2013 Ontario Economic Outlook and Fiscal Review

Chapter VII: Borrowing and Debt Management

Highlights

  • The total long-term public borrowing requirement over the 2013–16 period has been reduced by $0.5 billion compared to the 2013 Budget, primarily due to the lower deficit recorded in the 2012–2013 Public Accounts of Ontario.
  • The forecast for long-term public borrowing for 2013–14 remains at $33.4 billion, as forecast in the 2013 Budget.
  • The interest on debt (IOD) expense for 2013–14, forecast at $10,605 million, remains the same as in the 2013 Budget.
  • Net debt and accumulated deficit are forecast to be $0.7 billion and $1.1 billion respectively lower than projected in the 2013 Budget, primarily due to the lower deficit recorded in the 2012–2013 Public Accounts of Ontario.
  • Net debt is projected to be $272.1 billion as at March 31, 2014. Accumulated deficit is projected to be $178.9 billion as at March 31, 2014. The difference of $93.2 billion between net debt and accumulated deficit is due to net investments in capital assets.
  • The government will maintain a rigorous approach to control program spending to reduce Ontario’s net debt-to-GDP ratio to its pre-recession level of 27 per cent.
  • The government would make Ontario the first province in Canada to offer green bonds.

Long-Term Public Borrowing

The forecast long-term public borrowing requirement for 2013–14 remains at $33.4 billion, as forecast in the 2013 Budget. As at October 23, 2013, $21.9 billion, or 65 per cent, of this year’s long-term public borrowing requirement was completed. This figure includes Ontario Savings Bond sales of $0.4 billion.

The weighted-average term to maturity of long-term provincial debt issued so far in 2013–14 is 13.8 years, compared to 12.4 years for 2012–13 and 13.0 years for 2011–12. The term of debt may be extended or shortened depending on the future direction of interest rates and the term preference of investors. The interest on debt (IOD) expense for 2013–14, forecast at $10,605 million, remains the same as in the 2013 Budget.

Ontario has issued $17.5 billion in long-term debt in the Canadian dollar market so far this year, representing 80 per cent of total borrowing to date. The Province expects to end the year with at least 70 per cent of its borrowing in the Canadian market, as set out in the 2013 Budget.

Chart 7.1 2013–14 Borrowing

Canadian dollar borrowing has been completed through:

  • syndicated issues;
  • floating rate notes;
  • medium-term notes; and
  • Ontario Savings Bonds.

The U.S. dollar market has remained an important source of funding for Ontario this year. About $4.4 billion, or 20 per cent, of borrowing has been completed through global bonds in U.S. dollars.

TABLE 7.1 2013–14 Borrowing Plan
($ Billions)
  Budget
Plan
Current
Outlook
In-Year
Change
Deficit 11.7 11.7
Investment in Capital Assets 11.1 11.2 0.1
Non-Cash Adjustments (3.9) (3.9)
Net Loans/Investments 1.6 1.6
Debt Maturities 23.7 23.6 (0.1)
Debt Redemptions 0.3 0.3
Total Funding Requirement 44.5 44.5
Decrease/(Increase) in Short-Term Borrowing (1.5) (1.5)
Increase/(Decrease) in Cash, Cash Equivalents and Temporary Investments (5.8) (5.8)
Maturity of Debt Buybacks (3.7) (3.7)
Total Long-Term Public Borrowing Requirement 33.4 33.4
Note: Numbers may not add due to rounding.

Long-term public borrowing in 2013–14 will remain at $33.4 billion as forecast in the 2013 Budget.

Over the summer and early fall, long-term interest rates rose above those forecast in the 2013 Budget. If interest rates resume their rise during the remainder of 2013–14, there could be potential upward pressure on IOD costs depending on the term of debt issued.

The credit ratings of debt issued in the capital markets affect the cost of borrowing. The government will maintain a rigorous approach to control program spending to reduce Ontario’s net debt-to-GDP ratio to its pre-recession level of 27 per cent. This will help keep IOD at a manageable level and protect future generations from rising interest costs, which could otherwise crowd out spending on government priorities.

