2016 Ontario Economic Outlook and Fiscal Review
Chapter III: Economic and Fiscal Outlook

Section C: Borrowing and Debt Management

The Province’s total long-term borrowing is forecast to be $23.8 billion for 2016–17, a reduction of $2.6 billion from the forecast in the 2016 Budget. This is the smallest amount to be borrowed since 2008–09. A combination of historically low interest rates and cost-effective debt management has allowed Ontario to keep interest on debt (IOD) costs below Budget projections. As part of its cost-effective debt management, the Province has also extended the term of its borrowing to lock in low interest rates for longer periods, reducing refinancing risks. The Province’s IOD-to-revenue forecast is currently 8.6 cents of every revenue dollar, 0.4 cents lower than the forecast in the 2016 Budget. For 2016–17, net debt and total debt are projected to be $317.9 billion and $328.6 billion, respectively. Ontario is also committed to helping develop the Canadian Green Bond market and plans to issue its third Green Bond before the end of 2016–17.

Long-Term Public Borrowing

The Province’s deficit for 2016–17 is projected to be $4.3 billion, consistent with the 2016 Budget plan. The total funding requirement for 2016–17 is now forecast to be $28.9 billion, $1.4 billion lower than the 2016 Budget forecast.

The Province’s total long-term borrowing in 2016–17 is forecast to be $23.8 billion, $8.3 billion lower than the amount borrowed in 2015–16 and $2.6 billion less than forecast for 2016–17 in the 2016 Budget.

The Province, adopting a cautious approach, has included a projected Pension Adjustment in its expense outlook as described in Chapter II, Section B: Transforming Government and Managing Costs. The projected Pension Adjustment of $2.2 billion for 2016–17 is entirely non-cash and does not directly impact the Province’s projected borrowings or its total debt.

The overall change in non-cash adjustments, with the preborrowing from 2015–16, will allow the Province to reduce short-term and long-term borrowing by a total of $3.6 billion from the 2016 Budget plan.

The Province’s debt differs from personal debt in a number of ways. One key difference is the government’s role in making multigenerational investments in infrastructure. By issuing debt at comparatively low interest rates, the Province can borrow money to make investments in capital assets today that improve the quality of life of Ontarians and spread the costs equitably over the lifetime of the assets.

TABLE 3.19 Borrowing Program and Medium-Term Outlook
($ Billions)
2016 Budget
Current Outlook
 In-Year Change
2017–18 2018–19
Deficit/(Surplus) 4.3 4.3 0.0 0.0 0.0
Investment in Capital Assets 11.2 11.7 0.6 12.4 14.2
Non-Cash Adjustments (5.8) (7.4) (1.6) (6.1) (6.3)
Loans to Infrastructure Ontario 0.3 0.1
Other Net Loans/Investments (0.9) (0.9) (0.8) (1.2)
Debt Maturities 21.5 21.2 (0.2) 17.5 22.1
Debt Redemptions 0.1 0.1 0.1
Total Funding Requirement 30.3 28.9 (1.4) 23.3 28.8
Canada Pension Plan Borrowing (0.1) (0.1)
Decrease/(Increase) in Short-Term Borrowing (1.0) 1.0
Increase/(Decrease) in Cash and Cash Equivalents (2.7) (3.0) (0.3)
Preborrowing from 2015–16 (2.0) (2.0)
Total Long-Term Public Borrowing 26.4 23.8 (2.6) 23.3 28.7
Note: Numbers may not add due to rounding.

The Province plans to borrow $75.8 billion over the three-year period in the medium-term borrowing outlook, down from the forecast $85.9 billion over the three-year period contained in the 2015 Budget. This $10.1 billion decline in borrowing reflects the impact of lower deficits.

As at October 25, 2016, $16.1 billion of this year’s long-term public borrowing has been completed.

