Friday, September 12, 2014

Ford Brothers

This post might seem a bit off my topic of Ontario's economy, but hear me out. 
There are some parallels between Toronto Mayor Rob Ford and former Argentine First Lady Evita Peron. Rob, like Evita, has an unbreakable spiritual bond with the "shirtless ones". Both rail against "elitist" enemies. 
Doug Ford is similar to Juan Peron standing next to Rob basking in his brother's popularity.
Argentina was once one of the richest countries in the world -- well ahead of Canada. The Perons are long gone, but Peronist populism still holds Argentines in thrall at the cost of a lost century for that country's economy and society. 
Let's hope Toronto does not succumb to Fordism ever again. I expect John Tory to be elected Mayor. But, the Fords will be carping on the sidelines throughout Tory's tenure. If Toronto's economy declines in relative terms along with Ontario, we could see a Ford comeback in future.
All that being said, I wish Rob Ford a speedy return to good health.

Monday, July 14, 2014

Credit Ratings and Bond Yields

(Updated 8 January 2018)

Quebec is borrowing at lower interest rates than Ontario for the first time in history.

For the first time ever, in June 2017 Standard & Poor's rated Quebec bonds as lower risk than Ontario bonds.  


Rating Agency
Province of Ontario Bonds
Province of Quebec Bonds
Rating
Rank out of 10 Provinces
Rating
Rank out of 10 Provinces
Dominion (DBRS)
AA (low)
4th
A (high)
5th (tied)
Moody’s
Aa2 (stable)
4th (tied)
Aa2 (stable)
4th (tied)
Standard & Poor’s
A+ (stable)
4th (tied)
AA- (stable)
3rd
Sources: Rating agency websites 8 January 2018. I calculated the ranks. 
Note: Fitch also rates Ontario (AA-) and Quebec (AA-) bonds, but does not rate all Canadian provinces.
 
Critics discount the work of bond-rating agencies. And, there is academic evidence that rating agencies follow, rather than lead, the bond market. Bond raters may not be perfect, but their relative assessment of governments is usually accurate.

What counts is the interest rate that governments have to pay when they borrow. And, just as a low score means you are a better golfer, lower is also better for borrowers when it comes to interest rates.

Prior to the oil price collapse, interest rates on long-term bonds confirmed the DBRS and S&P ratings of Ontario and Quebec bonds in the middle of the provincial pack. However, financial markets are now rating both Quebec and Ontario bonds as lower-risk than Alberta and Saskatchewan bonds even though those western oil province bonds have higher ratings from the agencies. Oil-dependent Alberta is now facing slightly higher interest rates than Quebec even though Quebec bonds are rated lower than Alberta bonds by all rating agencies. 

Newfoundland bond rates have moved well above comparable rates for Ontario and Quebec. Oil prices and provincial government oil royalty revenues have recovered a bit recently, but caveat emptor, Newfoundland bond owners.


Government Issuing Bond
Maturity Date
Yield
Canada (Federal)
6/1/2029
2.18%
British Columbia (BC)
6/18/2029
    2.73%
Saskatchewan
3/5/2029
2.82%
United States (US$)
8/15/2029
2.49%
Ontario
3/8/2029
 2.77%
Quebec
10/1/2029
2.76%
Newfoundland 
4/17/2028      2.96%
Alberta
12/1/20332.95%
PEI
11/19/20373.26%
Nova Scotia
6/1/2037
3.01%
Manitoba
3/5/2041
3.09%
Canada (Federal)
6/1/2041
2.35%
Alberta
12/1/2040
3.05%
BC
6/18/2040
2.91%
Saskatchewan
6/1/2040
3.04%
Ontario
6/2/2041      2.986%
Quebec
12/1/2041
2.974%
Source: TD Waterhouse and CIBC Investors Edge Ask Yields on 8 January 2018. 
Note: The wide spread between federal and provincial bond yields partly reflects investors’ greater ability to trade federal bonds. The bonds above were issued at varying rates. The yields above indicate what interest rates the governments could borrow at on 1-8-2018 for long-term bonds maturing on the dates above.   


The slightly lower interest rates for Ontario bonds vs. comparable Quebec bonds indicate that bondholders attach a slightly higher risk probability to a worst-case scenario of Ontario having to delay interest payments before bonds mature or being unable to pay off the principal at maturity. To the best of my knowledge, the present period is the first time in history that interest rates have been lower on Quebec bonds than Ontario bonds. 

If you think that the prospect of a provincial government being unable to make interest payments seems unlikely, so did Greek bondholders before the 2008 world financial sector crash. I certainly do not mean to suggest that any Canadian provincial government is heading for a Greek-style bond default. But, there is a chance that some provincial governments will face lower demand for their bonds during the next recession.

Interesting to see that interest rates are higher in January 2018 than in July 2016.


