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S&P warns it may downgrade Ontario, raises questions over costs Add to ...

These are stories Report on Business is following Thursday, May 30, 2013.

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S&P could downgrade Ontario
One of the world's major credit ratings agencies warns of challenges ahead for the Ontario government, with a possible downgrade this year.

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Standard & Poor's Ratings Services held Ontario's long-term rating at AA-, but raised questions about whether Premier Kathleen Wynne's minority government can meet its cost goals.

(Earlier, the agency released an inaccurate statement saying it also cut its outlook for the province to "negative" from "stable." In fact, that happened a  year ago, and S&P has since corrected the inaccuracy.)

“The negative outlook reflects our view regarding the minority legislature’s ability in the next one to two years to meet what we view as aggressive cost containment targets necessary for the debt burden to peak in fiscal 2015 as planned,” S&P said of the province's budget goals.

“We believe the province's main credit challenges include its continuing weak budgetary and debt metrics and what we view as its aggressive cost-containment plan required to achieve budgetary balance by fiscal 2018.”

As S&P also warned last year, there’s a one-in-three chance it would lower the long-term rating, by one notch, within the next year, S&P warned, which would spell trouble for the province.

“A downgrade could occur should we come to believe that the debt burden started trending materially above our base-case scenario projection of a tax-supported debt burden of about 250 per cent as a share of consolidated operating revenues by the end of fiscal 2015,” the U.S. agency said.

“This could occur as a result of rising economic or fiscal pressures, for example, due to lower-than-anticipated economic growth or the government's inability to continue to rein in spending,” it added.

“Conversely, we could revise the outlook to stable if we saw that the government was able to meet or exceed its targets for its budgetary and debt burden metrics in the next fiscal year, and remain on course to attain its goal of budgetary balance by fiscal 2018.”

Ontario, whose debt is projected to top $271-billion this year, forecasts a deficit of $11-billion, or 1.7 per cent of gross domestic product, in its 2013-14 fiscal year.

“In our opinion, the rate of growth of Ontario's debt burden remains a concern, as it is already at the high end of the range for similarly rated domestic and international peers,” S&P said.

The agency did say that the government's projections for economic growth – 1.5 per cent this year – is “reasonably cautious.” That’s a good sign given that economic growth “underpins” the fiscal forecast.

Ontario faces uncertainty on several fronts, notably its ties to the U.S. economy and Toronto’s sinking housing market.

“We expect U.S. demand for Ontario goods and services to improve, although more clearly so in the latter half of 2013 and into 2014 with the U.S. fiscal uncertainty easing further,” senior economist Robert Hogue of Royal Bank of Canada said in his most recent forecast for the province.

He projects Ontario’s economy will expand by 1.6 per cent this year and 2.8 per cent in 2014, with a slower pace of construction and unemployment running at 7.6 per cent and 7.3 per cent, respectively.

Toronto-Dominion Bank economists also see a “gradual cooling” in real estate this year and next, but “encouraging prospects for a healthier U.S. economy towards the end of 2013 bode well for the province.”

And though a better fiscal picture this year is “encouraging,” it doesn’t “detract from the daunting task of returning to budgetary balance by fiscal 2017-18,” TD said.

RBC, CIBC profits climb
Two of Canada’s major banks have put some spark in the financial services sector today, with increases in second-quarter profits.

Royal Bank of Canada posted a profit of $1.94-billion or $1.27 a share, just missing analysts’ estimates, The Globe and Mail’s Tim Kiladze reports. That  compared to $1.5-billion or 99 cents a year earlier.

When you take out unusual items, RBC’s latest profit was $1.97-billion or $1.29.

Canadian Imperial Bank of Commerce, in turn, beat analyst estimates, The Globe and Mail’s Tara Perkins writes, as second-quarter profit climbed to $876-million or $2.12 a share from $811-million or $1.90 a year earlier.

CIBC also boosted its dividend, by 2 pennies, to 96 cents.

