifest in the double whammy of historically high borrowing levels and borrowing costs that are now higher than British Columbia, Ontario,  and Quebec, the latter two provinces seen by some analysts as “fiscal basket cases.”

As the Table below illustrates, for a provincial government bond maturing in about seven years, Alberta’s June 1, 2024 bond is trading to yield 1.795 semi-annually, which is higher than the bonds of similar maturity dates of all the provinces listed. Although 10 basis points (one basis point is one-one-hundredth of one per cent) may not sound like a lot- over many years and ten of billions, these numbers add up rather quickly. (Ten basis points on $10 billion a year is $10 million.)


Province Maturity Date Yield
Alberta 01-Jun-24 1.795
British Columbia 18-Dec-23 1.617
Ontario 02-Jun-24 1.748
Quebec 01-Sep-24 1.773
Manitoba 02-Jun-24 1.79
Saskatchewan 03-Jun-24 1.745
Source: RBC Direct Investing 2 June 2017

Standard and Poor’s downgrades Alberta credit27-5-17 GM

S and P hits Alberta with another credit downgrade27-5-17 EJ

This fiscal year (since 1 April 2017) the Province has borrowed $2.25 billion in term debt. As of 2 June 2017, total term debt outstanding was slightly over $50 billion.

The figure below includes debt borrowed on behalf of other entities such as the Alberta Capital Finance Authority (ACFA) and Alberta Treasury Branches (ATB Financial). These entities in turn lend the funds to municipalities and other institutions such as airports authorities and to Alberta consumers and businesses. About $18 billion of total lending is borrowed for other entities.  As such these entities have offsetting assets (e.g. loans) from which the proceeds will be used to retire this debt. Thus total direct debt is approximately $32.4 billion (at current exchange rates) is direct debt that will be funded from future taxes and fees and possibly more borrowing.  The latter source of funding is known as “re-funding.”

Alberta Term Debt Outstanding  at 2 June 2017 (millions) Total ($) Exchange Rate Total $ CAD
Total Australian dollar debt outstanding 200 1.0033 200.66
Total Canadian dollar debt outstanding 40,278 40,278
Total Euro debt outstanding 637 1.5218 969.38
Total British Pound Sterling debt outstanding 650 1.739 1,130.35
Total United States dollar debt outstanding 5600 1.3504 7,562.24
Source: Alberta Treasury Board and Finance, Term Debt Outstanding as of 2 June 2017 $50,140.63   2 June 2017

[Note: The computation of the total Canadian dollar debt outstanding does not take into account currency swaps that are routinely entered into when a foreign borrowing is undertaken. The total foreign currency debt is converted using the 2 June 2017 exchange rates published by the Bank of Canada.]  

Budget 2017 showed a total of $18.7 billion in borrowing this fiscal year. According to the table on page 119,  the province’s financial requirements this fiscal year are, respectively,  $5.95 billion for capital purposes; $6.4 billion for the “fiscal plan;”  $2.5 billion for ATB Financial; $3.05 billion for ACFA; $481 for the Alberta Petroleum Marketing Commission; and $315 million for the Agriculture Financial Services Corporation.  This year there is no requirement for re-funding maturing issues.  However in fiscal 2019-2020, $3.8 billion must be re-funded.

The next few years will be a busy time for the Alberta government’s debt managers.


Remarks to the Sunrise Rotary Club of Edmonton Friday 10 February 2017


Background  Bruce Clark asked me to provide a perspective on the debate occurring in policy-making circles: how to encourage economic diversification in Alberta.  Before getting into the meat of the issues, a disclaimer.  I worked in the Treasury Department from 1986-1996. Treasury folks tend to want to cut spending (or raise taxes) – balance budgets or produce surpluses- but are never keen to use incentives.  Rather let private sector folks do what they are supposed to do best- compete, invest and create jobs.

My employment period spanned two ministers- the late Dick Johnston and Jim Dinning.  Johnston’s tenure could be charitably called “bailing water” and Dinning’s “righting the ship.”

