- Denadment of Finance Minist?re des Finances. Canada Canada Wm magi-535s? .. SECRET (57 Deputy . . Munster 0f Fmance .- 1 Jen Collms/Ian Detta/M?lame Camer . . I Law u. ..s I :Yom?e?Vcter??renee Paul Rochon 2016FIN433791 . nae . MAR 1 0 2915 Newfoundland and Labrador-'5 Economic and Fiscal Situation is further weighin on the rovince?s econom and labour market, For information. Economic Situation The Newfoundland and Labrador (N economy is the least diversi?ed among provinces and was already predicted to contract priOr to the drop in global crude oil prices, as a result of the wind down of some major commodity-related construction projects. The drop in the price of oil - Fiscal Situation de?cit is over next ve years, an no ebt-to-GDP is projected to nearly double to around 60 per cent. - s.14(a) ADM: Nick Leswick (369-3346) ?6mm Directors: Glenn Purves/Claude Lavoie/Phil King 5-21 (1 5.21 (1 000001 CONTEXT AND ANALYSIS Economic Situation is by far the least diversi?ed provincial economy, and is heavily concentrated in oil and gas extraction and metal ore mining.1 Together, these sectors account for nearly one third of nominal GDP and have generally been the main drivers of growth since 2000. With construction winding down at a number of major projects, declines in capital expenditures and real GDP growth had already been anticipated for the province prior to the decline in commodity prices (Table 1).2 The sharp drop in commodity prices is further exacerbating the province?s economic dif?culties by dampening prospects for ?sture projects, and negatively impacting its terms of trade and, hence, nominal GDP growth. able 1 Evolution of Average Private Sector Forecasts . 2015 2016 2017 2018 2019 Real GDP growth July 2014 1.1 ~1.7 - -0.7 4.0 - February 2016 -2.6 -1.1 0.5 4.6 . 1.2 Nominal GDP growth July 2014 -. 3.2 0.5 1.6 6.2 - Februaly 2016 -8.9 -1.9 3.9 6.8 4.4 Unemployment rate July 2014 11.6 12.0 11 .7 11.3 - February 2016 12.8 13.4 12.6 12.1 11.6 Source: Department of Finance's compilation? of private sector forecasts; Conference Board of Canada. Lower commodity prices are translating into broad-based labour market weakness. The 2015 unemployment rate averaged 12.8 per cent (the highest in the country), 2.5 percentage points higher than in June 2014. The labour market is coming under additional stress as a result of layoffs in Alberta of itinerant ?y?out?) workforce. In fact, the total number of the province?s residents that are employed in Alberta, either working directly in the energy sector or in positions strongly tied to it, is nearly double the number of resident Workers employed in the energy and mining sector in the province itself. In total, we estimate that (in 2013) nearly 6 per cent of all employment income reported in was earned in Alberta. Over the medium-term, the Hebron oil ?eld and Muskrat Falls hydroelectric project are two major projects scheduled to begin production in 2017 and 2018, respectively. In particular, the National Energy Board forecasts increased crude oil production from in the next few years due to new ?elds coming on line, regardless of the price scenarios. However, production will only be enough to offset declines in output from existing ?elds. 1 Newfoundland and Labrador is Canada's third smallest provincial economy; representing 1.9 per cent of national GDP. 2 In its November 2015 Economic Review, the province was projecting four consecutive declines in real private and public investment in 2015, 4.0% in 2016, 49.3% in 2017 and 41.5% in 2018), with total capital investment expenditures shrinking from $1 1.8 billion in 2014 to $7.2 billion in 2018. 