2010 Ontario Economic Outlook and Fiscal Review

Chapter 4: Borrowing and Debt Management

HIGHLIGHTS

  • The total funding requirement for 2010–11 has declined by $2 billion since the 2010 Ontario Budget, due to the $1 billion decline in the projected deficit and the $1 billion payment to the Province from the proposed Teranet agreement.
  • Interest on debt (IOD) expense, at $9,715 million, is $246 million less than forecast in the 2010 Budget. This reduction in IOD primarily reflects the impact of lower interest rates.
  • Total debt is projected to be $236.5 billion as at March 31, 2011.
  • Net debt is projected to be $219.5 billion as at March 31, 2011.

LONG-TERM PUBLIC BORROWING

The forecast long-term public borrowing requirement for 2010–11 is $38.7 billion. As at November 4, 2010, $27.4 billion, or 71 per cent, of the long-term borrowing requirement was completed. This figure includes Ontario Savings Bond sales of $1.1 billion.

The Province maintained a flexible approach to borrowing, monitoring both domestic and international capital markets for cost-effective borrowing opportunities. The 2010 Ontario Budget announced that the Province planned to borrow at least 50 per cent in the domestic market. Since then, the Province has been responsive to strong demand in Canada, allowing it to increase the proportion borrowed domestically compared to recent years.

The Province has extended the term of its debt in response to robust demand from investors for long-term Ontario debt denominated in Canadian dollars. This term extension reduces refinancing risks and will mitigate the impact on the Province’s interest on debt costs in the future when rates begin to return to historical norms.

About $16.4 billion, or 60 per cent, of borrowing has been completed in the domestic market so far in 2010–11, compared to 49 per cent for the entire 2009–10 fiscal year. Domestic borrowing has been completed through a number of instruments, including:

  • syndicated issues
  • floating rate notes
  • Ontario Savings Bonds.
Chart 1: Pie Chart: Borrowing — Domestic Market

About $11 billion, or 40 per cent, of borrowing has been completed in the international markets so far in 2010–11, compared to 51 per cent for the entire 2009–10 fiscal year. Bonds issued in foreign currencies include:

  • four Global bonds in U.S. dollars
  • Euro Medium-Term Notes (EMTNs) in Euros, Norwegian kroner, Swiss francs, Japanese yen and Hong Kong dollars
  • a Kangaroo bond in Australian dollars.
Chart 2: Pie Chart: Borrowing — International Markets


Table 1
2010–11 Borrowing Program: Province and Ontario Electricity Financial Corporation (OEFC)
($ Billions)
  Budget Plan Current Outlook In-Year Change
Deficit 19.7 18.7 (1.0)
Investment in Capital Assets 9.8 9.8
Non-Cash Adjustments (1.7) (2.7) (1.0)
Net Loans/Investments 1.9 1.9
Debt Maturities 15.6 15.6
Debt Redemptions 0.4 0.4
Total Funding Requirement 45.6 43.6 (2.0)
Canada Pension Plan Borrowing (0.8) (0.8)
Decrease/(Increase) in Short-Term Borrowing (1.6) (0.6) 1.0
Increase/(Decrease) in Cash and Cash Equivalents (3.5) (3.5)
Total Long-Term Public Borrowing 39.7 38.7 (1.0)
  • Note: Numbers may not add due to rounding.

The total funding requirement for 2010–11 has decreased by $2 billion since the 2010 Ontario Budget, due to the $1 billion decrease in the provincial deficit and the $1 billion payment to the Province from the proposed Teranet agreement.

The Province has chosen to reduce both short-term and long-term borrowing at this point. Depending on market conditions throughout the remainder of the year, the Province has the flexibility to adjust the mix between short-term and long-term borrowing to continue to match investor demand.

Interest on debt (IOD) expense, at $9,715 million, is $246 million less than forecast in the 2010 Budget. This reduction in IOD primarily reflects the impact of lower interest rates.

Table 2
Medium-Term Borrowing Outlook: Province and OEFC
($ Billions)
2010–11 2011–12 2012–13
Deficit 18.7 17.3 15.9
Investment in Capital Assets 9.8 10.6 10.4
Non-Cash Adjustments (2.7) (3.0) (2.8)
Net Loans/Investments 1.9 1.8 1.0
Debt Maturities 15.6 14.0 17.4
Debt Redemptions 0.4 0.4 0.5
Total Funding Requirement 43.6 41.1 42.3
Canada Pension Plan Borrowing (0.8) (1.1) (0.8)
Decrease/(Increase) in Short-Term Borrowing (0.6) (1.2) (1.2)
Increase/(Decrease) in Cash and Cash Equivalents (3.5) (0.1)
Total Long-Term Public Borrowing 38.7 38.8 40.2
  • Note: Numbers may not add due to rounding.

For fiscal years 2010–11 to 2012–13, the Province’s total funding requirement has decreased by a cumulative $1.9 billion from the forecast included in the 2010 Budget.

DEBT

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $236.5 billion as at March 31, 2011, compared to $212.1 billion as at March 31, 2010.

Ontario’s net debt is the difference between total liabilities and total financial assets. Ontario’s net debt is projected to be $219.5 billion as at March 31, 2011, compared to $193.6 billion as at March 31, 2010.

TOTAL DEBT COMPOSITION

Total debt is composed of bonds issued in both the short- and long-term public capital markets and non-public debt.

Public debt totals $209 billion as at September 30, 2010, primarily consisting of bonds issued in the domestic and international long-term public markets in 11 currencies. Ontario also has $16.3 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt consists of debt instruments issued to public-sector pension funds in Ontario and the Canada Pension Plan Investment Board (CPPIB). This debt is not marketable and cannot be traded.

Chart 3: Pie Chart: Total Debt Composition as at September 30, 2010

DEBT-TO-GDP RATIOS

The Province’s debt-to-GDP ratios are expected to increase due to the projected deficits. The ratios stabilize and begin to decline during the period of the recovery plan as the deficit is eliminated.

Chart 4: Line Graph: Net Debt-to-GDP


Chart 5: Line Graph: Accumulated Deficit-to-GDP

COST OF DEBT

The effective interest rate (on a weighted-average basis) on total debt was 4.63 per cent as at September 30, 2010 (March 31, 2010, 4.58 per cent).

Chart 6: Line Graph: Effective Interest Rate (Weighted Average) on Total Debt

RISK EXPOSURE

The Province limits itself to a maximum net interest rate resetting exposure of 35 per cent of debt issued for Provincial purposes and a maximum foreign exchange exposure of five per cent of debt issued for Provincial purposes. As at September 30, 2010, the net interest rate resetting exposure was 5.1 per cent and foreign exchange exposure was 1.1 per cent.

All exposures have remained well below policy limits in 2010–11.

Chart 7: Bar Graph: Net Interest Rate Resetting Exposure


Chart 8: Bar Graph: Foreign Exchange Exposure