To finance further investment in transit, the government would make Ontario the first province in Canada to offer green bonds to finance transit projects. Green bonds, pioneered by the World Bank in 2008, are a tool to raise capital for projects with specific environmental benefits. Green bonds would be issued by Ontario for green transit initiatives, and other environmentally friendly infrastructure projects, to capitalize on the Province’s ability to raise low-cost funds.

TABLE 7.2 Medium-Term Borrowing Outlook
($ Billions)
  2013–14 2014–15 2015–16
Deficit 11.7 10.1 7.2
Investment in Capital Assets 11.2 10.4 10.4
Non-Cash Adjustments (3.9) (3.1) (3.0)
Net Loans/Investments 1.6 0.4 1.8
Debt Maturities 23.6 21.7 20.4
Debt Redemptions 0.3 0.3 0.3
Total Funding Requirement 44.5 39.8 37.1
Decrease/(Increase) in Short-Term Borrowing (1.5) (1.5)
Increase/(Decrease) in Cash and Cash Equivalents (5.8) (1.3)
Maturity of Debt Buybacks (3.7)
Total Long-Term Public Borrowing 33.4 37.0 37.1
Note: Numbers may not add due to rounding.

The total long-term public borrowing requirement over the 2013–16 period has been reduced by $0.5 billion compared to the 2013 Budget primarily due to the lower deficit recorded in the 2012–2013 Public Accounts of Ontario.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $291.9 billion as at March 31, 2014, compared to $281.1 billion as at March 31, 2013.

Ontario’s net debt is the difference between total liabilities and total financial assets. It is projected to be $272.1 billion as at March 31, 2014, $0.7 billion lower than forecast in the 2013 Budget. Net debt was $252.1 billion as at March 31, 2013.

Accumulated deficit is projected to be $178.9 billion as at March 31, 2014, compared to $179.9 billion forecast in the 2013 Budget. The projected difference of $93.2 billion between net debt and accumulated deficit is due to net investments in capital assets.

Residual Stranded Debt Update

The 2013 annual financial statements of the Ontario Electricity Financial Corporation (OEFC) showed revenue over expense of $1.0 billion, reducing the OEFC’s unfunded liability (or “stranded debt of the electricity sector”) from $12.3 billion as at March 31, 2012, to $11.3 billion as at March 31, 2013.

In accordance with Ontario Regulation 89/12, the Minister of Finance has determined the residual stranded debt to be $3.9 billion as at March 31, 2013. This is a decrease of $0.6 billion compared to residual stranded debt of $4.5 billion as at March 31, 2012, and a decrease of $8.0 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

Chart 7.2 Residual Stranded Debt since April 1, 1999

The residual stranded debt determination as at March 31, 2013, is based on a stranded debt amount of $11.3 billion, reduced by the estimated present value of future dedicated revenues to OEFC of $7.4 billion. This results in the calculated $3.9 billion of residual stranded debt as at March 31, 2013.

The Electricity Act, 1998, provides for the Debt Retirement Charge (DRC) to be paid by consumers until the residual stranded debt is retired. The estimate for when the residual stranded debt will likely be retired is between 2015 and 2018. The estimated timing for residual stranded debt retirement and the end of the DRC is provided as a range to reflect the uncertainty in forecasting future OEFC results and dedicated revenues to OEFC, which depend on the financial performance of Ontario Power Generation, Hydro One and municipal electrical utilities, as well as other factors such as interest rates and electricity consumption.

Total Debt Composition

Total debt is composed of bonds issued in the public capital markets, non-public debt, treasury bills and U.S. commercial paper.

Ontario total debt was $288.1 billion as at September 30, 2013. Public debt totals $274.8 billion, primarily consisting of bonds issued in the long-term markets in Canadian dollars and internationally in U.S. dollars and nine other currencies. The Province also has $13.3 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt primarily consists of debt instruments issued to the Canada Pension Plan. This debt is not marketable and cannot be traded.