000002 Fiscal Situation . Newfoundland and Labrador?s ?scal situation has deteriorated ?scal outlook has deteriorated signi?cantly, largely due to the 'fall in oil prices. 7 According to its December 2015 Economic and Fiscal Update, the'2015-16 budget de?cit is projected to be almost $2 billion (6.2 per cent of GDP), double the rovince?s ro'ections and the 2014-15 de?cit (Table 2 and Annex 1 for ?irther details) 5? Similarly, from its low point in 2011-12, the province?s net debt-to-GDP ratio has increased by 16 percentage points, to nearly 40 per cent in 2015-16. In addition to ?nancing the budgetary shortfall, the increase in debt re?ects infrastructure acquisitions, changes to public sector pension plans and funding for the Muskrat Falls hydroelectric project. Table 2: Fiscal Situation and Outlook, . I 2011-12 2012-13 201344 20:14-15 I 2015-16 2016-17 2017-18 2018-19 2019-20 202021 Budgetary'Balance (Smillionsl 974 -389 -986 I 4,963 72,437 4,955 4,933 4,919 4,956 2.9 -0.6 -J.1 -2.9 -52 -7.4 -5.8 -5.6 ~52 -5.o . I i . I Net debt (Smillions) 7,837 8,348 9.085 10,260 12.436 15.055 17,199 19,215 21,079 22,948 95 of GDP 23.4 26.1 25.0 30.6 39.6 45.6 51.4 56.0 5 7.6 58.2 Source: Newfoundland and Labrador Public Accounts. 2015 Economic and Fiscal Update. Statistics Canada s.14(a) 000003 -4- Figure 1: Program expenses and revenues 9mm Total revenues . . I I mono 7,000 - I, \g Revenues excl. royalties I 9, 6,000 - Program expenses 'a-onn- . 2,000 '?lgl '9 '19 q. ?9 Source: Newfoundland and Labrador Public Accounts, 2015 Economic and Fiscal Update The province has started a review process to identify consolidation measures The province has announced a Govern?rent Renewal Initiative to identify de?cit-reducing revenue and expenditure measures with results expected in Budget 2017. Nonetheless, re?ecting the worsening ?scal situation, in January 2016 downgraded the province?s rating from to A. While Moody?s and DBRS Limited have maintained the province?s ratings, they have revised its outlook ?'om Stable to Negative in recent months (see Annex 2 for details on provincial credit ratings). As well, bond Spreads have also risen relatively more than other provinces, but have stabilized over the last few weeks (Box 1). Box 1: Provincial Interest Rates and Spreads Since August 2015, spreads haVe widened for all provincial governments as risk aversion increased globally. Spreads for small and/or resource-rich jurisdictions such as Newfoundland and Labrador and the other Atlantic Saskatchewan and have widened the mos Nonetheless, the latest information for is that spreads have plateaued in recent weeks Historical interest rates for Newfoundland mange In 10-yearspreads slateAug. 2015 ?2?year s.14(a) 000004 Pages 5 to I a 8 are withheld pursuant to sections sont retenues en vertu des articles 14(8), 21(1)(b) of the Access to Information Act de la Loi sur l?acces a l?information -9- Total own-6 00709 menus 5.154 5.869 5.560 6.184 6.949 6,273 8.089 5.514 4.577 ova?ch: 0113mm oil 1.754 2.239 2.121 . 2.399 2.795 1.029 2.126 1.502 652 Fede?al cash uansfers 1.700 2.558 1.545 1.763 1.694 992 1.020 1.000 1.149 Total revenues? 0.942 0.427 7.106 7.927 0.54:1 7.265 7.109 6.621 4.726 6.221 6.601 6.919 7.033 7.139 expendl'lmfe 4.069 5.697 6.439 5.706 7.040 0.021 7.025 7.130 7.230 7.410 7.329 7.423 7.49:1 7.530 Deblchatgas 751 745 900 937 789 700 051 772 922 - 1.012 1.160 1.207 1.339 1.907 Total expenditures ""5320 0.202 73% 7&3 75039 7.701 7.876 7.910? 