Scotiabank grades Carney
As Governor Mark Carney counts down the minutes to his departure from the Bank of Canada, Bank of Nova Scotia economists have graded his shortened term: B+ and “incomplete.”

“I'm often asked what grade I'd give BoC Governor Carney for his term in office,” said Derek Holt, vice-president at Scotiabank Economics.

“I've remarked that I would lean toward grading his efforts as incomplete. In fact I can’t see any other more sensible choice.”

Mr. Carney, who will succeeded by Stephen Poloz, has won world renown during his five years at Canada’s central bank, for how he guided the country through the financial storm and how he has taken a leadership role in global bank supervision.

Sometimes described as the rock star of central banking, Mr. Carney leaves with a strong reputation.

Mr. Holt doesn't dispute that - he says Mr. Carney "served his country well" - but he does raise several issues, the first of which is that the central bank chief is cutting short what was supposed to be a seven-year term to become governor of the Bank of England.

“A governor signs on to a seven-year stint for a reason in that it is supposed to carry one through all or the majority of a cycle," Mr. Holt said. "… Now one may counter that he is so bright that he finished the coursework and defence of his thesis ahead of schedule. I think that’s cute in an academic sense, but impractical for the role at hand.”

The Scotiabank economist makes several other points in his research note today:

1. On what he has accomplished, Mr. Carney probably deserves a B+. “There is no doubting that he is a polished communicator, has catapulted Canada to the forefront of global discussions on capital adequacy and experimentation in monetary policy, and to boot he’s a heck of an affable guy … But let’s review the matters of policy substance. First, recall that Carney did not start the BoC's easing campaign, as the BoC under Governor [David] Dodge had cut 50 basis points before Carney took office and did so whilst warning of sharp and deleterious global imbalances. While Carney is often given all of the credit for having tackled the global crisis, the ball had been set in motion by the many bright lights at the BoC before his first decision. Carney did, however, have the foresight to keep cutting and along an aggressive path in recognition of the global headwinds that were sweeping through Canada. He could have dithered, but instead acted decisively and with the requisite confidence to deliver the goods.”

2. To his credit, he “avoided quantitative easing and credit easing … . The fact that Carney avoided this temptation is probably his single biggest unsung accomplishment in my opinion. Canada restructured itself the old fashioned way in the 1990s by paying its bills rather than resorting to the printing presses. It would have been a shame if the hard currency appeal of having avoided QE in the past had been squandered in this cycle, so kudos to Carney.”

3. Also in his favour was his ability to help unfreeze Canada’s asset-backed commercial paper.

4. Not only that, but “add to the list of accolades Carney’s willingness to think outside of the box and to entertain such contributions from others.”

5. Why the “incomplete” grade? “Our main argument is that since monetary policy operates with notoriously long, variable and highly uncertain lags, the jury is out on what Carney's actions are leaving behind for incoming governor-designate Poloz to face. Assessing Carney’s impact doesn’t stop upon cutting the rug to the door. Indeed, cut Poloz some slack going forward, as he inherits the consequences of decisions made over recent years. We have a view on how those risks will pan out, but at a minimum one cannot judge how effectively Carney served in his role without knowing with certainty what he is leaving behind on this side of the pond and it is premature to put a grade on this.”

The housing market is also an issue for Mr. Holt.

First, the Bank of Canada backed Finance Minister Jim Flaherty’s tightening of the mortgage market, which many believe is leading to a soft landing for real estate.

Mr. Holt, however, believes the “sleepy mortgage market” needed to be spiced up when banks became more innovative.

“But, I believe that after having eased as such and elevated housing activity to unsupportable heights, the rules were then tightened too much and too quickly at the precise all-time peak in the housing and consumer markets,” he said, projecting that real estate would have cooled on its own.

“By counselling very aggressive tightening at a relatively late stage of the game given that Carney ramped up his warnings on household debt really only in the very recent past, the consequences are only just emerging by way of the magnified risks of a hard landing,” he added.

