Very Strong Economy But Exposure to The Oil Sector Could Hamper Growth according to our auditors, Standard & Poors update released today.
Saskatoon is centrally located within Saskatchewan. It is the province’s largest Census metropolitan area, and the city estimates its population to be about 254,000 as of June 2014. It exhibited what we consider to be strong growth in the past three years (4% and 2% in 2013 and 2012, respectively), although more moderate growth preceded this. The population is young: 17% are under the age of 14, and its dependent population is about 30%, based on the 2011 Census. Saskatchewan’s GDP per capita averaged US$70,494 in 2011-2013 and the province had been forecasting growth of 2.2% in 2014 and 2.3% in 2015. However, the recent plunge in oil prices and the weak Canadian dollar will likely result in some downward revisions to these projections because the oil sector, which also contributes a significant proportion of provincial revenues through direct royalties, generates almost 20% of the provinces GDP. We estimate that Saskatoon’s GDP per capita would be in line with the province’s, given its stature as Saskatchewan’s largest Census metropolitan area and the subsequent greater economic diversity than other areas of the province.
The city is the larger of Saskatchewan’s two commercial centers, and the province is the world’s largest producer of potash. In our view, Saskatoon has moderate employment diversity. Agriculture, the public sector, and in particular the resource sector (mining and potash) are all important employers for the city, with the latter fuelling its recent population growth. Saskatoon has experienced a shortage of skilled labor and has had one of the lowest unemployment rates in Canada in the past few years; forecasted to be about 4.1% in 2014 which is flat from 2013 and down from 5.6% in 2012. Its highway, air, and rail transportation link it to markets throughout North America, making it one of Canada’s hub cities. Agriculture is another important employer in the province and Saskatoon provides services and products to this sector. Other prominent private sectors of employment are trade and transport, retail, and food processing. Utilities (namely SaskTel, SaskEnergy, and SaskPower), health care, government, and education (including the University of Saskatchewan) are important public sector employers. We believe the city’s economic fundamentals are very strong, although we expect a downturn in the resource sector would affect its economy through higher unemployment, lower population growth, and lower revenue.
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We believe Saskatoon’s land development activities expose it to some development risk. The city’s land development business line invests in infrastructure ahead of development and sells land at competitive market values to developers. Saskatoon has developed and follows a plan for growth and its land development activities help ensure it grows according to its plan. Although the city builds out infrastructure in consultation with developers, there is a risk that planned growth will not materialize, likely as a result of an economic slowdown, and the recovery of its land development costs from developers could be delayed.