As with today’s generation of politicians, Getty and Johnston sought to find ways to jump start the moribund Alberta economy during a period when both oil and natural gas prices had sagged to historic lows (real terms).  An economy that was used to $40 (then) or $100 per barrel oil prices (more recently), and whose labour markets and government were sized accordingly, had to face a drying up of capital investment and a brutal downsizing in industry, real estate and government sectors.  The blessing and curse of a commodity based economy

So today, I will keep my remarks concise and then look forward to engaging you in a conversation.  Here is how I’ve carved up the topic.  What is diversification?  Should we be worried about our current situation; a brief history of earlier diversification efforts and then I’ll examine obstacles and prospects

Understanding Diversification There are several ways to understand diversification.

One way is to look at what products the economy sell. If we sell a wide range of products from electronics, drugs, food products, paper products, cars, business services this suggests a more resilient economy.  That is- if one sector goes down, other products  will cushion losses in one affected sector.

One facet of product diversification is the complexity of the product being sold.  If a product, like grain for example, which is easily reproducible- then such production can be easily undermined by producers in other parts of the world. But an Iphone, which is a very complex product, is less easily reproduced.

Another perspective is the diversification of export markets.  An economy that has only one dominant buyer- the United States for example, exists in a more perilous situation if economic and political interests in that jurisdiction join together to attack exports entering into their home market. Softwood lumber and crude oil are classic examples of what economists call monopsonistic behaviour – a monopoly of buyers.

Another lens to view diversification is through the labour market. To the extent that our economy has a diversity of occupations this suggests a greater resilience to disruptions to an economy. For instance- a balance of engineers, computer coders, artists, architects, fashion designers, medical, educational, logistics planners, construction workers, business consultants, government and agricultural workers would point to an economy less vulnerable to rapid changes in product demands.

Finally the diversity of capital employed in the economy (public and private) – refineries, roads, factories, public parks and museums, coal plants is another measure of whether an economy is placing heavy bets on the success of a particular economic activity.

Some History My thesis is that the policy decisions taken by the triumvirate of Anne McLellan, Eric Newell and Ralph Klein to spur energy investment in the oil sands seriously distorted the economic development in the province. You do not need to be a tree hugger to acknowledge that serious distortions occurred in the Alberta economy- especially in labour markets and capital investment.  These distortions during the 2003-2009 caused an investment boom last seen in Alberta in the late 70s and early 1980s. The boom was inevitably succeeded by bust.  Not only did the oilsands royalty policy distort investment decisions by making uneconomic projects look economic, it fostered a “wild west” race to complete projects.  This rush in turn left project sponsors hostage to sub-contractors, suppliers, and labour.  The provincial government was also sidelined as it competed for the same resources to build infrastructure and pay public sector workers.

At the same time, the provincial treasury was filling with money from the sales of leases, temporarily high natural gas prices, and the capital investment boom that found its ways in construction workers pockets, construction firms and oil industry and ancillary industries.

The chart shows non-renewable resource revenue as a percentage of government own source revenue- that is provincial revenue from all sources excluding federal transfers-  since 1981. As you can see the wide variation from nearly 50 % to below 20%. In 2016 resource revenue was below ten per cent.  This volatility is a big problem for the government and residents of the province.

image027Peter Lougheed instituted a number of measures designed to diversify Alberta’s economy. PWA was purchased and its head office moved to Calgary. A stock savings program was also created to incent Albertans to invest in companies principally operating in Alberta. Vencap Equities was set up with a large pool of capital. Other initiatives are also listed here, including community bonds used in rural communities. Generally speaking these did create meaningful employment

But a number not listed not diversification projects per se but preservation initiatives. While the magnesium plant was a diversification effort without sufficient attention due to its technological feasibility, those listed here really tarnished the Getty legacy (and Lougheed’s too).  Huge bail-outs and subsequent write-downs were taken with the credit union bailout, Principal Group collapse, Gainers, Novatel (although the privatization of TELUS was generally seen as a success).  Another problematic investment was the Bi-provincial upgrader sold under Klein that has been a good long –term investment for Husky and the Saskatchewan government.  The sale to Onex of the Vencap portfolio remains a disaster in the mind of Vencap’s former management.