Government Issuing Bond
Maturity Date
Yield
Canada (Federal)
6/1/2029
1.37%
British Columbia (BC)
6/18/2029
    2.22%
Saskatchewan
3/5/2029
2.43%
United States
8/15/2029
1.698%
Ontario
3/8/2029
 2.27%
Quebec
10/1/2029
2.34%
Newfoundland 
10/17/2029      2.87%
Alberta
9/20/2029
2.45%



New Brunswick
9/26/2043
3.10%
Manitoba
3/5/2041
2.90%
Canada (Federal)
6/1/2041
1.74%
Alberta
12/1/2040
2.87%
BC
6/18/2040
2.655%
Saskatchewan
6/1/2040
2.898%
Ontario
6/2/2041      2.71%
Quebec
12/1/2041
2.765%
PEI
6/27/2042
3.06%
Source: TD Waterhouse and CIBC Investors Edge Ask Yields on 15 July 2016. 
Note: The wide spread between federal and provincial bond yields partly reflects investors’ greater ability to trade federal bonds. The bonds above were issued at varying rates. The yields above indicate what interest rates the governments could borrow at on 7-15-2016 for long-term bonds maturing on the dates above.

However, interest rates in January 2018 are still below summer 2014 levels.

 Issuing Bond
Maturity Date
Yield
Canada (Federal)
06/01/2029
2.4597%



British Columbia
06/18/2029
3.22%
Saskatchewan
03/05/2029
3.223%
Newfoundland
10/17/2029
3.425%
Ontario
06/01/2031
3.487%
 Nova Scotia
12/01/2031
3.52%






Canada (Federal)
06/01/2041
2.752%
Alberta
12/01/2040
3.487%
BC
06/18/2040
3.512%
Saskatchewan
06/01/2040
3.525%
Manitoba
03/05/2042
3.582%
Ontario
06/02/2041
3.677%
Quebec
12/01/2041
3.745%
Source: TD Waterhouse and CIBC Investor's Edge Ask Yields on 07/14/2014.  

What’s this blog about?

Over the next several years and perhaps decades, I will be keeping track of economic and social progress in Canada’s two largest provinces -- Ontario and Quebec.
I will report on a broad range of indicators:
  • employment
  • personal income
  • Gross Domestic Product (GDP)
  • population (including outmigration and inmigration within Canada as well as in and out of Canada)
  • happiness/satisfaction (if I can find comparable data)
  • test scores of 15-year-olds in the Organisation for Economic Cooperation and Development (OECD) Programme for International Student Assessment (PISA)
  • life expectancy and other population health indicators
  • low-income incidence by age group
  • greenhouse gas emissions
  • provincial government revenue and expenditure as a % of GDP (with adjustments for federal government transfers)
  • provincial government bond ratings and interest rates 
Why do I think Ontario vs. Quebec comparisons will be interesting starting with 2014? The provincial governments of Canada’s 2 largest provinces appear to be moving in opposite policy directions. If we look at the socioeconomic outcomes in both provinces over a long period of years with 2014 as the base starting date for comparisons (or 2013 for some calendar year data), perhaps we can learn something about which approach worked best – smaller government in Quebec vs. activist government in Ontario.  

This year the Philippe Couillard government was elected with a strong majority of seats in the Quebec legislature. A few months later, Premier Kathleen Wynne was re-elected in Ontario going from minority status to majority. Both Premiers are now free over the next couple of years to chart courses for their respective provinces that will carry their governments through to the next round of elections in 2018.

Premier Couillard campaigned on pledges that counter in some respects the European-style corporatist approach – often called the Quebec Inc. model -- that has held sway in Quebec since 1960. Premier Wynne promised to govern from the “activist centre”.

In general, I won’t be paying much attention to the rest of Canada. The three westernmost provinces – British Columbia, Alberta and Saskatchewan –have been supercharged over the past several years by high prices for their natural resources just as Texas and other oil-producing states have set the pace in the USA. Comparing the economies of Ontario and 
Quebec with Canada’s western provinces tells us less about the long-term effects of government policy and more about world prices for what’s in the ground.

I should reveal my personal biases. I am a member of the Green Party of Ontario and voted Green in the 2011 Ontario election. If Ontario had a preferential voting system, I would have ranked the Liberals 2nd, Conservatives 3rd and NDP 4th.

I worked for Ontario Finance from 1988 to 1990 and again on contract in 1997 and 1998 as well as for Ontario Education first on contract and then on staff from 2000 to 2007. And, I did some consulting work for Ontario Finance in 2008. I do not think of myself as a disgruntled ex-employee, but am glad to be more gruntled today as an independent consultant. 

My prior hypothesis is that Quebec will start to do better than Ontario in most respects. Premier Couillard and Finance Minister Carlos Leitao accomplished much in their professional careers. While luck and timing affect any politicians' success in government, ability in life before politics may also help. 
 

Of course, many factors beyond the reach of provincial government policies will affect socioeconomic developments in Ontario and Quebec. No matter what the data show, I won't be able to prove conclusively whether Ontario's activist approach or Quebec's deactivist approach works better. But, Ontario and Quebec are close neighbours and affected similarly by  similar external forces. I do believe Ontario vs. Quebec comparisons will allow us to learn some useful lessons about what works and what doesn't in government policy. 

I will work on this blog as time permits in my professional life as a public policy and financial planning consultant. Feel free to comment on my posts and to suggest possible topics. You can reach me either by commenting on this blog or offline at adil.sayeed@utoronto.ca


Of course, politics may put an end to this blog if Ontario and/or Quebec voters change course in subsequent elections. But, let’s enjoy the Quebec Couillard vs. Ontario Wynne contest while it lasts. May the best Premier win – (bad pun intended).