November 15, 2017 - 2017 Economic outlook and fiscal review
Hi, I’m Gadi Mayman, CEO of the Ontario Financing Authority. Thank you for joining me for the next few minutes.
Yesterday, the Province released its 2017 Fall Economic Statement and Fiscal Review — more commonly called the Fall Statement. I’d like to talk about some of its highlights, as well as our borrowing program and Ontario’s Green Bond program.
Let’s start with the 2017 Fall Statement...
Ontario’s 2017 Fall Economic Statement is projecting a return to balance in 2017–18, and continued balance in 2018–19 and 2019–20, consistent with the plan laid-out in the 2017 Budget.
Over the past three years, Ontario’s economy has grown faster than Canada’s and that of all G7 countries. The current private-sector average outlook for Ontario real GDP growth is 2.9 per cent in 2017, up from 2.4 per cent projected at the time of the 2017 Budget.
The strengthening economy has led to revenue growth, critical to maintaining a balanced budget. At the same time, the government has managed growth in program spending, allowing Ontario to remain the province with the lowest program spending per capita, and the Province’s program expense-to-GDP ratio has returned to its pre-recession level.
Ontario’s net debt-to-GDP ratio peaked in 2014–15 at 39.3 per cent and has trended downwards since then, now projected at 37.3 per cent in 2017–18, compared to the forecast of 37.5 per cent for 2017–18 contained in the 2017 Budget. This ratio is forecast to continue to decline to 37.1 per cent in 2018–19 and 37.0 per cent in 2019–20.
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.
Interest on debt, or IOD, calculated as a percentage of the government’s revenue, remains lower today, at 8.2 per cent, than it was in the 1990s and 2000s, and is forecast to remain lower through the outlook period to 2019–20.
The global decline in interest rates over the last 25 years cannot continue indefinitely and we are aware of the risks. To limit the fiscal impact of an increase in interest rates, the Province has continued to extend the term of its debt. Since 2010–11, we have issued $68.6 billion of debt with a term of at least 30 years to lock in historically low long-term interest rates. As a result, the weighted‐average term to maturity of long‐term Provincial debt issued has been extended significantly, from 8.1 years in 2009–10 to 12.8 years so far in fiscal 2017–18. However, 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 and will continually evaluate its borrowing strategy to respond to changing market conditions.
Speaking of the Borrowing program...
So far in 2017–18, we’ve borrowed $24.2 billion, which means we’ve completed about 94 per cent of the total borrowing requirement of $25.8 billion only seven and a half months into the fiscal year. The Province’s assessment is that geopolitical risks remain elevated. Therefore, we will target completing the 2017–18 Province’s borrowing program by the end of the third fiscal quarter and begin pre-borrowing for 2018–19.
While the Fall Statement deficit projections remained consistent with the Budget 2017 plan, our total long-term borrowing forecast for 2017–18 has declined by $0.6 billion from the 2017 Budget to a total of $25.8 billion. This is primarily because fiscal 2016–17’s deficit was $0.5 billion lower than was forecast at the time of the 2017 Budget.
Since the financial crisis in 2008–09, the Province started to increase the level of its liquid, or cash, reserves. These reserves currently stand over $30 billion, compared to an average of only $7.3 billion in 2007, the year preceding the financial crisis. Currently, we are 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 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.
Interestingly, our borrowing program in 2017–18 has been quite active in international markets. Taking advantage of borrowing opportunities that arose, we’ve had sizeable transactions in USD, Euros, and issued in Pound Sterling for the first time in 6 years. The remaining foreign currency borrowing was completed in Swiss Francs and Australian dollars. This international borrowing has resulted in about $9.0 billion, or 37 per cent of our borrowing to date, issued in foreign currencies, compared to the 26 per cent in 2016–17.
The remaining $15.2 billion that we have issued, or 63 per cent, was completed in Canadian dollars, primarily through 17 domestic syndicated transactions, as well as an FRN issue, along with our annual Ontario Savings Bonds campaign. Earlier this year, I mentioned that we were modifying downwards our forecast of funding of at least 75 per cent of our long-term borrowing in the Canadian dollar market. Currently, we forecast ending the year with about two-thirds of our funding done in Canadian dollars.
Finally, I’d like to talk about Green Bonds...
Green Bonds continue to be an important part of our borrowing program, and since our inaugural Green Bond issue in 2014, we’ve seen the Canadian dollar market continue to grow, with new issuers coming to the market this year: Province of Quebec, Export Development Canada and the City of Ottawa.
As a leader in Canadian dollar Green Bonds, Ontario has continued to ensure it follows best practices. We constantly strive to improve our processes, particularly in terms of our impact reporting and project selection. The third Green Bond Newsletter will be released in December, which will provide updates on our program, including the amount of funding that has been disbursed to each project, the projected environmental benefits and impacts, and project updates. The Newsletter will also contain an assurance audit from the Auditor General of Ontario.
Ontario remains committed to the Green Bond market and expects to continue to access it on an annual basis. We plan to launch our fourth Green Bond before the end of fiscal 2017–18.
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You can find further fiscal information, as well as detailed economic information, in our Investor Relations Presentation, posted on this website. You can also find the Fall Economic Statement on the Ministry of Finance’s website.