Obstacles  Alberta is a province of builders who seem prepared to take risks.  But the fiscal history of the province has shown that most builders- especially on the grandest scale-  look to various governments to underwrite their risks.

Alberta’s financial industry is highly specialized and is geared to oil and gas because that is where the BIG MONEY IS. Our oilsands industry has been underwritten by the taxpayers- the construction and engineering sectors have grown strong on provincial contracts. Our universities and polytechnics more than ever support our energy industry. Recent incentives to encourage petrochemical plants reinforce the notion that private industry has to be lured to set up in the province.

Prospects With a change in government it would seem a good time rethink our approach to economic development and to government.  Alberta’s prospects are actually really good.  We have a young well-educated population. Alberta is a tolerant, welcoming society.

Fossil fuels will remain an important transportation fuel for several more decades, but oilsands extraction is a sunset industry. Few politicians will tell you that and the business media is there to ensure that stranded assets are paid for by governments. We can and should be making money by reclaiming our orphan wells and the tailings ponds.  Alberta is not the only spot in the world with these engineering challenges. So we can lean to favour new technologies while profiting from cleaning up the past. And energy companies can also become renewable energy companies if leaders in Suncor, Canadian Utilities and other major Alberta corporations shift their views from quarterly results and look to their children and grandchildrens’ futures.

The future economy will be dominated by countries that invest heavily in human and machine intelligence.

The emergence of artificial intelligence, robotics and 3-D printing and its implications from food production to driverless cars to computer generated graphics in the entertainment business means that more and more physical jobs will continue to be displaced.  An excellent example is the work of Professor Sutton at UofA who is collaborating with Royal Bank to develop Artificial intelligence.

The new wealth is in the form of intellectual property that has been appropriated by a few enormously wealthy corporations for their benefit. Money is in designs and creativity not muscle (except for sports warriors!).

Finally there is a great deal of physical capital that sits idle.  Thoughtful business leaders Uber and Airbnb recognize that sharing places or things is a sound business strategy.  Why can’t Alberta be leaders in this area

Here’s my website address- I encourage you to take a look. Thank you for your attention and  I welcome your questions.


Economic Outlook 2017- Conference Wrap

Economic diversification has been a major challenge for Alberta policy-makers for at least half a century.  Indeed going back to the days of Ernest Manning’s Social Credit administration, the support for pipelines and the oil industry was a means of diversifying away from agriculture commodity production.

In the afternoon panel, Gil McGowan, President of the Alberta Federation of Labour, Martha Hall Findlay, President and CEO of the Canada West Foundation, and Trevor Tombe from the University of Calgary spoke to the challenges of economic diversification. McGowan was recently appointed as Co-Chair of the Economic Diversification Advisory Committee with a mandate “to engage Albertans and explore opportunities to increase the value of energy resources, create jobs and attract new investment. This includes such value-added ideas as partial upgrading, refining, petrochemicals and chemicals manufacturing.” McGowan began his presentation with a quote from the late Premier Peter Lougheed who in 1974 had also pushed a diversification agenda.

