2012 Ontario Economic Outlook and Fiscal Review

Chapter IV: Borrowing and Debt Management

Highlights

  • The total long-term public borrowing requirement over the forecast period has been reduced by $2.1 billion compared to the 2012 Budget, primarily because of the lower deficit recorded in the 2011–2012 Public Accounts of Ontario and the lower-than-forecasted deficit for 201213.
  • The forecast for long-term public borrowing for 2012–13 is $34.5 billion, down by $0.4 billion from the forecast in the 2012 Budget.
  • The interest on debt (IOD) expense for 2012–13, forecast at $10,601 million, is $18.0 million lower than in the 2012 Budget.
  • Total debt is projected to be $278.0 billion as at March 31, 2013.
  • Net debt is projected to be $257.6 billion as at March 31, 2013. Accumulated deficit is projected to be $172.8 billion as at March 31, 2013. The difference of $84.8 billion between net debt and accumulated deficit is due to net investments in 
    capital assets.

Long-Term Public Borrowing

The forecast long-term public borrowing requirement for 2012–13 is $34.5 billion, down by $0.4 billion from the forecast in the 2012 Budget. As at September 30, 2012, $17.9 billion, or 52 per cent, of the long-term public borrowing requirement was completed. This figure includes Ontario Savings Bond sales of $0.8 billion.

The weighted-average term to maturity of long-term provincial debt issued so far in 2012–13 is 12.5 years, compared to 13.0 years for 2011–12 and 12.8 years for 2010–11. The IOD expense for 2012–13, forecast at $10,601 million, is $18.0 million lower than in the 2012 Budget.

So far this year, Ontario has issued $11.7 billion, or 65 per cent, in the Canadian dollar market. The Province expects to end the year with at least 70 per cent of its borrowing in this market, as set out in the 2012 Budget.

2012–13 Borrowing

Canadian dollar borrowing has been completed through:

  • syndicated issues
  • Ontario Savings Bonds.

International markets have remained an important source of funding for Ontario this year. About $6.2 billion, or 35 per cent, of borrowing has been completed through global bonds and medium-term floating rate notes (MTNs) in U.S. dollars.

TABLE 4.1 2012–13 Borrowing Plan
($ Billions)
  Budget
Plan1
Current
Outlook
In-Year
Change
Deficit 14.8 14.4 (0.4)
Investment in Capital Assets 10.5 10.5
Non-Cash Adjustments (3.8) (3.8)
Net Loans/Investments 1.1 1.3 0.2
Debt Maturities 17.3 17.3
Debt Redemptions 0.3 0.3
Total Funding Requirement 40.2 39.9 (0.3)
Canada Pension Plan Borrowing (0.8) (0.8)
Decrease/(Increase) in Short-Term Borrowing (3.0) (3.0)
Increase/(Decrease) in Cash and Cash Equivalents (0.3) (2.2) (1.9)
Maturity of 2011–12 Debt Buyback (1.2) (1.2)
Provision for 2012–13 Debt Buyback 1.7 1.7
Total Long-Term Public Borrowing Requirement 34.9 34.5 (0.4)
1 Reflects the 2012 Budget Plan as outlined in the April 25, 2012 fiscal update.
Note: Numbers may not add due to rounding.

Long-term public borrowing in 201213 will be lower by the $0.4 billion reduction in the 201213 deficit forecast.

The lower deficit in 201112 resulted in the Province beginning 201213 with higher cash reserves than forecast at the time of the 2012 Budget. These higher cash reserves will be used in 201213 to reduce the 201314 borrowing program by buying back debt maturing in that year.

The debt buyback will allow the Province to smooth the borrowing program over the next two years, while taking advantage of historically low interest rates and robust demand for Ontario long-term debt.

TABLE 4.2 Medium-Term Borrowing Outlook
($ Billions)
  2012–13 2013–14 2014–15
Deficit 14.4 12.8 10.1
Investment in Capital Assets 10.5 10.5 9.3
Non-Cash Adjustments (3.8) (4.0) (3.6)
Net Loans/Investments 1.3 1.6 1.0
Debt Maturities 17.3 23.7 21.7
Debt Redemptions 0.3 0.3 0.3
Total Funding Requirement 39.9 44.8 38.8
Canada Pension Plan Borrowing (0.8)
Decrease/(Increase) in Short-Term Borrowing (3.0) (3.0)
Increase/(Decrease) in Cash and Cash Equivalents (2.2) (0.7) (0.7)
Maturity of 2011–12 Debt Buyback (1.2) (2.0)
Provision for 2012–13 Debt Buyback 1.7 (1.7)
Total Long-Term Public Borrowing 34.5 37.4 38.1
 Note: Numbers may not add due to rounding.

The total long-term public borrowing requirement over the forecast period has been reduced by $2.1 billion compared to the 2012 Budget, primarily because of the lower deficit recorded in the 2011–2012 Public Accounts of Ontario and the lower-than-forecasted deficit for 201213.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $278.0 billion as at March 31, 2013, compared to $257.3 billion as at March 31, 2012.

Ontario’s net debt is the difference between total liabilities and total financial assets. It is projected to be $257.6 billion as at March 31, 2013, compared to $259.8 billion forecast in the 2012 Budget. Net debt was $235.6 billion as at March 31, 2012.

Accumulated deficit is projected to be $172.8 billion as at March 31, 2013. The projected difference of $84.8 billion between net debt and accumulated deficit is due to net investments in capital assets.

Residual Stranded Debt Update

The 2012 annual financial statements of the Ontario Electricity Financial Corporation (OEFC) showed revenue over expense of $1.1 billion, reducing the OEFC’s unfunded liability (or “stranded debt of the electricity sector”) from $13.4 billion as at March 31, 2011, to $12.3 billion as at March 31, 2012.

In accordance with Ontario Regulation 89/12, the Minister of Finance has determined the residual stranded debt to be $4.5 billion as at March 31, 2012. This is a decrease of about $1.3 billion compared to residual stranded debt of $5.8 billion as at March 31, 2011, and a decrease of about $7.4 billion from an estimated peak of residual stranded debt of $11.9 billion as at March 31, 2004.

Residual Stranded Debt Since April 1, 1999

The residual stranded debt determination as at March 31, 2012, is based on a stranded debt amount of $12.3 billion, reduced by the estimated present value of future dedicated revenues to OEFC of $7.8 billion. This results in the calculated $4.5 billion of residual stranded debt as at March 31, 2012.

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 electric 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 is $272.2 billion as at September 30, 2012. Public debt totals $258.2 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 $14.0 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt mainly consists of debt instruments issued to public-sector pension funds in Ontario and the Canada Pension Plan Investment Board. This debt is not marketable and cannot be traded.

Total Debt Composition as at September 30, 2012

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 2014–15 at 41.2 per cent, which is below the 41.3 per cent forecast in the 2012 Budget.

Net Debt-to-GDP
Accumulated Deficit-to-GDP

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt was 4.19 per cent, as at September 30, 2012 (March 31, 2012, 4.35 per cent).

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, 2012, the net interest rate resetting exposure was 7.1 per cent and foreign exchange exposure was 1.0 per cent.

Interest Rate Exposure
Foreign Exchange Exposure