Ontario successfully completed its annual borrowing program in 2010–11, despite continuing challenges in global financial markets. The Province’s total funding requirement for 2010–11 has declined by $7.0 billion since the 2010 Budget.
The Province took advantage of favourable market conditions and robust demand for Ontario bonds to pre-borrow for 2011–12. Ontario completed $39.9 billion in long-term public borrowing for 2010–11, an increase of $0.2 billion from the projection in the 2010 Budget in spite of the $7.0 billion lower funding requirement. This pre-borrowing, combined with a lower deficit forecast for 2010–11, will allow the Province to increase its cash reserves by $5.6 billion and reduce the Province’s short-term borrowing by $1.6 billion compared to the 2010 Budget forecast.
Ontario was able to borrow almost 59 per cent in the domestic market in 2010–11, up from 49 per cent in 2009–10. In total, Ontario borrowed approximately $23.5 billion in the domestic market in 2010–11, $2.1 billion more than in 2009–10. This increase in domestic borrowing reflects strong global investor demand for Canadian-dollar assets, the liquidity of Ontario benchmark bonds and continuing confidence in the Province of Ontario credit.
Over the past year, as domestic investors have shown a strong preference for longer-term maturities, Ontario has been able to extend the term to maturity of its debt and take advantage of the lower interest rate environment. The weighted-average term to maturity of long-term Provincial debt issued in 2010–11 was 12.8 years, longer than the weighted-average term to maturity of 8.1 years for 2009–10. This term to maturity extension allowed the Province to lock in low interest rates for a longer period, which reduces refinancing risks and helps offset the impact of expected higher interest rates on the Province’s interest on debt (IOD) costs.
Long-term public borrowing for 2011–12 is forecast at $35.0 billion, $4.9 billion lower than in 2010–11. With a smaller borrowing program and expected ongoing strong demand in the domestic market, the Province will be relying less on foreign markets to achieve its financing requirement.
About $23.5 billion, or 59 per cent, of long-term public borrowing was completed in the domestic market through a number of instruments, including:
In 2010–11, 41 per cent ($16.4 billion) was borrowed in international capital markets in a total of eight foreign currencies. Bonds issued in foreign currencies were:
|Investment in Capital Assets||9.8||9.5||(0.2)|
|Total Funding Requirement||45.6||38.6||(7.0)|
|Canada Pension Plan Borrowing||(0.8)||(0.8)||0.0|
|Decrease/(Increase) in Short-Term Borrowing||(1.6)||0.0||(1.6)|
|Increase/(Decrease) in Cash and Cash Equivalents||(3.5)||2.1||5.6|
|Total Long-Term Public Borrowing||39.7||39.9||0.2|
The total funding requirement for 2010–11 has declined by $7.0 billion from the 2010 Budget.
Interest on debt expense, at $9,527 million, is $434 million lower than forecast in the 2010 Budget.
The $5.6 billion increase in cash and cash equivalents compared to the 2010 Budget is the result of pre-borrowing for 2011–12, as the Province took advantage of favourable market conditions in late 2010–11.
|Investment in Capital Assets||10.9||11.5||10.5|
|Total Funding Requirement||40.7||42.3||45.3|
|Canada Pension Plan Borrowing||(1.1)||(0.8)||0.0|
|Decrease/(Increase) in Short-Term Borrowing||0.0||(3.0)||(3.0)|
|Increase/(Decrease) in Cash and Cash Equivalents||(4.6)||0.0||0.0|
|Total Long-Term Public Borrowing||35.0||38.6||42.2|
The 2011–12 total funding requirement is primarily the result of the deficit, investment in capital assets and refinancing of debt maturities. To meet the funding requirement, Ontario will continue to be flexible, monitoring domestic and international markets, issuing bonds in different terms and currencies and responding to investor preferences.
The forecast for long-term public borrowing for 2011–12 is $35.0 billion, which is down by $4.9 billion from the $39.9 billion raised in 2010–11, and down by $3.8 billion from the forecast for 2011–12 borrowing in the 2010 Budget.
Diversification of borrowing sources will continue to be a primary objective in 2011–12. Depending on market conditions, the Province plans to borrow at least 60 per cent, or $21.0 billion in the domestic market. With a smaller borrowing program, the Province will be relying less on foreign markets to achieve its financing requirement. It is planning to borrow up to $14.0 billion in foreign markets, $2.4 billion less than in 2010–11.
The Province’s total long-term public borrowing has declined by a cumulative $5.4 billion over the next two fiscal years from the forecasts included in the 2010 Budget. This decline is primarily due to a decision to pre-borrow in 2010–11 and a lower deficit forecast over the next two fiscal years. The government will seek approval from the legislature for borrowing authority to meet the Province’s requirement.
