Ontario successfully completed its annual borrowing program in 2011–12, despite continuing challenges in global financial markets. Going forward, the Province’s long-term public borrowing for 2012–13 has declined by $3.0 billion since the 2011 Budget.
Strong global investor demand for Canadian-dollar assets, the liquidity of Ontario benchmark bonds and continuing confidence in the Province have allowed Ontario to borrow 81 per cent in the Canadian-dollar market in 2011–12, up from 59 per cent in 2010–11 and well above the target of at least 60 per cent set out in the 2011 Budget.
In 2012–13, the Province plans to borrow at least 70 per cent in the Canadian-dollar market. This is in line with the historical average of issuing approximately three-quarters in that market, but represents a considerable decline in the reliance on foreign markets during the financial crisis. In 2009–10, more than 50 per cent of the Province’s issuance was in international markets.
The weighted-average term to maturity of long-term Provincial debt issued has been extended significantly over the past two years. In 2011–12, it was 13.0 years, slightly longer than 12.8 years for 2010–11, and much longer than 8.1 years for 2009–10. This continuation of the extension of the term to maturity 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.
Canadian-dollar borrowing has been completed primarily through 31 syndicated issues, but has also included floating rate notes and Ontario Savings Bonds.
In 2011–12, 19 per cent ($6.5 billion) was borrowed in international capital markets in three foreign currencies. Bonds issued in foreign currencies were:
|Investment in Capital Assets||10.9||10.5||(0.4)|
|Total Funding Requirement||40.7||38.5||(2.2)|
|Canada Pension Plan Borrowing||(1.1)||(1.1)||–|
|Decrease/(Increase) in Short-Term Borrowing||–||0.7||0.7|
|Increase/(Decrease) in Cash and Cash Equivalents||(4.6)||(6.4)||(1.8)|
|Total Long-Term Public Borrowing||35.0||34.9||(0.1)|
Note: Numbers may not add due to rounding.
In total, the final deficit for 2010–11 and interim deficit for 2011–12 have declined by $3.7 billion from the forecast in the 2011 Budget. Interim net debt for 2011–12 is now forecast at $237.6 billion, down $3.9 billion from the forecast in the 2011 Budget.
IOD expense for 2011–12, at $10,097 million, is $193 million lower than forecast in the 2011 Budget.
The debt buy-backs outlined in the 2011 Ontario Economic Outlook and Fiscal Review will be completed and will reduce long-term public borrowing and refinancing risk by $3.2 billion over the next two fiscal years.
|Investment in Capital Assets||10.5||10.5||9.3|
|Total Funding Requirement||40.5||45.4||39.4|
|Canada Pension Plan Borrowing||(0.8)||–||–|
|Decrease/(Increase) in Short-Term Borrowing||(3.0)||(3.0)||–|
|Increase/(Decrease) in Cash and Cash Equivalents||–||(0.7)||(0.7)|
|Total Long-Term Public Borrowing||35.6||39.6||38.7|
Note: Numbers may not add due to rounding.
The Province began 2011–12 with higher cash reserves than forecast in the 2011 Budget because of the lower deficit reported in the 2010–11 Public Accounts. This, combined with the lower forecast deficit in 2011–12, allowed the Province to reduce the planned borrowing program in 2012–13 and 2013–14 by a cumulative $5.6 billion, while taking advantage of historically low interest rates and continued demand for Ontario long-term debt in 2011–12.
The 2012–13 total funding requirement is primarily the result of the deficit, investment in capital assets and refinancing of debt maturities. This funding requirement and the borrowing program are lower than forecast in the 2011 Budget, but are slightly higher than in 2011–12 mainly because debt maturities that have to be refinanced rise from $13.7 billion in 2011–12 to $17.3 billion in 2012–13.
To meet the funding requirement, Ontario will continue to be flexible, monitoring Canadian-dollar and international markets, issuing bonds in different terms and currencies, and responding to investor preferences.
The government will seek approval from the legislature for borrowing authority to meet the Province’s requirement.
The Province uses derivatives to reduce risk by hedging to minimize foreign exchange and interest costs when borrowing in international markets. This hedging process will become more complex due to the Dodd-Frank bill and Basel III regulations. Initiatives that assist regulators in ensuring the future stability of capital markets are welcome. However, it must be recognized that these initiatives may increase the cost of hedging through substantially higher capital charges and transaction costs. Derivatives trading liquidity will likely decline as well, making it more challenging to hedge the Province’s large global bond issues.
The Volcker Rule, a section of the Dodd-Frank bill, is intended to reduce systemic risk, with its focus on restricting banking entities from engaging in proprietary trading. In its current draft form, the Volcker Rule provides an exemption for proprietary trading in U.S. government bonds but contains no exemption for foreign government bonds. A major concern for Ontario and all other Canadian governments is that, without this exemption being extended to Canadian government bonds, Ontario’s market could see substantially reduced liquidity. This could increase the future cost of borrowing and hedging. Ontario, the federal government, the Bank of Canada and other provinces have expressed their concerns to the relevant U.S. regulatory bodies, but the outcome is uncertain at this time.
Total debt, which represents all borrowing without offsetting financial assets, is projected to be $257.5 billion as at March 31, 2012, compared to $236.6 billion as at March 31, 2011, and a forecast of $257.9 billion in the 2011 Budget.
Ontario’s net debt is the difference between total liabilities and total financial assets. Ontario’s net debt is projected to be $237.6 billion as at March 31, 2012 (March 31, 2011, $214.5 billion). This projection for March 31, 2012 is $3.9 billion below the forecast of $241.5 billion in the 2011 Budget. It includes the broader public sector’s (BPS) net debt of $14.8 billion (March 31, 2011, $13.6 billion).
