During a virtual presentation held yesterday, British Columbia's Finance Minister Carole James presented an update on the economy and debt management amidst the coronavirus fallout. The presentation provided a qualitative assessment of the COVID-19 impact on the economy and quantitative estimates of COVID-19 related spending. While a more complete update, including the revenue impact of the virus will be provided to investors in September, we use this opportunity to provide additional context around B.C.’s fiscal situation:
A Deep Recession But Gradual Improvement In Specific Areas
Without providing a number, James acknowledged that the province faces a severe recession. Most sectors of the economy have been affected by the crisis so far. Non-essential retail and food and accommodation services operations had to be closed during the shutdown. The public health measures put in place significantly reduced the COVID-19 transmission. The province implemented the second phase of its Restart Plan on May 19. As of June 7, retail and recreation activity in B.C. was 25% lower than pre-crisis levels, according to Google (NASDAQ:GOOGL) Mobility Data compared with 55% at the trough (chart 1).
The global demand shock and borders closures generated a negative supply shock on B.C.’s international exports and tourism sector. However, the diversity of B.C.’s export markets has been beneficial so far in 2020. China, the province’s second most important trading partner, reopened its economy in early spring. Nominal exports to China are up 16% year-to-date as opposed to being more than 20% lower to the United States and other countries (chart 2). Geopolitical tensions between Canada and China remain a downside risk. The recent decision by B.C. Supreme Court to allow the extradition case against Huawei CFO Meng Whanzhou to move forward could exacerbate trade tensions. For instance, reports that China found pests in logs from Canada could be a prelude to additional sanctions on targeted Canadian exports.
Employment, business and consumer confidence declined in the short-run. In contrast, the housing market showed resilience. Annualized housing starts briefly dipped to 30,000 in April but have increased to the dynamic level of 38,000 in May. On the resale market, the sales-to-listings ratio dipped from sellers’ territory to a balance market, preventing benchmark prices from falling. Residential resale transactions hit an 11-year low in April but rebounded in May as the province progressively reopened.
Additional Spending And Revised Borrowings
Additional spending incurred to face the COVID-19 pandemic amounts to $5 billion, representing a net 9% of program expenditures projected in the Mid-February Budget. From this amount, $1.8 billion is dedicated to financially support affected workers through a one-time $1,000 benefit and many payment deferrals (ICBC, electricity and student loans), $1.7 billion is directed to frontline services such as health care and $1.5 billion will be dedicated to support the recovery. Also, James reiterated the government’s decision to allow municipalities to borrow for operating purposes.
All in all, the $5.0 billion in additional spending increases the projected borrowing program for FY 2020-21 from $8.6 billion to $13.6 billion. To date, $7.3 billion (54%) has been completed with a clear focus on the domestic market. The province also has access to a sizable $7.4 billion in cash reserves and other liquidity facilities to cover additional revenue shortfalls.