2013 Ontario Budget
Chapter V: Borrowing and Debt Management

Highlights

  • Total long-term public borrowing for 2013–14 is forecast to be $33.4 billion, $3.2 billion lower than the amount borrowed in 2012–13.
  • Also, the total borrowing requirement for 2013–14 is $7.2 billion lower than forecast in the 2012 Budget because of lower deficits. Long-term borrowing for 2013–14 has been reduced by $5.7 billion from the forecast contained in the 2012 Budget, and short-term borrowing has been reduced by $1.5 billion.
  • Net debt is projected to be $252.8 billion as at March 31, 2013, lower than the $259.8 billion forecast in the 2012 Budget.
  • The net debt-to-GDP ratio is projected to be 37.5 per cent at the end of fiscal 2012–13, compared to the 39.4 per cent forecast in the 2012 Budget. This ratio is expected to peak at 40.4 per cent in 2015–16, lower than the 41.3 per cent forecast in the 2012 Budget.
  • After eliminating the deficit by 2017–18, overall spending increases will be restricted to one per cent below GDP growth until the Province's net debt-to-GDP ratio returns to the pre-recession level of 27 per cent.
  • Interest on debt (IOD) expense is projected to be $10,372 million for 2012–13, and $10,605 million for 2013–14, which is lower than forecast in the 2012 Budget by $247 million and $610 million respectively. These reductions primarily reflect the impact of lower-than-forecast interest rates together with lower deficits.
  • For 2013–14, the impact of a one percentage point change in interest rates would be a change in IOD of approximately $408 million for the Province.

Long-Term Public Borrowing

Ontario successfully completed its annual borrowing program in 2012–13, despite continuing challenges in global financial markets. The Province borrowed $36.6 billion in 2012–13, taking advantage of the historically low interest rate environment and strong demand for Ontario bonds.

The Province's total borrowing requirement in 2013–14 has been reduced by $7.2 billion compared to the 2012 Budget forecast because of lower deficits. This reduction will impact both long-term and short-term borrowing. Long-term public borrowing in 2013–14 is now $5.7 billion lower than the forecast contained in the 2012 Budget, and short-term borrowing is forecast to be $1.5 billion lower.

Strong global investor demand for Canadian-dollar assets, the liquidity of Ontario benchmark bonds and continuing confidence in the Province allowed Ontario to borrow 72 per cent in the Canadian-dollar market in 2012–13. This is consistent with the target of at least 70 per cent set out in the 2012 Budget, down from 81 per cent in 2011–12.

In 2013–14, 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, and continues to represent a decline in the reliance on foreign markets seen during the financial crisis. In 2009–10, at the peak of the crisis, only 49 per cent of the Province's issuance was in the Canadian-dollar market.

The weighted-average term to maturity of long-term Provincial debt issued has been extended significantly over the past three years. It was 12.4 years for 2012–13, 13.0 years for 2011–12, and 12.8 years for 2010–11. This average term is much longer than the 8.1 years for 2009–10. Extending 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 IOD costs.

Chart 5.1: 2012–13 Borrowing. Click for an accessible full description.

Canadian-dollar borrowing was completed primarily through 29 syndicated issues, but also included floating rate notes, Ontario Savings Bonds and medium-term notes.

The U.S. dollar market remained an important source of funding for Ontario. About $10.2 billion, or 28 per cent, of borrowing was completed through global bonds and medium-term floating rate notes (MTNs) in U.S. dollars.

TABLE 5.1 2012–13 Borrowing Program: Province and Ontario Electricity Financial Corporation
($ Billions)
  2012 Budget1 Interim In-Year Change
Deficit 14.8 9.8 (5.0)
Investment in Capital Assets 10.5 9.6 (0.9)
Non-Cash Adjustments (3.8) (1.8) 2.1
Net Loans/Investments 1.1 0.9 (0.2)
Debt Maturities 17.3 17.3
Debt Redemptions 0.3 0.2 (0.1)
Total Funding Requirement 40.2 36.0 (4.2)
Canada Pension Plan Borrowing (0.8) (0.8)
Decrease/(Increase) in Short-Term Borrowing (3.0) (3.0)
Increase/(Decrease) in Cash, Cash Equivalents and Temporary Investments (0.3) 3.8 4.1
Maturity of 2011–12 Debt Buyback (1.2) (1.2)
2012–13 Debt Buyback 1.7 1.7
Total Long-Term Public Borrowing 34.9 36.6 1.6
1 Reflects the 2012 Budget Plan as outlined in the April 25, 2012 fiscal update.
Note: Numbers may not add due to rounding.

The Province's deficit for 2012–13 is now projected to be $9.8 billion — a $5.0 billion improvement compared with the 2012 Budget forecast.