Mr. Carney has, of course, been warning about the record levels of consumer debt, going so far as to warn of a rate hike if we didn’t get our act in gear.

But, Mr. Holt noted, these “excesses” were driven partly by the ultralow interest rates during Mr. Carney’s time.

“This is a policy catch-22 and I have a lot of sympathy for the view that there was no real other choice, lest [the Canadian dollar] be trading at double par against the [U.S. dollar] on a several hundred basis point overnight spread in the absence of those cuts,” he said.

“We realize that it may have been either an undesired or unintended consequence to have fed housing and consumption excesses,” he added.

“But just as a basic legal tenet is to hold accountable individuals for the full ramifications of their actions howsoever intended they may or may not have been, so too should the same apply in judging the all-around efficacy of policy measures.”

Until it all washes out, the Scotiabank economist said, you can’t give a completed grade.

CMHC pulls back
Canada Mortgage and Housing Corp. is continuing to shrink its business, as the government seeks to reduce its exposure to the housing market, The Globe and Mail's Tara Perkins reports.

The amount of insurance that the Crown corporation had in force ticked down by $3.5-billion, to $562.6-billion, during the first three months of the year.

The figure falls as consumers pay down insured mortgages and rises when CMHC sells new insurance.

Tokyo plunges
Japan is again the focus of market attention today after Tokyo stocks plunged into correction territory.

Other markets are faring far better.

Tokyo’s Nikkei sank 5.2 per cent, on the heels of tremendous turmoil for the benchmark index, which, despite that, is still up about 30 per cent so far this year.

"All in all, there would appear to be a small element of 'panic' in the recent Nikkei plunge, the halt in [yen] weakness and U.S. equity market strength and the move up in U.S. mortgage rates," said Stephen Gallo, Bank of Montreal's European chief of foreign exchange strategy.

"However, we tend to view much of this as a very welcome and healthy development," he added in a research note.

"Nevertheless, the element of 'panic' should not be entirely ignored either, given that the liquidity surplus-deficit analysis would suggest that as [the Fed's quantitative easing program] tapering begins, without Japanese investors heavily involved in foreign asset markets, the offsetting Japanese liquidity to make up for what the Fed is withdrawing may simply not be there."

European stocks, however, rose, while the S&P 500, Dow Jones industrial average and Toronto's S&P/TSX composite are gaining ground.

New devices in works
It’s getting harder by the day to keep track of gadgetry as the world goes increasingly mobile.

Samsung Electronics Co. today unveiled the Galaxy S4 mini, with a 4.3-inch screen, a device aimed at the mid-segment market.

Apple Inc. is also expected to launch a cheaper device.

Just yesterday, Google Inc.’s Motorola business unveiled plans for the Moto X phone, also an attack on Apple.

ExxonMobil on climate change
Some quotes are more memorable than others.

Here’s what the chief executive officer of ExxonMobil Corp. told shareholders yesterday:

“What good is it to save the planet if humanity suffers?”

Rex Tillerson was responding to issues raised by environmental activists, who, according to reports of the annual meeting, wanted the world’s biggest oil company to establish greenhouse gas emission targets.

Shareholders voted that down, by 3 to 1. They also nixed a proposal to ban discrimination where sexual orientation is concerned.

Mr. Tillerson, according to The Associated Press, said that cutting back on using oil would make it more difficult to help some billions of people living in poverty.

The CEO, according to the Houston Chronicle, agreed climate change is a major issue, but he questioned what activists say should be a goal of carbon in the atmosphere of less than 350 parts per million.

“We do not see a viable pathway with any known technology today to achieve the 350 outcome that is not devastating to economies, societies and peoples’ health and well-being around the world,” he said.

“So the real question is, do you want to keep arguing about that and pursuing something that cannot be achieved at costs that will be detrimental? Or do you want to talk about what’s the path we should be on and how do we mitigate and prepare for the consequences as they present themselves?“

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