KAPLAN: Will the October 19 referendum cause an ‘Alberta independence risk premium?’

Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Ministry of Treasury Board and Finance, and later the Executive Director of the MacKinnon Panel on Alberta’s Finances. During his tenure, he focused, among his other duties, on assisting in the development of meaningful options to reform federal-provincial fiscal arrangements.The spectre of the upcoming October 19 referendum on Alberta independence could cost the Alberta government a debt financing risk premium. The “Alberta independence risk premium” estimates are derived by examining the yields on Alberta 10-year and 30-year government bonds.Using the current debate in Quebec around independence as a proxy, the uncertainty surrounding the prospects of the results from an Alberta independence referendum could increase Alberta’s borrowing costs by between 5 and 10 basis points, or 0.05% to 0.10%. Alberta's long-term debt issues are now estimated at about $40 billion over the next three fiscal years. A decision by Alberta to seek independence from Canada would likely kick off years of difficult negotiations between Canada and Alberta over such complex issues as federal assets and debt partition, currency, renegotiation of internal and international trade agreements, and transfer of Canada Pension Plan (CPP) net assets. This could create great uncertainty, and investors don’t like uncertainty. According to Bloomberg’s reporting on the situation occurring in Quebec, “markets have started pricing in the risk of renewed instability. Thirty-year Quebec bonds are trading about five basis points wider than similar debt from Ontario, which is wider than normal, according to data compiled by Bloomberg. Other factors are also at play, such as U.S. tariffs and the province’s strained finances … In an environment of tight credit spreads everywhere, investors are looking to de-risk their portfolios...” .The Alberta government must provide Albertans with more information on the projected impact of Alberta independence on interest rates and debt servicing costs. I assume that, by this time, the potential impacts of an Alberta independence referendum on future interest rates and debt servicing costs have been examined by the Alberta government. Alberta Treasury Board and Finance (TB&F) prepares a Forecast and Analysis of the Province’s Interest Rate Risk Report, on a quarterly basis, with a Debt Servicing Cost and Net Interest Expense: Forecast and Sensitivity Analysis Report prepared monthly. These reports include projected debt servicing costs (DSC) and net interest expense for the current and future two fiscal years, comparing figures to the latest budgeted (estimated and targeted) amounts. Sensitivity analyses are also reported, illustrating the impact of +100/+200/+300/+400 basis point parallel interest rate shocks on projected DSC and net interest expense by fiscal year.I am not suggesting that the prospects of Alberta seeking independence would have any impact on Alberta’s overall credit rating from bond rating agencies, at this time, as so many factors go into these assessments, most notably fiscal and economic performance and risks. However, a risk premium being attached to Alberta bonds by investors seems a distinct possibility to me. The Smith government should immediately release all relevant documents and studies, including the Forecast and Analysis of the Province’s Interest Rate Risk Report and the Debt Servicing Cost and Net Interest Expense: Forecast and Sensitivity Analysis Report, assessing the impact of an “Alberta independence risk premium” on the province’s finances.Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Ministry of Treasury Board and Finance, and later the Executive Director of the MacKinnon Panel on Alberta’s Finances. During his tenure, he focused, among his other duties, on assisting in the development of meaningful options to reform federal-provincial fiscal arrangements.

KAPLAN: Will the October 19 referendum cause an ‘Alberta independence risk premium?’

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