February 1, 2016 / 8:35 PM / 2 years ago

Potash woes worsen Saskatchewan growth, debt outlook

TORONTO, Feb 1 (Reuters) - Tanking fertilizer prices have worsened the economic and budget outlook for the Canadian province of Saskatchewan, where the oil shock has already stalled growth, pushed the government into deficit and caused its bonds to underperform.

Fertilizer giant Potash Corp of Saskatchewan last week forecast its bleakest year in a decade. Royalties from its potash mines are a key contributor to the provincial budget.

Saskatchewan may have seen no growth, at best, in 2015, economists said, and given the latest potash news, this year is not looking much better.

“The economy is struggling mightily,” said Nick Exarhos, an economist at CIBC Capital Markets, who noted the oil shock has spilled over to other sectors, including home and retail sales.

He predicted its economy would shrink 0.5 percent in 2016 after similar contraction last year.

“There was a decided slowing pattern (for potash demand)through the year (2015) and that seems to be intensifying as we move into 2016,” said Paul Ferley, assistant chief economist at Royal Bank of Canada, who has scaled back his 2016 growth forecast to 1.0 percent.

Saskatchewan in November projected a C$262 million ($187.77 million) deficit for 2015-16.

But the November forecast was based on an average West Texas Intermediate crude oil price of $53 for 2016. It traded below $32 on Monday.

The assumption for potash prices was $286.54 per tonne in 2016. But Potash Corp’s realized price for potash fell 16 percent to $238 per tonne in the fourth quarter.

Whether or not the province wants to employ fiscal stimulus, “the starting point has to be a wider deficit,” said CIBC’s Exarhos.

Like fellow oil-producing province Alberta, Saskatchewan’s bonds have suffered.

The spread between the yields on Saskatchewan and Canada government 10-year bonds has widened to 102 basis points on Monday from less than 50 basis points a year ago, nearly its widest since the oil shock began.

It also underperformed provinces less dependent on commodities, such as Ontario and Quebec.

Commodity prices may rebound, however, and Saskatchewan is less dependent than Alberta on the energy sector.

The cheapening in the province’s triple-A rated bonds has left them at attractive levels, according to Brian Calder, senior bond trader at Franklin Bissett Investment Management.

Saskatchewan has a strong credit rating and an “excellent track record” of managing its budgets, together with a low overall debt burden, he said.

$1 = 1.3953 Canadian dollars Editing by Jeffrey Hodgson and Sandra Maler

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