Interest on debt (IOD) expense is projected to be $10,372 million for 2012–13, and $10,605 million for 2013–14, which is lower than forecast in the 2012 Budget by $247 million and $610 million respectively. These reductions primarily reflect the impact of lower-than-forecast interest rates together with lower deficits.

TABLE 5.2 Medium-Term Borrowing Outlook: Province and Ontario Electricity Financial Corporation
($ Billions)
  2013–14 2014–15 2015–16
Deficit 11.7 10.1 7.2
Investment in Capital Assets 11.1 10.4 10.4
Non-Cash Adjustments (3.9) (3.1) (3.0)
Net Loans/Investments 1.6 0.4 1.8
Debt Maturities 23.7 21.7 20.3
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, Cash Equivalents and Temporary Investments (5.8) (0.7)
Maturity of Debt Buybacks (3.7)
Total Long-Term Public Borrowing 33.4 37.6 37.1
Note: Numbers may not add due to rounding.

The Province's total long-term public borrowing in 2013–14 is forecast to be $33.4 billion, $3.2 billion lower than the amount borrowed in 2012–13.

The Province has completed $1.6 billion of its 2013–14 long-term public borrowing requirement, by issuing two 30-year syndicated bonds in the domestic market in early April.

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 foreign exchange and interest costs when borrowing in international markets. This hedging process will become more complex due to the Dodd-Frank Act and Basel III regulations. Hedging may also become more expensive if proposals such as financial transaction taxes or mark-to-market derivatives taxes are legislated and implemented in Europe or the United States.

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 transaction costs and capital charges on the Province's counterparties. Derivatives trading liquidity would likely decline as well, making it more challenging to hedge the Province's large global bond issues.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $281.1 billion as at March 31, 2013, compared to $257.3 billion as at March 31, 2012, and a forecast of $278.5 billion in the 2012 Budget. The increase from the 2012 Budget forecast is mainly due to additional borrowing to pre-fund a portion of the 2013–14 borrowing requirement. When calculating total debt, the liability of this pre-funding is included, but, unlike in the calculation of net debt, the offsetting financial asset is not included.

Ontario's net debt is the difference between total liabilities and total financial assets. Ontario's net debt is projected to be $252.8 billion as at March 31, 2013 (March 31, 2012, $235.6 billion). This projection for March 31, 2013 is $7.0 billion below the forecast of $259.8 billion in the 2012 Budget, and includes the broader public sector's net debt of $13.0 billion (March 31, 2012, $14.3 billion).

After eliminating the deficit by 2017–18, overall spending increases will be restricted to one per cent below GDP growth until the Province's net debt-to-GDP ratio returns to the pre-recession level of 27 per cent.

Residual Stranded Debt Update

Interim 2012–13 results for the Ontario Electricity Financial Corporation (OEFC) show a projected excess of revenue over expense of about $1.0 billion, reducing the Corporation's unfunded liability from $12.3 billion as at March 31, 2012 to $11.3 billion as at March 31, 2013. Projected 2013–14 OEFC results are an excess of revenue over expense of about $0.9 billion, which would reduce the unfunded liability to $10.4 billion as at March 31, 2014.

As published in the 2012 Ontario Economic Outlook and Fiscal Review, the Minister of Finance determined the residual stranded debt to be $4.5 billion as at March 31, 2012, consistent with the estimate provided in the 2012 Budget. Under Ontario Regulation 89/12, the determination of residual stranded debt as at March 31, 2013, will be made by the Minister of Finance after the OEFC submits to the Minister its annual report, including the audited financial statements, and by no later than March 31, 2014. Residual stranded debt estimates are subject to uncertainty in forecasting future dedicated revenues to OEFC, which depend on the financial performance of Ontario Power Generation Inc., Hydro One Inc. and municipal electrical utilities, as well as other factors such as electricity consumption and interest rates.

Chart 5.2: Residual Stranded Debt Since April 1, 1999. Click for an accessible full description.

Total Debt Composition

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

Public debt, as at March 31, 2013, totals $267.5 billion, primarily consisting of bonds issued in the domestic and international public markets in 11 currencies. Ontario also has $13.6 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.

Chart 5.3: Total Debt Composition. Click for an accessible full description.

Debt-to-GDP Ratios

The Province's net debt-to-GDP ratio is projected to be 37.5 per cent at the end of fiscal 2012–13, compared to the 39.4 per cent forecast in the 2012 Budget. This ratio is expected to peak at 40.4 per cent in 2015–16, lower than the 41.3 per cent forecast in the 2012 Budget.

Chart 5.4: Net Debt-to-GDP. Click for an accessible full description.
Chart 5.5: Accumulated Deficit-to-GDP. Click for an accessible full description.

