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| 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.
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| 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.”
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