Image result for Gil McGowan
Citing polling data, he observed that the concept of adding value to raw resources is easy for the public to grasp. Indeed, the absence of any job losses in the “downstream” sector (that is refining, processing and petrochemicals) demonstrates that a value-added strategy makes sense. In supporting the case for government assistance to bring major investment in processing to Alberta, the AFL president stated that practically all refinery complexes throughout the world enjoyed some form of government support, whether that be roads, feedstock guarantees, or tax holidays.
Trevor Tombe is an Assistant Professor at the University of Calgary and Research Fellow at the School of Public Policy. He began by saying that the trouble with the notion of economic diversification is it is rarely defined as a precise goal. What is it that the government is trying to achieve? Is it more “good jobs” or less economic volatility or less volatility in government revenue,  or in economic output?  Should not government policy aim to support economic activities where Alberta has a clear comparative advantage? Citing recent research by Robert Mansell which examines a measure of labour market diversity, Alberta by one measure is more diversified than Ontario and Quebec.  However, other measures show that in terms of GDP volatility or employment volatility, Alberta is closer to other resource provinces such as B.C., Saskatchewan, and Newfoundland and Labrador.
A key difficulty for economists and policy-makers in assessing the case for any expenditure to enhance social or economic well-being is the “opportunity cost” of not doing something else. As Professor Tombe noted, instead of the recent announcement to forego up to $500 million in royalties to bring new petrochemical projects to Alberta, what about the merits of an across the board income tax cut; corporate income tax cut; or increases to day-care programs.(see Petrochemical Announcement.)
Ms. Findlay, a former Liberal M.P., noted that economic diversification is usually talked about when times are tough- she would encourage businesses and governments to consider the topic when times are good. She cautioned policy-makers and decision-makers not to chase the “shiny things.”  Rather, companies and governments should support locally-known economic opportunities, such as “Agtech.”
Image result for Martha Hall FIndlay
She emphasized that with a new American administration lowering costs of doing business, especially in the energy field, “Canada got a lot more expensive – and the U.S. a lot less expensive.” Looking on the bright side perhaps, she observed that the empty office towers in Calgary might be a good way to attract business.
During the question period, Findlay made a convincing case for innovative regulatory approaches.  Instead of government regulators rejecting innovation in their industry (the Uber case was cited), regulators should be seeking new ways to regulate in a rapidly changing competitive environment. Tombe and McGowan debated the question of whether there is evidence of “market failure” that would support the case for government intervention. McGowan basically argued that barriers to entry in these industries are high and since every government is attempting to lure investment, Alberta policy should follow.
Avi Lewis’s speech was entitled “The Economic Case for LEAP Manifesto- A Canada based on Caring for the Earth and One Another.”  In a disarming and amusing manner, Lewis spoke about the personal attacks he endured as a “downtown Latte socialist” from Toronto at the April 2016 NDP national convention held in Edmonton. Noting the manifesto was the product of extensive consultations by anti-poverty, indigenous, and labour groups, its guiding principle is a call for social justice.
The Leap Manifesto calls for an “industrial transformation” to address, among other things,  climate change, income inequality, and living conditions for our First Nations. Mr. Lewis also stressed that the Manifesto calls for a halt to new, not existing, energy infrastructure. This industrial transformation is based on building renewable power projects, strengthening local control over energy infrastructure, enhancing public infrastructure, including public transit, and vastly improving energy efficiency in dwellings.
In making the case for meaningful action on climate change, Lewis referred to work done by the Insurance Bureau of Canada on the rising cost of climate change being imposed on the property and casualty industry.  In the United States, Freddy Mac, a large mortgage insurer is concerned that people with homes along coast lines will start leaving their mortgaged homes en masse.
Lewis then returned to what he called the “grand bargain” that was expected to be agreed to by first ministers in Ottawa the next day (9 December).  The bargain consists of the approval of various energy projects (a tripling of the existing TransMountain pipeline; a doubling of the Clipper pipeline project, and the approval of the Petronas LNG project in B.C.), the introduction of minimum national carbon price; and a l phase out on coal-fired electricity by 2030.  Mr. Lewis calculates that if Canada wishes to meet the Paris commitments made by Trudeau (to lower carbon emissions by 200 megatonnes), these measures will only get the country to 10 per cent of the goal. Of concern to Lewis is that if these projects go ahead, and if Canada wants to meet its targets, then the burden will fall heavily on the non-carbon-intensive segments of the economy to reduce carbon emissions thus setting up a very divisive political fight   (Go to a report by David Hughes Lewis cites- January 2016 Parkland Institute report.)


The first take-away for me is the conclusion that Alberta is really a by-stander.  We do not make our history; rather we react. Alberta’s economy in the 1930s was decimated by events taking place in world capitals and financial markets, which caused grain prices to collapse and provincial finances to implode. In 1973 and in 2007, OPEC’s emergence and the financial crisis, respectively, were external shocks to Alberta’s economic system.  Even more recently, the technological changes leading to the oil price plunge of 2014-16, were shocks to Alberta’s political economy.