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt is estimated to be 4.1 per cent as at March 31, 2013 (March 31, 2012, 4.4 per cent). For comparison, as at March 31, 1991, the effective interest rate on total debt was 10.9 per cent.

For 2013–14, the impact of a one percentage point change in interest rates would be a change in IOD of approximately $408 million for the Province.

Chart 5.6: Effective Interest Rate (Weighted Average) on Total Debt. Click for an accessible full description.

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 March 31, 2013, the interim values for net interest rate resetting exposure and foreign exchange exposure were 8.9 per cent and 0.8 per cent respectively. All exposures remained well below policy limits in 2012–13.

Chart 5.7: Net Interest Rate Resetting Exposure. Click for an accessible full description.
Chart 5.8: Foreign Exchange Exposure. Click for an accessible full description.

Consolidated Financial Tables

TABLE 5.3 Net Debt and Accumulated Deficit
($ Millions)
  2008–09 2009–10 2010–11 2011–12 Interim 2012–13 Plan
2013–14
Debt1            
Publicly Held Debt            
Bonds2 145,488 175,899 200,074 223,467 245,544 254,949
Treasury Bills 9,044 13,914 14,925 11,925 13,024 14,564
U.S. Commercial Paper2 2,006 3,087 3,242 4,701 6,611 6,611
Infrastructure Ontario (IO)3 1,695 1,920 1,989 1,854 1,909 1,609
Other 68 296 353 347 360 332
  158,301 195,116 220,583 242,294 267,448 278,065
Non-Public Debt            
Canada Pension Plan Investment Fund 10,233 10,233 10,233 10,233 10,233 10,233
Ontario Teachers' Pension Fund 3,001 1,765 1,205 625
Public Service Pension Fund 1,991 1,713 1,403 1,048 656 226
Ontario Public Service Employees' Union Pension Fund (OPSEU) 946 814 667 498 312 108
Canada Mortgage and Housing Corporation 811 755 696 635 570 502
Other4 1,632 1,726 1,842 1,945 1,857 1,719
  18,614 17,006 16,046 14,984 13,628 12,788
Total Debt 176,915 212,122 236,629 257,278 281,076 290,853
Cash and Temporary Investments (11,878) (17,102) (22,416) (21,180) (25,166) (19,284)
Total Debt Net of Cash and Temporary Investments 165,037 195,020 214,213 236,098 255,910 271,569
Other Net (Assets)/Liabilities5 (8,948) (15,598) (13,261) (14,862) (16,143) (11,584)
Broader Public Sector
(BPS) Net Debt
13,496 14,167 13,559 14,346 13,023 12,825
Net Debt 169,585 193,589 214,511 235,582 252,790 272,810
Non-Financial Assets6 (56,347) (62,632) (69,938) (77,172) (84,598) (92,875)
Accumulated Deficit 113,238 130,957 144,573 158,410 168,192 179,935
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 2012–13 debt is composed of Infrastructure Renewal Bonds of $1,250million (2011–12, $1,250 million)and short-term commercial paper of $659million (2011–12, $604 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 businessenterprises, 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.


TABLE 5.4 Medium-Term Outlook: Net Debt and Accumulated Deficit
($ Billions)
  2014–15 2015–16
Total Debt 308.1 323.8
Cash and Temporary Investments (18.6) (18.6)
Total Debt Net of Cash and Temporary Investments 289.5 305.2
Other Net (Assets)/Liabilities (11.9) (13.1)
Broader Public Sector (BPS) Net Debt 12.5 11.7
Net Debt 290.1 303.9
Non-Financial Assets (100.0) (106.6)
Accumulated Deficit 190.1 197.3
Note: Numbers may not add due to rounding.


TABLE 5.5 Debt Maturity Schedule
($ Millions)
Currency
  Canadian
Dollar
U.S.
Dollar
Japanese
Yen
Euro Other Currencies1 Interim
2012–13
Total
2011–12
Total
Fiscal Year Payable 
Year 1 28,666 12,593 163 2,345 1,621 45,388 33,705
Year 2 11,797 9,022 54 752 21,625 24,993
Year 3 8,446 9,811 1,033 1,798 21,088 21,671
Year 4 11,213 7,107 496 18,816 16,723
Year 5 11,096 4,729 385 16,210 18,857
1–5 years 71,218 43,262 1,250 2,730 4,667 123,127 115,949
6–10 years 47,478 7,527 474 6,278 2,048 63,805 52,904
11–15 years 18,794 18,794 16,963
16–20 years 14,229 14,229 14,200
21–25 years 21,920 21,920 17,091
26–50 years2 39,201 39,201 40,171
Total3 212,840 50,789 1,724 9,008 6,715 281,076 257,278
Debt Issued for Provincial Purposes 188,731 48,835 1,724 8,829 5,621 253,740 230,314
OEFC Debt 24,109 1,954 179 1,094 27,336 26,964
Total 212,840 50,789 1,724 9,008 6,715 281,076 257,278
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, 2062.
3 Total foreign currency denominated debt for interim 2012–13 is $68.2 billion (2011–12, $65.3 billion). Of that, $66.3 billion or 97.1 per cent (2011–12, $63.0 billion or 96.4 per cent) was fully hedged to Canadian dollars.


