Opinion: Bond rating agencies don’t play politics

By Medicine Hat News Opinon on December 5, 2019.

cgallant@medicinehatnews.com@collingallant

If beauty is in the eye of the bondholder, then Alberta should probably take another look in the mirror.

On Wednesday, bond rating agency Moody’s edged down Alberta’s credit rating, the first since Albertans elected the United Conservatives on a get-back-to-business platform in the spring.

Albertans will well-remember how the UCP and their predecessor parties hammered the New Democrats over and over and over again on such downgrades.

They repeated the lines this week, citing “mismanagement by the previous government” and warning against growing debt as the enemy of future prosperity

And sure it’s early days, but by any objective analysis, another credit downgrade just weeks after a budget billed as transformational, is hardly a ringing endorsement by economists.

Similarly, it’s one report by one agency, but considering the gravity given to the bond ratings by the former opposition UCP, the now-governing UCP should offer a better explanation.

First off, bond ratings are a complex, multi-faceted calculation that most people will happily let fly over their heads other than to note that a “downgrade” sounds bad, and it is.

The short answer is that a lower bond rating makes borrowing more expensive. They reflect the borrower’s ability to pay, and higher interest rates are required to offset supposed risk by rewarding the lender with higher interest.

Secondly, bond rating agencies care not a wit that governments borrow money, in fact that’s their main line of business, and would prefer more borrowing than less.

Their sole focus is on the ability to repay that money. As such the general performance of the economy is a factor than the size of the debt held. It’s only is a factor in the calculation if there’s no credible way to pay it off.

This is where Alberta’s economic outlook comes in, but like most economic data these days it is subject to be melded and spun into any result depending on which political faction you ask.

Both parties in the Alberta legislature agree the soap opera over getting new pipelines built is part of the revenue picture. It’s the biggest assumption in provincial budgets both this year and last.

But the price of oil is just as large, as evidence by the fact that since oil prices dropped in 2016, downgrades have hit nearly every major jurisdiction in North America that has an economy heavily weighted to petroleum.

Alaska had a sterling AAA rating in 2016 now sits at AA-, with the latest bump down happening in September amidst a budget crisis.

Major oil producers such Texas and California, each with economies and population bases on par with Canada as a whole, weren’t torched, but Oklahoma and North Dakota were.

Like Alberta, Saskatchewan’s rating dipped in 2016, but has since stabilized.

In the fine print, however, bond analysts note Saskatchewan’s economy is less dependent on a single source of revenue, like the oil and gas sector, and the much smaller economy is more resilient.

Further afield, Louisiana’s bond rating only rose in 2018 after a new state government raised taxes and abandoned a piecemeal approach to fill a budget gap through economic growth and one-time land sales.

If the goal is simply to improve the credit rating, then enacting a universally decried provincial sales tax would be the easiest route.

That’s not going to happen any time soon and the government that chose to exempt new revenue as an option to balance the budget, is not likely to change its course.

While people may play politics with bond ratings, bond rating agencies don’t play politics. They only want to get paid, by hook or by crook, and they appear less confident that will happen in Alberta.

(Collin Gallant is a News reporter. You can contact him by email at cgallant@medicinehatnews.com)