May 1, 2017 - 2017 Ontario Budget
Hi, I’m Gadi Mayman, CEO of the Ontario Financing Authority. Thank you for joining me for the next few minutes.
Today I would like to discuss the release of the Province’s 2017 Budget and provide you with an update on last year’s borrowing program and our borrowing plans for the 2017–18 fiscal year.
Let’s start with the Budget.
Ontario’s economy continues to grow strongly despite an uncertain global environment. It is supported by economic growth in the United States, low oil prices and a competitive Canadian dollar.
The Province was one of the fastest growing provincial economies in Canada over the last three years, in 2016 Ontario’s real GDP grew at 2.6% - the second fastest growth in the country. Private sector economists expect that trend to continue until at least 2018, with the current private-sector forecast average for Ontario’s real GDP growth at 2.4% in 2017, and 2.2% in 2018.
The 2017 Budget is projecting a return to balance in 2017–18, and continued balance in 2018–19 and 2019–20, following an interim deficit forecast of $1.5 billion in 2016–17, an improvement of $2.8 billion compared to the 2016-17 deficit target laid out in the 2016 Budget.
Net debt, as of March 31, 2017, is forecast to be $301.9 billion, $6.4 billion lower than projected in last year’s Budget. Ontario’s net debt-to-GDP ratio peaked in 2014–15 at 39.1 per cent and has trended downwards since then, now forecast at 37.8 per cent in 2016-17, well below the forecast of 39.6 per cent for 2016-17 contained in the 2016 Budget. This ratio is forecast to continue to decline to 37.5 per cent in 2017–18, 37.3 per cent in 2018–19 and 37.2 per cent in 2019–20. The government is setting 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.
Net debt-to-GDP is the most important financial ratio that we follow. It is the best indicator of the capacity of the Province’s economy to carry the debt we have incurred to finance operating deficits and capital expenditures. If we were to examine the Province’s net debt for the past nine years, about 61 per cent of the increase in net debt was due to the deficit, with net investments in capital assets responsible for the balance. The balanced budget from 2017–18 onwards will ensure that the increase in net debt is 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.
The Province’s interest on debt expense, or IOD, is forecast to have been $11,250 million in 2016–17— an improvement of $506 million compared to last year’s Budget. IOD is forecast to be $11,581 million this fiscal year, $872 million less than was forecast for this year in the 2016 Budget. Calculated as a percentage of the government’s revenue, IOD remains lower today at 8.2 per cent, than it was for the past 25 years, and is forecast to remain lower through the outlook period to 2019–20. We are aware of the risk of rising interest rates, so, since 2010–11, we have issued $63 billion of debt with a term of at least 30 years to lock in historically low long-term interest rates. The average term of Ontario debt issued in 2016–17 was 13.9 years, compared to only 8.1 years in 2009–10. Subject to market conditions, we will continue to focus on maximizing the term of our debt issuance.
You can find further fiscal and economic information in the 2017 Budget on the Ministry of Finance’s website. You can also find updated borrowing information on our Investor Relations Presentation, posted on this website.
Now let’s turn to the borrowing program.
We issued $27.0 billion in long-term debt last fiscal year. This was up from the $26.4 billion forecast in the 2016 Budget, in spite of the lower deficit, as the Province capitalized on the continuing low interest rate environment and strong demand for Ontario bonds to prefund $3.2 billion of its 2017–18 requirement.
Approximately $19.9 billion, or 74 per cent of last year’s borrowing was completed in Canadian dollars, primarily through 22 syndicated issues and a Green Bond issue. While this percentage was lower than the 81 per cent of 2015–16’s borrowing completed in Canadian dollars, it remains roughly in line with the target of at least 75 per cent.
The remaining $7.1 billion, or 26 per cent, was issued in foreign currencies. The U.S. dollar market has remained an important source of funding for Ontario, with $6.8 billion issued in U.S. dollars last fiscal year. The remaining foreign currency borrowing included 10-year bonds issued in Australian Dollars for $300 million, equivalent to $296 million Canadian Dollars.
I’d now like to move on to our borrowing plans for the 2017–18 fiscal year.
In 2017-18, we are planning to issue $26.4 billion in long-term public borrowing, the smallest borrowing program the Province has had since 2008-09. This is $0.6 billion less than the amount borrowed in 2016–17, and reflects both the $3.2 billion of prefunding achieved last fiscal year, which reduces the borrowing required, offset by a $6.0 billion increase in liquid, or cash, reserves to address larger benchmark debt maturities commencing in 2019–20.
So why have we determined that we need higher cash reserves? Coming out of the financial crisis, the Province, in response to investor feedback, began a strategy of creating large, liquid 10- and 30-year benchmark domestic bond issues in 2009–10. This strategy has been very successful and continues to lower Ontario’s borrowing costs and enhance the Province’s access to capital. However, as a result of these large bond issues, the Province will have large cash outflows on single days commencing in 2019–20, rather than having maturities spread more evenly through the year. In anticipation of the need for cash reserves to meet these requirements for large outflows on a single day, the Province began building cash reserves in 2016–17, and will continue to increase these reserves in 2017–18.
As for the split between domestic and international borrowing, in 2017–18 we will continue to maintain the 75 per cent Canadian-dollar borrowing target while remaining vigilant for cost-effective borrowing opportunities in other currencies to continue to diversify the Province’s investor base.
Six years ago, we introduced a large order syndication procedure, or as they are more commonly called, carve-outs, to maintain issue size flexibility to accommodate large individual orders while striving to treat all investors fairly. The Province has completed 49 carve out deals to-date totalling approximately $26.8 billion, including 5 last fiscal year, and will continue to facilitate large reverse inquiry orders.
Ontario bonds are highly liquid, second only to Government of Canada bonds. We believe that current Ontario spreads continue to represent value for investors, particularly as the Province is forecasting balanced Budgets for this fiscal year and the next two. The OFA will maintain a responsive and flexible approach in dealing with markets and investors.
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Thank you very much for your time.