Varcoe: Alberta gets credit rating upgrade amid sunnier economic outlook

A credit rating upgrade lowers the cost of capital for the province

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As oil prices bounce back from a recent dip and the economy chugs ahead despite ongoing turbulence, Alberta has received another credit rating upgrade.

The upgrade from Fitch Ratings comes as the Conference Board of Canada forecasts Alberta’s economy will grow by 1.7 per cent this year — a number mirrored by the Royal Bank of Canada in its new outlook.

With benchmark West Texas Intermediate (WTI) crude prices pushing back above US$78 a barrel this week — after falling about eight per cent between late May and early June — the financial outlook for the province is solidifying as the midway point of 2024 approaches.

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“It shows positive momentum and it shows a real direction. This is our third upgrade in under a year,” Finance Minister Nate Horner said Thursday from Boston, where he’s meeting with financial agencies and promoting Alberta bonds and investment into the province.

“Alberta is in a pretty enviable economic position.”

On Wednesday, Fitch upgraded the province’s long-term credit rating on senior unsecured bonds to AA from AA-minus. In its report, the agency noted the province’s net adjusted debt levels dropped over two years by $17 billion to $57.5 billion, for the fiscal year ending in March.

“It certainly marks an improvement for Alberta,” Fitch analyst Douglas Offerman said Thursday from New York.

“They went for many years with rising debt, in the decade before the pandemic, and we think of them as having used this period of recovery pretty ably, in terms of breaking that momentum of debt accumulation, and reversing it.”

As the report noted, Alberta’s revenue base is less diverse than other provinces due to the cyclical and volatile nature of the oil and gas industry.

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Last year, the oil, gas and mining sectors made up 18.4 per cent of Alberta’s gross domestic product (GDP), although that’s down from almost 24 per cent a decade earlier.

However, the province’s finances are closely tied to the energy roller-coaster.

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The province is projecting a slender surplus of $367 million in the current budget year, based on oil prices averaging US$74 a barrel. Resource revenues are projected to top $17 billion, making up almost a quarter of all government revenues.

Offerman said Alberta’s ability to shoulder its debt burden has improved as it’s paid down debt in recent years and adopted a new fiscal framework.

That plan includes using at least half of budget surpluses to repay maturing debt, setting aside money for savings — such as in the Heritage Fund — or for one-time initiatives that don’t commit the government to permanent spending hikes.

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“It speaks to a commitment to identifying and tackling problems early,” Offerman added. “We think of that as being something that will be important in Alberta’s case, as they eventually encounter another hiccup in oil prices.”

A credit rating upgrade lowers the cost of capital for the province. Alberta’s debt-servicing costs are budgeted to hit $3.4 billion this year, but that figure is projected to fall by $244 million in 2025-26.

The provincial government is expected to borrow about $11.6 billion this year for future debt requirements, as existing debt will mature in early 2025-26.

“We have some huge stacks of maturing debt that we need to refinance at a higher rate. So this is a real, tangible way for us to impact the costs of borrowing that money,” Horner said of the rating upgrade.

Alberta Finance Minister Nate Horner
Alberta Finance Minister Nate Horner. David Bloom/Postmedia

The Fitch Ratings upgrade arrives as oil prices remain relatively robust, with WTI crude prices closing Thursday at $78.62 per barrel.

The Conference Board of Canada released an economic forecast last week showing the country’s economy growing by a weak 0.8 per cent, led by Newfoundland and Labrador, followed by Alberta.

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The province’s economy will expand by 1.7 per cent (up slightly from last year) and then grow by 2.4 per cent in 2025, said Richard Forbes, the board’s lead economist.

“The Trans Mountain expansion is now complete, so some companies have noted a ramp-up in production and exports from that. So the energy outlook this year is pretty bright,” Forbes said.

“Another big driver for the Alberta economy right now is huge population growth.”

The province’s population boomed last year, growing by 202,000 people. Alberta has become a prime destination for newcomers due to strong job growth and more affordable housing than in Ontario or British Columbia, although the gap is narrowing.

The board anticipates Alberta’s population will increase by four per cent this year as international and interprovincial newcomers continue to relocate to the province.

But this also leads to pressure on the housing front, on government services and to rising unemployment.

Townhome construction in Calgary
Townhomes under construction are seen along Bow Trail west of downtown Calgary on Monday, May 13, 2024. Brent Calver/Postmedia

The province is creating new jobs, and employment will increase 3.5 per cent this year, but the sheer number of people moving to Alberta means the unemployment rate will edge up, averaging 6.4 per cent this year, the board says.

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The RBC outlook released this week also shows the province’s economy expanding by 1.7 per cent this year, before topping two per cent growth in 2025.

“Alberta’s economy grew slightly less than expected last year. With most of the softness behind us, however, this provincial economy is likely to kick into higher gear in 2024,” RBC states.

Horner noted the population growth was projected in February’s budget to slow slightly to 3.7 per cent this year, but that number is likely to be adjusted to about 4.6 per cent as more people move here.

Calgary Chamber of Commerce CEO Deborah Yedlin said the credit rating upgrade is a “vote of confidence” in the province, after seeing several downgrades and lean years last decade.

“We had seven tough years, it’s been a tough road for Alberta. This is fantastic news,” Yedlin said.

“Businesses are feeling optimistic.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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