The sharp drop in oil prices is expected to spell deficits for the government of Alberta for the next couple of years, says Moody’s Investors Service.
In a new report, the rating agency indicates that Alberta is now expecting to fall into the red for its current fiscal year, instead of the surplus of over $900 million that was forecast late last year. And, the province may remain in deficit until 2017-2018, instead of being in surplus, as was previously expected, it says.
The projected budget shortfall for this year, and the risk of future deficits, is credit negative, Moody’s says. “The dramatic fall in oil prices and correlated effect on oil royalty revenue is driving the province’s deteriorating fiscal situation,” it says. “At current oil prices, we expect a substantial deepening of Alberta’s deficit in fiscal 2015-2016 as well as fiscal 2016-2017 if the government fails to address the projected revenue shortfall by cutting expenditures.”
While there’s no time to adjust planned spending for the current fiscal year, Moody’s says that it expects that “the provincial government will demonstrate its strong fiscal discipline and adjust operating and capital expenditures for 2015-2016 and 2016-2017 to restore fiscal balance over time.” And, given that capital spending tends to be less rigid than operational spending, Moody’s says that it believes that the province “has more flexibility to temporarily postpone certain capital investments than to reduce services for healthcare and education.”
Despite the gloomier fiscal outlook, Moody’s says that it views Alberta as being “very well positioned” to weather a period of at least 12 months of low oil prices. In particular, it says that Alberta has excellent financial and fiscal flexibility, a significant liquidity cushion, and a low debt burden relative to revenues.