Long-Term Public Borrowing
The government is continuing to project a balanced budget in 2017–18, unchanged from the 2017 Budget forecast.
The Province’s total long-term borrowing in 2017–18 is forecast to be $25.8 billion, $0.6 billion less than the forecast for 2017–18 in the 2017 Budget, primarily because fiscal 2016–17’s deficit was $0.5 billion lower than was forecast at the time of the 2017 Budget.
TABLE 3.17 Borrowing Program and Medium-Term Outlook
|Investment in Capital Assets||13.1||13.1||–||15.4||17.1|
|Loans to Infrastructure Ontario||0.4||0.4||–||0.5||0.6|
|Other Net Loans/Investments||(0.8)||(0.7)||0.0||1.4||0.6|
|Total Funding Requirement||23.7||23.6||(0.1)||32.3||38.7|
|Canada Pension Plan Borrowing||–||–||–||–||(0.9)|
|Decrease/(Increase) in Short-Term Borrowing||–||–||–||–||–|
|Increase/(Decrease) in Cash and Cash Equivalents||6.0||6.0||–||–||–|
|Pre-Borrowing from 2016–17||(3.2)||(3.8)||(0.5)||–||–|
|Total Long-Term Public Borrowing||26.4||25.8||(0.6)||32.2||37.8|
Table 3.17 Footnotes:
Note: Numbers may not add due to rounding.
The Province’s assessment is that geopolitical risks are currently elevated. Therefore, the Province will target completion of its 2017–18 borrowing by the end of the third fiscal quarter and begin pre-borrowing for 2018–19. As of October 31, 2017, $24.2 billion, or 94 per cent, of this year’s long-term public borrowing was completed.
The government increased the level of its liquid, or cash, reserves as the province came through the financial crisis of 2008–09. These reserves are currently over $30 billion as compared to an average of $7.3 billion in 2007, preceding the financial crisis. The Province is targeting a level in excess of $25 billion at the end of this fiscal year. This build-up in cash reserves will allow the Province to withstand unexpected economic events including any market disruptions. It also ensures that the Province will be well prepared to meet large single-day maturities in both 2018–19 and 2019–20. Investors and rating agencies also look favourably upon liquid reserves that are consistently high as evidence that the Province will be able to meet its financial commitments, and include this as a factor in their assessment of the Province’s credit worthiness.
Approximately 63 per cent of this year’s borrowing to date has been completed in Canadian dollars, primarily through syndicated issues.
About $9 billion, or 37 per cent, of borrowing has been completed in foreign currencies. The Province has adjusted its target for Canadian dollar borrowing to approximately two-thirds of total borrowing, from 75 per cent, in response to strong demand for Ontario bonds in foreign currencies. The Province will continue to assess this target and adjust it further, if needed, to reflect market conditions. The U.S. dollar and euro markets have remained important sources of funding for Ontario this year, with almost all of the Province’s foreign-denominated issuance to date being completed in U.S. dollars and euros. The remaining foreign currency borrowing has been completed in pound sterling, Swiss francs and 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 the Province will continue to have access to capital if market conditions become more challenging.
Leading Canadian Dollar Green Bond Market
On January 27, 2017, Ontario successfully launched its third Canadian dollar Green Bond of $800 million. The Province plans to issue its fourth Green Bond later this fiscal year.
Green Bonds are an important tool to help Ontario finance transit and other environmentally friendly projects across the province. Twelve eligible projects with an emphasis on clean transportation, and energy efficiency and conservation have been selected to receive funding from the third Green Bond.
To date, the total Green Bond financing amounts to $2.05 billion, with up to $1.77 billion allocated to Metrolinx for clean transportation projects. All three Green Bond issues helped fund the Eglinton Crosstown LRT project in Toronto, one of the largest public transit expansions in the history of the province.
Interest on Debt Savings and Affordability
Chart 3.9 illustrates how the interest on debt (IOD) savings have improved the interest on debt-to-revenue ratio, a key measure of affordability of debt. The 2010 Budget forecast that, by 2017–18, the Province would have to spend 11.3 cents of every revenue dollar received on interest. The current forecast is 3.1 cents lower, at a cost of 8.2 cents in interest for every dollar of revenue. This ratio is lower than it was in the 1990s and 2000s, and is forecast to remain lower throughout the outlook period to 2019–20.
In 2017–18, the net debt-to-GDP ratio will be 37.3 per cent, or 0.2 per cent lower than was forecast in the 2017 Budget. In the 2017 Budget, the government set an interim net debt-to-GDP ratio target of 35 per cent by 2023–24 and continues to maintain a target of reducing the net debt-to-GDP ratio to its pre-recession level of 27 per cent, currently projected to be achieved by 2029–30.
Cost of Debt
The global decline in interest rates over the last 25 years cannot continue indefinitely. To protect the province from an increase in interest rates, the government has continued to extend the term of its debt. Going back to the beginning of fiscal 2010–11, Ontario has issued $68.6 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 13.9 years in 2016–17 and 12.8 years for 2017–18 as at October 31, 2017. As interest rates begin to rise, the Province will assess whether it remains cost-effective over the long term to continue to extend the term of its debt.
Reducing Ontario’s Electricity Sector Stranded Debt
The 2017 annual financial statements of the Ontario Electricity Financial Corporation (OEFC) showed revenue over expense of $1.2 billion, reducing the OEFC’s unfunded liability (or “stranded debt”) from $4.4 billion as at March 31, 2016, to $3.2 billion as at March 31, 2017, the 13th consecutive year of stranded debt reduction.
Chart 3.8: 2017–18 Borrowing
As at October 31, 2017, $24.2 billion of this year’s long-term public borrowing has been completed. This consisted of $13.5 billion of Canadian dollar syndicated bonds, $1.6 billion of Canadian Dollar Floating Rate Notes, $0.1 billion of Ontario Savings Bonds, $5.2 billion of U.S. dollar bonds, $2.3 billion of euro bonds, $0.5 billion of Swiss franc bonds, $0.9 billion of pound sterling bonds and $0.1 billion of Australian dollar bonds.
Chart 3.9: Interest on Debt-to-Revenue Ratio
Interest on debt-to-revenue ratio is forecast to be 8.2 per cent for 2017–18. This ratio is lower than it was in the 1990s and 2000s, and is forecast to remain lower through the outlook period to 2019–20.
Chart 3.10: Net Debt-to-GDP and Accumulated Deficit-to-GDP
Ontario’s net debt-to-GDP ratio is forecast at 37.3 per cent in 2017–18, 37.1 per cent in 2018–19, 37.0 per cent in 2019–20, and 36.7 per cent in 2020–21.
Chart 3.11: Effective Interest Rate (Weighted Average) on Total Debt
As of March 31, 2017, the effective interest rate (calculated as a weighted average) was 3.5 per cent on the Province’s total debt, compared to the 3.6 per cent in 2015–16. The effective interest rate has been steadily decreasing from 10.9 per cent in 1990–91. It is 3.5 per cent as at September 30, 2017.