This leads to a second point- the backwash into Canada of the Trump victory and his unabashed ability to sow divisions with every tweet he makes. Avi Lewis alluded to Trump’s genius (?) to persuade blue collar workers to vote against their class interests. Trump has clearly tapped into a deep distrust, perhaps paranoia, mainly among rural Americans, Americans with a distrust of government, and those whose employment security has been threatened. Hilary Clinton, by ignoring these concerns and omitting to propose real change to the political system (gerry- mandering, term limits for Congress, restrictions on elections for judicial office), confirmed she was seeking power, not public service.

So Albertans will be hearing more about “competitiveness” with the Trump cabinet trying to reverse environmental protections and reducing corporate tax rates.  Watch for the Trudeau and Notley government to come under assault from business groups advocating Canadian jurisdictions to follow suit. While these measures are not a “slam dunk,” the shift towards tribal thinking and away from the desirability of polite, democratic discourse will cast its shadow northward.

Economic Outlook 2017

On 8th December 2016, the Economics Society of Northern Alberta hosted their annual 2017 economic Outlook conference. The Association pulled together a list of eminent economists, a political scientist, and keynote speaker the environmentalist Avi Lewis. This post will summarize presentations of some speakers with a subsequent post covering the remaining speakers.

The first speaker was Dr. Avery Shenfeld, chief Economist of CIBC who provided a global outlook.  Shenfeld observed that the “new normal” growth rate for western industrial economy is now 2% rather than 3%. In Europe he noted that the Greek crisis is not over and that there uncertainty concerning the restructuring of Italian banks. With respect to Brexit he acknowledged that UK- Europe trade is very significant and felt that the outcome would reflect the interdependence of those economies. In the case of China the expected rotation from capital spending (which has been an enormous) over to consumer spending is not happening yet. Therefore commodity prices have fallen as the Chinese growth rate slows and capital investment fall.


Turning to the oil markets, the CIBC economist commented that there were two significant headwinds. Firstly the large oil and storage (equivalent to about one year’s growth in demand) would be a negative on oil prices. Secondly, shale oil and gas can come on stream very quickly and well before any oil sands projects get online. This could mean that as oil prices move to the $60 a barrel range, $60 could then become a bit of a ceiling given additional supply from the shale oil.

In the case of the US economy Shenfeld e sees underlying strength in the retail and employment sectors and some rise in the wage levels. The housing the sector is expected to add to GDP growth since over the last number of years the number of housing starts has not met the demand for housing. With respect the financial markets he felt that the Federal Reserve would move very slowly to raise interest rates. He also noted that with the election of Donald Trump, trade protectionism is something to watch and this would be a problem for retailing and companies operating in different jurisdictions. The question of whether the US government’s deficit will rise significantly is an open one as Trump may face opposition in Congress on increasing deficits. One of the serious implications on Canada is the prospect of financial industry and energy industry deregulation which may make American companies more competitive (i.e. they would face lower compliance costs). This may draw investment into those sectors from Canada.

In the case of Canada, energy investment declines have put a significant dent in GDP growth over the last 2 years. The household sector is not expected to be an engine of growth as the huge contributions to housing from the BC and Ontario markets are unlikely to persist. Export growth remains weak due to loss of manufacturing capacity in the 2010 -13 period when the Canadian dollar is very high. At that time market share was lost to the United States and Mexico. The CIBC economist also observed that the posture of the Bank of Canada is to keep the Canadian dollar closed at around $1.35 range to encourage investment in Canada and to draw more investment to Canada.


