24 March 2020

Bank of Canada to help GNL make payroll #nlpoli

Bank of Canada
234 Wellington St, Ottawa
The Bank of Canada announced today that it will purchase up to 40% of money market securities with terms to maturity of 12 months or less that are  issued directly by Canadian provinces.

The Bank of Canada will make the first purchases on Wednesday, 25 March 2020.  The purchases will include treasury bills and short-term promissory notes. The Bank may adjust the percentage based on markets.

The program – called Provincial Money Market Purchase (PMMP) – will give help to all provinces.  It will be especially welcome news for the Government of Newfoundland and Labrador, which relies on short-term debt to fill in gaps in its cash flow. 

There is a relatively limited pool of capital for the provincial government anyway.  Its relatively low credit rating can make it harder for the government to borrow money at rates it can afford.  For about six months in late 2015 and early 2016, the provincial government came close to being unable to meet payroll due to a shortage of capital in the markets and uncertainty in the markets about the intentions of the provincial government after the 2015 general election.

NL finance minister Tom Osborne
(not exactly as illustrated)
In the current emergency, with all provinces looking for extra cash, the federal program will ensure that the Government of Newfoundland and Labrador can issue t-bills and other short-term financial instruments and raise at least 40% of what it needs.  The move also means that other provinces will be less likely to drain the available pool, thereby leaving something for everyone.

Budget 2019 forecast an accrual deficit of nearly $800 million for 2020 but that didn’t represent the full amount of borrowing needed by the government even before the collapse of oil prices and the onset of COVID-19.   

Combine that with a projection from the 2019 budget and the provincial government may need to borrow more than $2.0 billion in cash to cover its 2020 spending. 

The Estimates for 2019 forecast a cash borrowing requirement of more than $1.8 billion in 2019 (about 6% of GDP) with an estimated accrual deficit of more than $575 million. The Loan Act, 2019 authorized the government borrow $1.2 billion.

Earlier this month,  DBRS announced it had the province’s rating under review.  In a news release, DBRS,  said that “the deficit (on an adjusted basis) may exceed 7.0% of GDP [SRBP: that is, more than $2.1 billion] and the adjusted debt-to-GDP ratio may rise above 70% in 2020–21.”