Approximately 77 per cent of this year’s borrowing to date has been completed in Canadian dollars, primarily through syndicated issues. Given the strength of demand Ontario has experienced in the Canadian-dollar market, the Province will maintain its Canadian-dollar borrowing target of at least 75 per cent in 2016–17.

About $3.6 billion, or 23 per cent, of borrowing has been completed in foreign currencies. The U.S. dollar market has remained an important source of funding for Ontario this year, with almost all of the Province’s foreign-denominated issuance to date being completed in U.S. dollars. The remaining foreign currency borrowing has been completed in Australian dollars.

The Province regularly accesses borrowing opportunities in currencies other than Canadian dollars to diversify its investor base. This helps reduce Ontario’s overall borrowing costs and ensures that the Province will continue to have access to capital if market conditions become more challenging.

Green Bond Update

As the first Canadian province to issue Green Bonds, Ontario continues to lead the way in establishing and developing a Canadian-dollar Green Bond market with global investor participation. Since Ontario’s inaugural issue in 2014, the Province’s Green Bonds have attracted investors from the United States, Europe and Asia, bringing new international buyers and, recently, international issuers to the Canadian-dollar market.

As the market continues to grow, the Province will look to issue a third Canadian-dollar Green Bond to leverage global investor demand and help fund environmentally friendly infrastructure projects across Ontario. Depending on market conditions, Ontario plans to come to market with its third issue before the end of fiscal 2016–17.

To date, total Ontario Green Bond financing amounts to $1.25 billion, with up to $1.2 billion allocated to Metrolinx for clean transportation projects. In all, eight different projects have received funding from Ontario’s Green Bonds, with the Eglinton Crosstown Light Rail Transit (LRT) receiving funds from both the inaugural and second issues:

  • Metrolinx — Eglinton Crosstown LRT;
  • Metrolinx — York vivaNext Bus Rapid Transit;
  • Metrolinx — GO Transit Regional Express Rail;
  • Sheridan College Hazel McCallion Campus Expansion — Mississauga;
  • St. Joseph’s Healthcare Hamilton — West 5th Campus;
  • St. Joseph’s Health Care London — London and St. Thomas;
  • Waypoint Centre for Mental Health Care — Penetanguishene; and
  • Centre for Addiction and Mental Health — Queen Street Site, Phase 1B.

Interest on Debt Savings and Affordability

Interest on debt (IOD) expense is projected to be $11,375 million for 2016–17, which is $381 million lower than forecast in the 2016 Budget, reflecting lower-than-forecast interest rates, lower borrowing requirements and cost-effective debt management. Interest on debt expense is forecast to be $11,700 million in 2017–18 and $12,400 million in 2018–19 — $753 million and $707 million lower, respectively, than forecast in the 2016 Budget.

These savings continue a trend that has been in place since 2010–11, through a combination of lower-than-forecast deficits and borrowing requirements, and lower-than-forecast interest rates. Interest on debt savings over the period to balance now total $22.8 billion relative to the 2010 Budget forecast.

Chart 3.10 illustrates how the savings on IOD have lowered a key measure of the affordability of debt. The 2010 Budget forecast that, by 2016–17, the Province would have to spend 11.7 cents of every revenue dollar received on interest. The current forecast is 3.1 cents lower, at 8.6 cents of interest costs for every dollar of revenue. This ratio is lower than it was in the 1990s and 2000s and is forecast to remain lower through the outlook period to 2018–19.

Net Debt-to-GDP

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $328.6 billion for March 31, 2017 (March 31, 2016, $327.4 billion).

Ontario’s net debt is the difference between total liabilities and total financial assets. It is projected to be $317.9 billion for March 31, 2017 (March 31, 2016, $305.2 billion). The net debt projection for March 31, 2017, was forecast to be $308.3 billion in the 2016 Budget, $311.5 billion in the 2015 Budget and $317.2 billion in the 2014 Budget.