Total debt, which represents all borrowing without offsetting financial assets, is projected to be $236.3 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 $217.3 billion as at March 31, 2011 (March 31, 2010, $193.6 billion). This figure includes the broader public sector’s (BPS) net debt of $13.5 billion (March 31, 2010, $14.2 billion).
Interim 2010–11 results for the Ontario Electricity Financial Corporation (OEFC) show a projected excess of revenue over expense of $1.2 billion, reducing the Corporation’s unfunded liability (or “stranded debt of the electricity sector”) from $14.8 billion as at March 31, 2010 to $13.6 billion as at March 31, 2011. Projected 2011–12 OEFC results are an excess of revenue over expense of about $1.4 billion, which would reduce the unfunded liability to $12.2 billion as at March 31, 2012.
Total debt consists of bonds issued in the public capital markets, non-public debt, treasury bills and U.S. commercial paper.
Public debt, projected to March 31, 2011, totals $220.3 billion, primarily consisting of bonds issued in the domestic and international public markets in 11 currencies. Ontario also has $16.0 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt consists of debt instruments issued mainly to public-sector pension funds in Ontario and the Canada Pension Plan Investment Board. This debt is not marketable and cannot be traded.
The Province’s net debt-to-GDP ratio is expected to peak at 40.6 per cent in 2014–15, lower than the 41.8 per cent projected in the 2010 Budget.
In 2010–11, Canada's and Ontario’s net debt-to-GDP ratios were well below those of G7 countries.
The effective interest rate (on a weighted-average basis) on total debt is estimated to be 4.52 per cent as at March 31, 2011 (March 31, 2010, 4.58 per cent). For comparison, as at March 31, 1991, the effective interest rate on total debt was 10.92 per cent.
For 2011–12, the impact of a one percentage point increase in interest rates above forecast would increase interest on debt by approximately $500 million for the Province.
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 February 28, 2011, the net interest rate resetting exposure was 6.9 per cent and foreign exchange exposure was 1.0 per cent. All exposures remained well below policy limits in 2010–11.
|Publicly Held Debt|
|U.S. Commercial Paper2||254||644||2,006||3,087||3,088||3,659|
|Infrastructure Ontario (IO)3||1,262||1,632||1,695||1,920||1,949||1,949|
|Canada Pension Plan Investment Board||10,233||10,233||10,233||10,233||10,233||10,233|
|Ontario Teachers' Pension Fund||6,411||4,466||3,001||1,765||1,205||625|
|Public Service Pension Fund||2,502||2,260||1,991||1,713||1,403||1,048|
|Ontario Public Service Employees' Union Pension Fund (OPSEU)||1,188||1,074||946||814||666||497|
|Canada Mortgage and Housing Corporation||914||863||811||755||696||635|
|Unamortized Foreign Exchange Gains/(Losses)||318||161||90||132||(69)||(57)|
|Cash and Temporary Investments5||(6,622)||(8,144)||(11,878)||(17,102)||(19,245)||(14,621)|
|Total Debt Net of Cash and Temporary Investments||150,689||154,073||165,037||195,020||217,098||243,286|
|Other Net (Assets)/Liabilities5||(8,050)||(9,697)||(8,948)||(15,598)||(13,274)||(15,986)|
|Broader Public Sector (BPS) Net Debt||11,103||12,240||13,496||14,167||13,523||14,172|
|Cash and Temporary Investments||(-14.6)||(-14.6)|
|Total Debt Net of Cash and Temporary Investments||267.7||288.4|
|Other Net (Assets)/Liabilities||(-17.1)||(-18.5)|
|Broader Public Sector (BPS) Net Debt||14.2||15.0|
|Fiscal Year Payable|
|Unamortized Foreign Exchange Gains/(Losses)||–||57||(105)||44||(65)||(69)||132|
|Debt Issued for Provincial Purposes||150,812||42,005||1,844||8,850||5,630||209,141||184,684|
|Forward foreign exchange contracts||9,775||–||–||–||–||–||–||9,775||9,379|
The table above presents the maturity schedule of the Province’s derivatives by type, interim as at March 31, 2011, based on the notional amounts of the contracts. Notional amounts represent the volume of outstanding derivative contracts and are not indicative of credit risk, market risk or actual cash flows. The Province uses derivatives to hedge and to minimize interest costs. Hedges are created primarily through swaps. Swaps allow the Province to offset existing obligations, converting them into obligations with more desirable characteristics.