TABLE 5.6 Derivative Portfolio Notional Value
($ Millions)
Maturity in
Fiscal Year
2013–14 2014–15 2015–16 2016–17 2017–18 6–10
Years
Over
10 Years
Interim 2012–13
Total
2011–12 Total
Swaps:                  
Interest rate1 15,398 23,687 19,272 17,812 10,730 22,752 7,385 117,036 112,799
Cross currency 11,702 9,650 8,649 8,349 3,676 19,848 61,874 65,780
Forward foreign exchange contracts 19,303 19,303 11,877
Swaptions2 100 150 500 750 750
Total 46,503 33,487 27,921 26,661 14,406 42,600 7,385 198,963 191,206
1 Includes $3.7 billion (2012, $3.2 billion) of interest rate swaps related to loans receivable held by consolidated entity.
2 An interest rate swap option contract.
Source: Ontario Financing Authority.

The table above presents the maturity schedule of the Province's derivatives by type, interim as at March 31, 2013, 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.

Chart Descriptions

Chart 5.1: 2012–13 Borrowing

As at March 31, 2013, the Province’s 2012–13 borrowing program totalled $36.6 billion, and consisted of $23.1 billion of syndicated bonds, $2.1 billion of domestic floating rate notes, $0.4 billion of domestic medium-term notes, $0.8 billion of Ontario Savings Bonds, $9.6 billion of U.S. dollar global bonds, and $0.6 billion of U.S. dollar medium-term notes.

Return to Chart 5.1

Chart 5.2: Residual Stranded Debt Since April 1, 1999

As at March 31, 2012, as determined by the Minister of Finance, the residual stranded debt was $4.5 billion, a decrease of about $1.3 billion compared to residual stranded debt of $5.8 billion as at March 31, 2011. This is also a total estimated decrease of about $7.4 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

Return to Chart 5.2

Chart 5.3: Total Debt Composition

As at March 31, 2013, the Province’s total debt was $281.1 billion, and consisted of $181.9 billion of domestic bonds, $13.6 billion of non-public debt, $19.6 billion of treasury bills and U.S. commercial paper, and $66.0 billion of international bonds.

Return to Chart 5.3

Chart 5.4: Net Debt-to-GDP

Net debt-to-GDP ratio is projected to be 37.5 per cent as at March 31, 2013, down from a forecast of 39.4 per cent in the 2012 Budget. The net debt-to-GDP is projected to peak at 40.4 per cent in 2015–16, down from 41.3 per cent in the 2012 Budget.

Return to Chart 5.4

Chart 5.5: Accumulated Deficit-to-GDP

The accumulated deficit-to-GDP ratio is projected to be 25.0 per cent as at March 31, 2013, down from a forecast of 26.4 per cent in the 2012 Budget. The accumulated deficit-to-GDP peaks at 26.3 per cent in 2014–15, down from 27.6 per cent in the 2012 Budget.

Return to Chart 5.5

Chart 5.6: Effective Interest Rate (Weighted Average) on Total Debt

As at March 31, 2013, interim figures show an effective interest rate (calculated as a weighted average) of 4.1 per cent on the Province’s total debt. This compares with 4.4 per cent in 2011–12 and 4.5 per cent in 2010–11. The effective interest rate has been steadily decreasing from 10.9 per cent in 1990–91.

Return to Chart 5.6

Chart 5.7: Net Interest Rate Resetting Exposure

The Province’s interim net interest rate resetting exposure, calculated as a percentage of the debt issued for Provincial purposes was 8.9 per cent on March 31, 2013. This compares to 8.3 per cent as at March 31, 2012, and 8.3 per cent as at March 31, 2011. The interest rate exposure limit is set at 35 per cent.

Return to Chart 5.7

Chart 5.8: Foreign Exchange Exposure

The Province’s interim foreign exchange exposure, calculated as a percentage of the debt issued for Provincial purposes, was 0.8 per cent as at March 31, 2013. This compares to 1.0 per cent as at March 31, 2012, and 1.0 per cent as at March 31, 2011. The foreign exchange exposure limit is set at 5 per cent.

Return to Chart 5.8