The next speaker was Catherine Rothrock who is the Chief Economist for the Government of Alberta. Her slide presentation highlighted that the depth and the length of the oil price decline in 2014 to 2016 was similar to that experienced in the 1980s. Falling incomes have impacted negatively nominal GDP and over $60 billion have been taken out of the economy in terms of oil profits, government revenue and personal incomes. The Ministry see oil sands investment wrapping up in the next couple of years. With the completion of large commercial office properties in Calgary and Edmonton this year, commercial construction is likely to be weak over the next few years. That said, over half a million barrels of oil production from the oil sands will be coming on stream in the near term.

Market access via pipelines remains important for the long-term health of the Alberta economy according to Rothrock.  She sees Alberta’s economic activity becoming more stable although the climate is still generally negative. They are seeing some pickup in business output. She posted some interesting slides with respect to unemployment levels of Alberta versus the national rate and the interprovincial migration rates. Interprovincial migration, while negative, has not gone negative nearly as much as believed would be the case. International migration has been strong.

On the housing front, the market remains sluggish. Return to GDP growth is expected to come from increased production the rebuild of Fort McMurray in 2017. Rothrock observed that despite the decline in Alberta’s economic output, nominal GDP per capita remains the highest in the country.

In the question-and-answer period that followed Shenfeld noted that there will be a competitive challenge to Canada if the Trump Administration lowers corporate taxes.

The next speaker was Antoine Halff from Columbia University who is an expert in global oil markets.  He was rather bearish on the recent OPEC agreement to cut production. While there are some signs of rebalancing in the market, and there is a sense of optimism, that optimism may be misplaced.  In assessing the OPEC agreement, he stated that Libya and Nigeria were exempt. With respect to Iran the numbers just don’t add up- it appears like a cut of 180,000 barrels a day but really it turns out to be an increase of 90,000, based on information from reliable secondary sources. In the case of the total output of the cartel, the members boosted production in the last few months to have a start a higher starting point before the cuts take effect. One other concern is that if Russia reneges, this will allow OPEC to abandon the agreement.


Halff also made some interesting comments about shale producers becoming the swing producer now in the global oil markets. The shale producers can turn on production fairly readily to take advantage of higher oil prices. He concluded by saying that OPEC faces an existential crisis.  Firstly there is the supply revolution with the employment of new technologies and processes to exploit new finds. Secondly, has demand peaked with electric cars, tighter emission standards driven by climate change policies.  Thirdly, the fragility of Petro States including Syria, Yemen, and Libya where there is open conflict. Other states such as Nigeria, Angola, Algeria and Venezuela are on the brink of conflict. States in these situations are problematic because it’s unclear how decisions are made and who makes those decisions. Another point identified was the growing opposition to fossil fuels illustrated by protests against both energy companies and pipelines. The bottom line is he does not see a strong price recovery until 2020 to 2022.


Kevin Birn from IHS Energy sees a slower pace of growth. His first point was that price recovery was to be gradual. Secondly, oil sands growth will continue but at a moderate pace. Thirdly, ultimately the future depends on their ability to compete with other oil producing  region. He  agreed with the previous speaker that compliance with OPEC was uncertain.  Birn acknowledged that the oil sands were about 19 per cent more carbon intensive than the US average but operators were improving the performance. The call in operations at the oil sands plants have fallen by 8% in the past two years. For SAGD, operating costs have fallen by 40% while operating costs for mining facilities have fallen by 25% and the capital investment costs falling by 8% all relative to 2014. He also stressed that the takeaway capacity by pipelines was a key uncertainty for investment. Announcements today from CNRL and Cenovus showed some confidence in oil sands production.

In the question period the question of how to respond to a Donald Trump’s presidency was raised. Mr. Halff responded by saying that any decision should be assessed through the lens of “what is good for the U.S. economy and jobs.” Another interesting point was the large demand for storage that’s occurring since OPEC. does not have any more spare capacity.  The growth in storage capacity is occurring mainly in Asia specifically  China, Singapore, and  Malaysia.

All in all a cautiously optimistic assessment of the Alberta economy. Particularly worrisome is the uncertainty created by the Trump presidency whose future actions on trade, de-regulation of the oil and gas and financial industries, lowering corporate tax rates, and environmental policy will have a huge impact on Alberta industries.