Government Finance Update

Yesterday, Joey Mack, GMP Director of Fixed Income attended the BMO Capital Market’s Annual Government Finance Meeting. The Federal Government, CMHC, and respective provincial representatives presented on individual budgetary performance. Please see his note regarding the meeting outcome below.
 

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I had the pleasure of attending BMO Capital Market’s annual government finance yesterday, where every province except Saskatchewan (due to the recent election) presented, as did the federal government and CMHC.

The focus of most presentations was of course on individual budgetary performance, which I summarize in the table below.  Overall, the downturn in commodity prices is of course weighing on provincial economies with a resource base, while the weaker Canadian dollar and lower energy prices are benefiting central Canada. Nonetheless, only BC is in surplus, and Quebec is in balance, but the rest are running deficits - hence we can expect more borrowing over the next 12 months.  

 (Source: Joey Mack, GMP Director, Fixed Income)

There was also a lot of discussion over the housing market, acknowledging the well-publicized concerns over the overvaluation in the Toronto and Vancouver markets. Interestingly, CMHC was less concerned about Vancouver – despite the overvaluation, it has not had the run-up that Toronto has recently had, and lack of supply is a driving factor (as it is in Toronto). CMHC also highlighted that Toronto has a higher participation rate of foreign buyers in its new condo market than Vancouver does.  Foreign buyers however are not necessarily seen as a negative by government officials – after all, if they are happy encouraging foreign investors to build factories, which can be shut, why would you not be happy having investors fund housing, which presumably will continue to have tenants even if foreign buyers leave?  

The other urban centers CMHC noted were of concern were Calgary and Saskatoon – both markets are also seen as overvalued, but are also seeing growing new home supply, which suggests the downturn there could be more problematic (as an insurer of mortgages, you would be more concerned about defaults in that situation). Finally, it was noted that defaults on mortgages have a much higher correlation to employment than pricing, and that Canada overall is seeing decent employment numbers. 

Finally, there was some discussion on the interest rate outlook – and interestingly, most are now in the camp that we are going to see rates lower for longer. This is opposite to what has been discussed for the last five years, where the consensus has incorrectly called for higher rates. The contrarian in me says that this could be a good indication we will finally see rates move higher, but with the recent spate of soft data, it is not going to be a near term event. 

 

Joey Mack, CFA

Director, Fixed Income

GMP Securities L.P.

tel: 416-941-0198 | mobile: 416-587-3942 | fax: 416-943-6161

e-mail: jmack@gmpsecurities.com | web: www.gmpsecurities.com

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