The accumulated deficit is projected to be $207.0 billion as at March 31, 2017. The projected difference of $110.9 billion between net debt and accumulated deficit is due to the Province’s consistent level of investment in infrastructure.

The Pension Adjustment for the Public Accounts of Ontario 2015–2016 resulted in the net debt-to-GDP ratio increasing to 40.0 per cent as at March 31, 2016, and is projected to be 40.3 per cent as at March 31, 2017. This ratio begins to decline from 2017–18 onwards.

The Pension Adjustment that increased net debt by $10.7 billion in 2015–16 has no impact on the Province’s total debt or current and future borrowings.

About 64 per cent of the increase in net debt from 2008–09 to 2015–16 is due to the deficit, with investments in capital assets responsible for most of the balance. Once a balanced budget is reached, the increase in net debt will be limited to the difference between cash investments in capital assets and amortization.

These investments will work to increase economic growth and will result in GDP growing more quickly than debt, thereby helping to lower the net debt-to-GDP ratio to its pre-recession level.

Cost of Debt

The interest rate that Ontario pays on its debt has been steadily declining since 1990–91, when the effective interest rate on total debt was 10.9 per cent. As at September 30, 2016, it was 3.6 per cent, unchanged from March 31, 2016, and lower than the 3.7 per cent interest rate from March 31, 2015.

The global decline in interest rates over the last 25 years cannot continue indefinitely. To protect itself from an increase in interest rates, the Province has continued to extend the term of its debt. Going back to the beginning of fiscal 2010–11, Ontario has issued $59.9 billion of bonds longer than 30 years to lock in low rates. As a result, the weighted-average term to maturity of long-term provincial debt issued has been extended significantly, from 8.6 years in 2008–09 to 14.2 years in 2015–16 and 15.1 years for 2016–17 as at October 25, 2016.

For 2016–17, the impact of a one percentage point change in interest rates on IOD is approximately $350 million for the Province.

Reducing Ontario’s Electricity Sector Stranded Debt

The 2016 annual financial statements of the Ontario Electricity Financial Corporation (OEFC) showed revenue over expense of $3.7 billion, reducing the OEFC’s unfunded liability (or “stranded debt of the electricity sector”) from $8.1 billion as at March 31, 2015, to $4.4 billion as at March 31, 2016.

This is the 12th consecutive year of stranded debt reduction, and the largest annual reduction in unfunded liability that OEFC has ever recorded. This reduction primarily reflects the upfront impact on OEFC’s 2015–16 results from the broadening of ownership of Hydro One through an initial public offering of common shares.

Chart Descriptions:

Chart 3.9: 2016–17 Borrowing

To date, $16.1 billion of this year’s long-term public borrowing has been completed and consisted of $11.1 billion of Canadian dollar bonds, $1.2 billion of Canadian dollar floating rate notes, $0.1 billion of Ontario Savings Bonds, $3.6 billion of U.S. dollar bonds and $0.1 billion of Australian dollar bonds.

Return to Chart 3.9

Chart 3.10: Interest on Debt-to-Revenue Ratio

Interest on debt-to-revenue is forecast to be 8.6 per cent for 2016–17. This ratio is lower than it was in the 1990s and is forecast to remain lower through the outlook period to 2018–19.

Return to Chart 3.10

Chart 3.11: Net Debt-to-GDP and Accumulated Deficit-to-GDP

The net debt-to-GDP ratio is forecast to peak at 40.3 per cent in 2016–17. The accumulated deficit-to-GDP is projected to be 26.2 per cent as at March 31, 2017.

Return to Chart 3.11

Chart 3.12: Effective Interest Rate (Weighted Average) on Total Debt

As at September 30, 2016, the effective interest rate (calculated as a weighted average) is forecast to be 3.6 per cent on the Province’s total debt, lower than the 3.7 per cent in 2014–15. The effective interest rate has been steadily decreasing from 10.9 per cent in 1990–91.

Return to Chart 3.12