0.062 ?0.057 6.062 9.65? 5.105" Budgetary Balance 1.421 2.350 43 594 974 405 999 400 -1.9 .2437 4.955 4.933 41.919 4.966 11010901 10.100 7.900 9.220 8.255 7,037 0.491 9.005 10.330 12.430 16.056 17.109 10.215 21.0711 22.948 {?ith! ?12007-08 W9 31320134155201.1912 912012-13 9161-3201311 74555201 7:1 8332015419 72201920 'rnual ammo mm 17.7 10.9 22.2 21.2 20.7 10.6 17.4 16.5 14.6 01? Mick: I . Offshore Oil Ruyaltias 0.0 7.1 0.6 2 9.3 97 6.1 4.7 1.0 Federal cash mien 02 91 6.2 8.1 4.0 :11 2.9 3.0 3.7 70131 nwnuas? 23.9 26.7 20.4 27.9 25.5 22.7 20.3 10.6 10.2 18.0 10.6 10.5 16.9 10.0 T0121 program expenditure 17.1 17.5 25.0 23.1 21.0 21.6 201 21.3 23.0 22.5 21.9 21.6 20.5 19.1 041.11 charges Tom expenditures 19.7 19.9 29.3 26.9 23.4 24.0 22.6 23.6 25.6 26.2 20.6 25.0 24.6 23.1 Budgetary Balance 4.0 7.4 41.1 2.0 2.9 -0.6 -1.1 -2.0 42 .7.4 A -5.8 - -5.0 5.2 -5.0 E3401 35.1 25.2 929 20.4 _2_3.4 . 20.3 20.0 30.0 39.6 Jae 51.4 56.0 57.6 59.2 Sources and Notes: and Labrador 2015 31143010042015 Economlnand Fiscal Updale. 1. Total menus; curforecasl Indudes nenncome from Business Entaqmse: and :11 1101017941111 comparable ?admwara. 000009 -10- Annex 2: Praldncial Credit Ratings The table below lists' provincial credit ratings froth the three major credit ratings agencies as of February 2016. Newfoundland and Labrador?s ratings are now the lowest in the country. However, they are better than they were between 1985 and 2005 (see chart below). Provincial credit'ratz?ngs a; of February, 2016 - Protdnce Moody?s . DBRS Newfoundland and Labrador; A (Negative) Aa2 (Negative) A (Negative) Prince Edward Island I . A Aaz (Stable) A (low) Nova Scotla (Stable) A (high) New Brunswick Aa2 (Stable) A (high) Qu?bec A . A52 (Stable) A (high) Ontario - Aaz' (Negative) AA (low) Manitoba AA Aa2 (Stable) A (high) Saskatchewan I (Negative) (Stable) AA Alberta (Negative) (Negative) British Columbia Alla (Stable) AA (high) Canada Note: The ratings agencies assign letter ratings to borrowers. The major categories, In descending order of credit quality. are: and B. The and "high", ?low? and and modifiers show relative standing within the major categories (for example exceeds AA). 58:? Credit Rating for Newfoundland and Labrador 888000010 Pages 11 tol? 12 are withheld pursuant to sections sont retenues en vertu des articles 14(8), 21(1)(b) of the Access to Information Act de la Loi sur l?acces a l?information Departmental Finance anada 0 Canada . for Signature by I hfonnalion of A signer par] Pour l?infonnution dc Minister of Finance Prenamd by (name/initials/division) Pr?par? par (nomfinitiles/division)' ?Jcn Collins Ian Dctta In consultation with En consultation avec 1L Siyam Railsque Dominique Tremblay Approver Approuv? par . to . Egg; Glenn Purves Director . mm Claude Lav01e Director . 13mm genera; Harnet Jackson gammy?? Nick Leswick Associate Deputy Minister 8: G7 Deputy for Canada Sous-ministre d?l?gu? ct mpr?smtant du Canada an G7 Timothy Sargent Associate Deputy Minister Sm?mmda?gm Marta Morgan Deputy Minis?? Paul Rochon Sous-mhistxe Remarks Remarques: Newfoundland. and Labrador?s Economic and Fiscal Situation File no. No dc dossier Date 2016FIN433791 HARD 9 2915 Associate Deputy Minister G7 Deputy for Canada Sous-ministre d?l?gu? et repr?sentant (Sign on behalf of DM) El du Canada au G7 Signer an new du SM Associate Depinty Minister . Sous-ministre d?l?gu?e . (Sign on behalf of BM [j (Signer an new du SM) I AssistantDe?uty Minister - Sous-ministre adjoint(e) - Sign on behalf of DM El Signer au nom du SM 000013