Chart 7.3 Total Debt Composition as at September 30, 2013

Debt-to-GDP Ratios

The Province’s debt-to-GDP ratios are expected to increase due to the projected deficits and investments in capital. The ratios will stabilize and begin to decline as the deficit is eliminated.

The net debt-to-GDP ratio is expected to peak in 2015–16 at 40.5 per cent, compared to the forecast peak of 40.4 per cent in the 2013 Budget. This small increase can be attributed to lower-than-forecast nominal GDP growth.

Chart 7.4 Net Debt-to-GDP

Chart 7.5 Accumulated Deficit-to-GDP

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt was 4.0 per cent as at September 30, 2013, compared to 4.1 per cent as at March 31, 2013. This drop occurred because the debt issued in the first half of this fiscal year had lower interest rates than that of maturing debt, even though long-term interest rates have risen above those forecast in 2013 Budget. The rate of decline in the Province’s effective interest rate has slowed, however, and if long-term interest rates continue to rise, this trend will reverse and the effective interest rates on total debt will begin to rise.

Chart 7.6 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, 2013, the net interest rate resetting exposure was 8.9 per cent and foreign exchange exposure was 0.4 per cent.

Chart 7.7 Interest Rate Exposure

Chart 7.8 Foreign Exchange Exposure

Chart 7.1: 2013–14 Borrowing
As at October 23, 2013, the Province’s 2013–14 borrowing program totalled $21.9 billion, and consisted of $15.6 billion of domestic syndicated bonds, $1.4 billion of domestic floating rate notes, $0.02 billion of domestic medium-term notes, $0.4 billion of Ontario Savings Bonds and $4.4 billion of U.S. dollar global bonds.

Return to Chart 7.1

Chart 7.2: Residual Stranded Debt since April 1, 1999
As at March 31, 2013, as determined by the Minister of Finance, the residual stranded debt was $3.9 billion, a decrease of $0.6 billion compared to residual stranded debt of $4.5 billion as at March 31, 2012. This is also a total estimated decrease of $8.0 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

Return to Chart 7.2

Chart 7.3: Total Debt Composition as at September 30, 2013
As at September 30, 2013, the Province’s total debt was $288.1 billion, and consisted of $189.6 billion of domestic bonds, $13.3 billion of non-public debt, $19.7 billion of treasury bills and U.S. commercial paper, and $65.5 billion of international bonds.

Return to Chart 7.3

Chart 7.4: Net Debt-to-GDP
Net debt-to-GDP ratio is projected to be 39.3 per cent for 2013–14. The net debt-to-GDP is projected to peak at 40.5 per cent in 2015–16.

Return to Chart 7.4

Chart 7.5: Accumulated Deficit-to-GDP
The accumulated deficit-to-GDP ratio is projected to be 25.9 per cent for 2013–14. The accumulated deficit-to-GDP is projected to peak at 26.3 per cent in 2014–15.

Return to Chart 7.5

Chart 7.6: Effective Interest Rate (Weighted Average) on Total Debt
The effective interest rate (calculated as a weighted average) on total debt was 4.0 per cent as at September 30, 2013. This compares with 4.1 per cent in 2012–13 and 4.4 per cent in 2011–12. The effective interest rate has been steadily decreasing from 10.9 per cent in 1990–91.

Return to Chart 7.6

Chart 7.7: Interest Rate Exposure
The Province’s interest rate exposure, calculated as a percentage of the debt issued for Provincial purposes was 8.9 per cent on September 30, 2013. This compares to 8.9 per cent as at March 31, 2013, and 8.3 per cent as at March 31, 2012. The interest rate exposure limit is set at 35 per cent and excludes OEFC debt.

Return to Chart 7.7

Chart 7.8: Foreign Exchange Exposure
The Province’s foreign exchange exposure, calculated as a percentage of the debt issued for Provincial purposes, was 0.4 per cent as at September 30, 2013. This compares to 0.8 per cent as at March 31, 2013, and 1.0 per cent as at March 31, 2012. The foreign exchange exposure limit is set at 5 per cent and excludes OEFC debt.

Return to Chart 7.8