Interim 2011–12 results for the Ontario Electricity Financial Corporation (OEFC) show a projected excess of revenue over expense of about $1.2 billion, reducing the corporation’s unfunded liability from $13.4 billion as at March 31, 2011 to $12.3 billion as at March 31, 2012. Projected 2012–13 OEFC results are an excess of revenue over expense of about $0.9 billion, which would reduce the unfunded liability to $11.4 billion as at March 31, 2013.
In accordance with a regulation proposed to be made under the Electricity Act, 1998, residual stranded debt is estimated to be $5.8 billion as at March 31, 2011. This is a decrease of about $6.1 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004. Based on interim actual results for 2011–12, and projected future dedicated revenues to OEFC, the residual stranded debt is estimated to be $4.5 billion as at March 31, 2012. Residual stranded debt is estimated to further decline to $3.6 billion as at March 31, 2013.
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, 2012, totals $242.5 billion, primarily consisting of bonds issued in the domestic and international public markets in 11 currencies. Ontario also has $15.0 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 forecast to be 37.2 per cent at the end of fiscal 2011–12, below the forecast of 37.6 per cent projected in the 2011 Budget. This ratio is expected to peak at 41.6 per cent in 2014–15, higher than the 40.6 per cent projected in the 2011 Budget and the 41.3 per cent in the 2011 Ontario Economic Outlook and Fiscal Review, but lower than the 41.8 per cent projected in the 2010 Budget. While net debt is forecast to be lower in the peak year of 2014–15 than projected in the 2011 Budget, the increase in this ratio above the 2011 Budget results from a lower nominal GDP forecast.
The effective interest rate (on a weighted-average basis) on total debt is estimated to be 4.35 per cent as at March 31, 2012 (March 31, 2011, 4.54 per cent). For comparison, as at March 31, 1991, the effective interest rate on total debt was 10.92 per cent.
For 2012–13, the impact of a one percentage point change in interest rates would be a change in IOD of approximately $467 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 29, 2012, the net interest rate resetting exposure was 9.6 per cent and foreign exchange exposure was 1.0 per cent. All exposures remained well below policy limits in 2011–12.
|Publicly Held Debt|
|U.S. Commercial Paper2||644||2,006||3,087||3,242||4,336||4,336|
|Infrastructure Ontario (IO)3||1,632||1,695||1,920||1,989||1,985||1,985|
|Canada Pension Plan Investment Fund||10,233||10,233||10,233||10,233||10,233||10,233|
|Ontario Teachers' Pension Fund||4,466||3,001||1,765||1,205||625||0|
|Public Service Pension Fund||2,260||1,991||1,713||1,403||1,048||656|
|Ontario Public Service Employees' Union Pension Fund (OPSEU)||1,074||946||814||667||497||311|
|Canada Mortgage and Housing Corporation||863||811||755||696||635||570|
|Cash and Temporary Investments||(8,144)||(11,878)||(17,102)||(22,416)||(19,167)||(17,967)|
|Total Debt Net of Cash and Temporary Investments||154,073||165,037||195,020||214,213||238,307||261,196|
|Other Net (Assets)/Liabilities5||(9,697)||(8,948)||(15,598)||(13,261)||(15,542)||(15,423)|
|Broader Public Sector
(BPS) Net Debt
1 Includes debt issued by the Province and Government Organizations, including OEFC.
2 All balances are expressed in Canadian dollars. The balances above reflect the effect of related derivative contracts.
3 Infrastructure Ontario’s (IO) interim 2011–12 debt is composed of Infrastructure Renewal Bonds ($1,250 million) and short-term commercial paper ($735 million). IO’s debt is not guaranteed by the Province.
4 Other non-public debt includes Ontario Immigrant Investor Corporation and indirect debt of school boards.
5 Other Net (Assets)/Liabilities include accounts receivable, loans receivable, investments in government business enterprises, other assets, accounts payable, accrued liabilities, deferred revenue and capital contributions, pensions and other employee future benefits, and other liabilities.
6 Non-financial assets include the tangible capital assets of the Province and broader public sector.
Source: Ontario Ministry of Finance.
|Cash and Temporary Investments||(15.3)||(14.6)|
|Total Debt Net of Cash and Temporary Investments||282.3||299.6|
|Other Net (Assets)/Liabilities||(16.0)||(15.9)|
|Broader Public Sector (BPS) Net Debt||14.8||13.6|
Note: Numbers may not add due to rounding.
|Fiscal Year Payable|
|Debt Issued for Provincial Purposes||169,161||44,348||2,072||8,874||6,084||230,539||209,443|
1 Other currencies include Australian dollar, New Zealand dollar, Norwegian kroner, U.K. pound sterling, Swiss franc, Hong Kong dollar and South African rand.
2 The longest term to maturity is to June 2, 2054.
3 Total foreign currency denominated debt as at March 31, 2012, is projected to be $65.3 billion (2011, $61.6 billion). Of that, $62.7 billion or 96.2 per cent (2011, $59.4 billion or 96.4 per cent) was fully hedged to Canadian dollars.
|Forward foreign exchange contracts||9,942||–||–||–||–||–||–||9,942||9,558|
1 Includes $2.9 billion (2010, $2.5 billion) of interest rate swaps related to loans receivable held by consolidated entity.
2 An interest rate swap option contract.
The table above presents the maturity schedule of the Province’s derivatives by type, interim as at March 31, 2012, 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.