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Briefing highlights

  • Ontario's dubious debt distinction

Ontario net direct and indirect debt

Ontario holds a rather dubious distinction when it comes to outstanding debt: It has more of it than any sub-national government outside the U.S., Moody’s Investors Service says.

Of the 250 non-U.S. regional and local governments it rates, Ontario tops that list, at a projected $322.9-billion in net direct and indirect debt as of March 31.

Ontario would likely still come out on top even if the U.S. were included, Moody’s says.

That $322.9-billion, or about 240 per cent of revenue, has ballooned from $150.5-billion, or 137.9 per cent of revenue, in 2008. The province has the highest debt in terms of total amount, rather than as a percentage of revenue.

Ontario “has more outstanding debt than any Moody’s-rated sub-sovereign, reflecting a succession of significant debt-funded deficits since 2008,” Moody’s said in a report this week, adding it expects that level to swell further still, given spending plans for its hefty 10-year infrastructure program.

If that seems Greece-like, Moody’s said the province’s rising debts should be manageable in this era of low interest rates and an improving fiscal position.

“The current low-interest-rate environment has been beneficial to Ontario,” Moody’s senior analyst Michael Yake said in an accompanying statement.

“Despite the material increase in debt, Ontario’s interest expense has remained relatively stable and is forecast to continue to remain so.”

He cited the fact that interest payments now are 8.9 per cent of revenue, not far off from the 8.8 per cent of eight years ago.

The province’s budget plan calls for balanced books by 2017-18

“Ontario’s low financing costs also reflect the province’s conservative debt management,” Moody’s said.

“The province typically pre-borrows some of the funds that will be required the following fiscal year,” it added.

“Given the current expectation that interest rates will rise, this allows it to lock in lower rates.”

Ontario, which is rated Aa2, stable, by Moody’s, ran up its debt in the wake of the financial crisis and along with infrastructure spending.

“Higher debt levels created downward credit pressure for Ontario,” Moody’s said.

“Nonetheless, the policy decision to borrow for infrastructure spending at a time of historically low interest rates, combined with the prudent debt management practices outline above, has helped to support the province’s Aa2 rating.”

As The Globe and Mail’s Adrian Morrow reports, the governing Liberals are in a tiff with Auditor-General Bonnie Lysyk over a $10.7-billion discrepancy in the net-debt category, which relates to the fact that Ontario is counting that amount, in two pension plans, as an asset.

The AG says that should stop because the province can’t touch that money.

Put that aside, though, because there’s some encouraging information in the unaudited provincial statements that were released this week, said Warren Lovely, National Bank’s head of public sector research and strategy.

Those statements reveal a $5-billion deficit for the past fiscal year, which Mr. Lovely described as a “noteworthy” improvement of $3.5-billion from the budget forecast.

“The deficit would have been even narrower, down to just $3.5-billion, or less than half that originally planned, were it not for a disagreement with the AG over pension accounting,” he said, noting the complex nature of what’s going on because the the province has temporarily adopted Ms. Lysyk’s recommendation.

And there’s good news on the revenue front.

“A stronger prior-year revenue hand-off, and an upbeat economy, bolster the province’s 2016-17 fiscal outlook and give the government confidence that its key commitment of erasing the deficit by 2017-18 remains within reach,” Mr. Lovely said.

“The fiscal commitment should remain front and centre as we go through a fall update and ultimately digest a 2017 provincial budget.”

BoC backs measures

The Bank of Canada is endorsing the Trudeau government’s efforts to cool the country’s debt-fueled housing market, The Globe and Mail’s Barrie McKenna reports.

“Over time, the measures announced by the federal government ... will help mitigate risks to the financial system posed by household imbalances,” Senior Deputy Governor Carolyn Wilkins said in remarks prepared for a speech in Trois-Rivières, Que.

Even with the economy still struggling to gain traction, the central bank has set a high bar for cutting its key interest rate at its next scheduled rate-setting announcement Oct. 19.

“We are mindful that low interest rates can lead to a buildup in financial vulnerabilities,” Ms. Wilkins pointed out.