Canada to Jolt Economy With Two-Year Deficit of C$64 Billion
Canadian Finance Minister Jim Flaherty today will announce the first deficit in more than a decade, cutting taxes and boosting spending on roads and transit links to jolt the world’s eighth-largest economy out of recession.
Builders such as SNC Lavalin Group Inc. and Aecon Group Inc. may benefit from the economic plan, which Flaherty is scheduled to release in Ottawa at 4 p.m. New York time. In addition to announcing deficits of C$64 billion ($52.2 billion) over the next two years, Flaherty also will take steps to spur lending by Royal Bank of Canada and other banks as firms struggle to get credit.
“What we’re talking about is cushioning the blow,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “It’s simply a matter of trying to stem the decline and help stop the economy from sliding downward.”
The Canadian economy will shrink by 1.2 percent this year, the Bank of Canada said last week. Prime Minister Stephen Harper, 49, who had said before the Oct. 14 elections he wouldn’t allow deficits, has since said the stimulus may last as long as five years.
A government official, who spoke to reporters last week on condition he not be identified, said the deficit for the fiscal year starting in April will be C$34 billion, followed by a C$30 billion deficit in fiscal 2010.
Spur Spending
The planned spending includes C$4 billion for new roads and highways, C$2 billion for repairs and maintenance, and C$1 billion for energy-related projects, Transport Minister John Baird told reporters in Ottawa yesterday. Harper told La Presse the budget would include permanent tax cuts.
“It’s going to be a catch-all of support for everybody,” said Todd Johnson, a portfolio manager at BCV Asset Management in Winnipeg, Manitoba, which manages about C$65 million in assets.
The government has also indicated the budget will contain C$2 billion in funding for job training, C$2 billion for social housing and C$1.5 billion on programs for farmers and rural communities that depend on forestry and other industries hurt by dropping demand.
The deficits could wipe out a decade worth of debt reductions for the energy-rich country. Canada, flush with commodity-related revenue, used its resource windfall to run 11 consecutive surpluses and pay down C$105 billion of debt.
Canada, which ships about three-quarters of its exports to the U.S. and is being squeezed by plunging demand from that country, is in recession for the first time since 1992.
Infrastructure Projects
It may also bode well for SNC Lavalin and Aecon as investors anticipate a pick-up in new infrastructure projects payday loans. Aecon’s stock has gained 75 percent over the past three months, the most outside of mining on the S&P/TSX Composite Index.
“Everyone has talked infrastructure to death,” which would bode well for companies such as Aecon and SNC Lavalin, said Greg Taylor, who helps manage about $1.6 billion as a portfolio manager with Aurion Capital in Toronto.
Bombardier Inc., the world’s second-largest trainmaker by sales, has won pledges for new trains worth over $2.1 billion in the past two months as governments across Europe boost expenditure on rail infrastructure to spur economic growth. The Montreal-based company’s stock has advanced 13 percent over the past month.
Bank Focus
Banks will also be a focus of the budget.
Flaherty has said access to credit is the No. 1 concern of business owners and has indicated he will use the fiscal plan to help ease credit markets. Those moves might include measures to revive Canada’s market for corporate debt and to give the government new authority to take over banks and inject capital. The budget may also change rules to allow foreign governments and sovereign wealth funds to own stakes in Canadian banks and insurers, the Globe and Mail reported on Jan. 20.
State holdings in banks may help the nation’s lenders better compete with the increasing number of nationalized banks globally, said Mario Mendonca, an analyst at Genuity Capital Markets in Toronto.
“It’s kind of important, if only to put us on a level playing field with the rest of the world,” said Mendonca. “Canadian banks’ costs of funds would be far greater than the costs of funds for those” nationalized banks.
Balance Sheet
The Canadian government already has been putting its balance sheet on the line for the economy. The government is offering guarantees on more than C$200 billion of bank debt and has pledged to buy as much as C$75 billion in mortgages from banks to free up cash or loans to consumers and businesses.
“I suspect the banks will end up being winners,” said John Aiken, an analyst at Dundee securities Corp. “What you’ll see is various measures to help ease the crunch.”
The budget will need backing by at least one opposition party to pass because the governing Conservatives hold fewer than half the seats in Parliament.
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