Investors are voting for infrastructure over austerity in Kathleen Wynne’s Ontario.
The province’s debt is outperforming the average of its peers as Premier Wynne pledges to spend C$130 billion ($108 billion) on roads, transit and hospitals over the next 10 years and Moody’s Investors Service has labeled it the world’s largest sub-sovereign debtor. The government is so confident of strong demand for the initial public offering of its Hydro One Inc. utility it plans to pay investment banks a quarter of the standard fees for the sale.
The demand signals markets are buying into Wynne’s Liberal Party vision for investing in the economy to help stoke growth. While jurisdictions from Greece to Italy are cutting spending to restore fiscal balance, the 61-year-old Wynne is taking a go-slow approach that is winning investors over.
“It’s encouraging, because we are at this moment having a very difficult discussion in Ontario about how we’re going to go about building this infrastructure,” Wynne said in an interview at Bloomberg’s New York headquarters on May 14, along with her finance minister, Charles Sousa. “This reinforces what Charles and I know to be true, which is – this is what’s needed in Ontario in order for us to be able to compete.”
Debt Rising
Wynne has pledged to gradually reduce the deficit without slashing jobs and social services while initiating one of largest infrastructure outlays in Canadian history. The government forecasts a 2015-16 deficit of C$8.5 billion, returning to balance by 2017-18. The shortfall peaked at C$19.3 billion in 2009-10 as the global economic crisis and high currency hammered its manufacturing base.
While the deficit has been dropping, the province’s total debt outstanding has been rising and now stands at about C$315 billion, according to the Ontario Financing Authority. Ontario’s C$250 billion of long-term bonds rated by Moody’s is the most of any province state or local government in the world, the New York-based company said last year. Moody’s has the province’s AA- credit rating on watch for possible downgrade.
The bond market is backing Wynne’s strategy.
Ontario debt contributed 2.97 percentage points to Canada’s total return of 8.92 percent over the past 12 months, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index and data compiled by Bloomberg. That shows investors received the most profit from Ontario bonds.
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