April 12, 2019 — 2019 Ontario Budget
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 2019 Budget. I’d like to take this opportunity to provide you with a few highlights and also give you an update on our borrowing plans for the 2019–20 fiscal year.
Let’s start by looking at our long-term public borrowing plan
Ontario’s 2019 Budget forecast an interim deficit of $11.7 billion in 2018–19, which is a $3.3 billion improvement from the Independent Financial Commission of Inquiry’s, or the “Commission’s”, forecast of a $15.0 billion deficit. Over the medium-term and recovery plan period, the government projects steadily declining deficits of $10.3 billion in 2019–20, $6.8 billion in 2020–21, $5.6 billion in 2021–22, $3.5 billion in 2022–23, and a $0.3 billion surplus by 2023–24.
In 2018–19 we completed $39.6 billion in long-term borrowing. That is a larger amount than any of the borrowing programs over the next five years, including the 2019–20 borrowing program which is forecast to be $3.6 billion lower at $36.0 billion. As the deficit is reduced, a growing portion of borrowing will be used to refinance maturing debt, rather than financing new debt. By the end of the recovery plan in 2023–24, the borrowing program is forecast to be $36.6 billion, which is less than the Province’s debt maturities that year. With the release of the Budget, we are now in a position to resume the borrowing program, and will look to return to market as early as next week.
Of the $39.6 billion issued to complete the 2018–19 long term borrowing program, about $30.6 billion, or 77 per cent, was completed in Canadian dollars. This is well above the target for Canadian dollar borrowing to be approximately 70 per cent of total borrowing for the fiscal year, but in line with the 78 per cent of borrowing in Canadian dollars completed at the time of the 2018 Fall Economic Statement. For 2019–20 we will be revising this target to be a range, rather than a fixed point, to recognize that market conditions change rapidly and that the Province needs to continue to be flexible in its approach to borrowing in order to minimize interest on debt costs. This range will be set at 70 to 80 per cent of total borrowing in 2019–20.
The government continues to search for efficiencies in the borrowing program. Therefore, the Province has discontinued its sales of Ontario Savings Bonds due to low sales and high administrative costs. Despite the discontinuation of future sales, all outstanding bonds continue to be safe and guaranteed, and the Province will honour these bonds until the time of their redemption or maturity.
Following the continued success of the Province’s Green Bond Program including the fifth Green Bond issuance earlier this year, we plan to issue our next Green Bond in 2019–20.
The Province is also modestly increasing short term borrowing over the outlook period to keep the proportion of short-term debt to total debt outstanding in the middle of a six to eight per cent range.
The government’s fiscal recovery plan supports reducing the debt burden, through the implementation of the debt burden reduction strategy as mandated by the proposed new Fiscal Sustainability, Transparency and Accountability Act. The debt burden reduction strategy is underpinned by a commitment to reduce, by 2022–23, Ontario’s net debt-to-GDP, to less than the Commission’s forecast for 2018–19 of 40.8 per cent. The government is forecasting net debt-to-GDP to be 40.7 per cent in 2019–20, lower than the Commission’s revised baseline for 2018–19. The government has also committed that any unused contingency funds and reserve would go towards debt reduction at year-end, by default.
In addition to net debt-to-GDP, another measure of debt sustainability is the net debt-to-revenue ratio. The forecast for net debt-to-revenue in 2018–19 is 227.8 per cent, rising modestly to a level equivalent to the 2014–15 peak before resuming a downward trend through the period to balancing the Budget in 2023–24.
The interest rates that the Province must pay on new or refinanced debt every year have been rising for the past two years. The average cost of borrowing in 2018–19 was about three-quarters of a percentage point higher than the low point in interest rates in 2016–17. The Province’s interest on debt forecast is based on cautious interest rate forecasts, which assume that the average annual Ontario borrowing rates will continue to rise. To protect the Province from this projected increase in interest rates, the government has extended the term of its debt to lower the amount that must be refinanced every year. Going back to the beginning of 2010–11, Ontario has issued $80.1 billion of bonds longer than 30 years to lock in low rates, including $9.6 billion in 2018–19.
As a result, the average of Ontario’s debt portfolio has been extended, from 9.7 years in 2009–10 to 10.6 years for 2018–19. The OFA monitors interest rates daily. It continually assesses and determines, based on demand for its debt and how high interest rates rise across the yield curve, whether it remains cost-effective to continue to extend the term of its debt. The Province currently plans to continue to keep the average term of its debt in the same extended range that it has been over the past five years.
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You can find more fiscal information, as well as detailed economic information, in our Investor Relations Presentation, posted on this website. You can find the 2019 Ontario Budget on the Ministry of Finance’s website.
Thank you very much for your time.