The Debt Management Strategy sets out the Government of Canada’s objectives, strategy and plans for the management of its domestic debt and foreign currency liabilities. Borrowing activities support the ongoing refinancing of government debt coming to maturity, the execution of the budget plan, and other financial operations of the Government, including borrowing on behalf of some Crown corporations.
The Financial Administration Act requires that the Government table the Debt Management Strategy in Parliament prior to the start of the fiscal year. Further information on the management of the Government’s debt and liquid financial assets, including a description of the governance framework and details on program activities and outcomes, can be found in two annual reports that are tabled in Parliament following the tabling of the Public Accounts of Canada: the Debt Management Report and the Report on the Management of Canada’s Official International Reserves, both of which can be found on the Department of Finance website.
To address the current economic challenges, substantial new borrowing has been undertaken to finance the Government’s plan for economic stimulus and access to credit. Fortunately, due to prudent financial management and debt reduction, Canada is in a good position to weather the current economic downturn and meet these funding challenges.
Since 2005–2006, the Government has reduced the federal debt by $37 billion. The proportion of government revenue spent on debt service charges has also been falling steadily and is expected to be 13 per cent in 2008–09, the lowest level since the 1970s.
As well as lowering interest charges—which frees up resources for more productive uses—the reduction in public debt has given the Government flexibility to deal with the current economic slowdown and difficult credit market situation, while maintaining a significant capacity to increase borrowing in order to face new challenges.
The emphasis on maintaining well-functioning government securities markets over the past few years, despite a rapid decline in debt levels, has enabled the Government to access a reliable and sustainable source of funding during this period of heightened borrowing requirements without need for major structural changes to the debt program.
The focus of the Government’s debt strategy is the market debt, which is a component of gross debt. The federal debt consists of the total liabilities of the Government of Canada (gross debt) minus financial and non-financial assets. The following diagram illustrates the relationships between the components of the federal debt (Figure A4.1).
For accounting purposes, gross debt is decomposed into market debt, which is issued and outstanding in financial markets; value adjustments to market debt (for the foreign exchange value of swap liabilities and the net of unamortized premiums and discounts of new issues and buybacks); capital leases; and other liabilities. The rest of the liabilities comprise liabilities held outside capital markets and include obligations to public sector pension plans as well as accounts payable and accrued liabilities and allowances.
Financial assets comprise cash on deposit with the Bank of Canada, chartered banks and other financial institutions; accounts receivable (including tax receivables); foreign exchange accounts; and loans (including loans to Crown corporations), investments and advances.
Non-financial assets comprise tangible capital assets, inventories and prepaid expenses.
The liabilities that are actively managed under the debt strategy include wholesale and retail debt denominated in Canadian dollars, together with foreign currency liabilities. The latter category comprises both direct foreign currency debt and derivatives (where domestic debt issues are converted to foreign currency via cross-currency swaps).
Borrowing activities support the ongoing refinancing of government debt coming to maturity, the execution of the budget plan, and other financial operations of the Government, including borrowing on behalf of some Crown corporations.
Authority to borrow in financial markets is provided by Part IV of the Financial Administration Act (FAA), which authorizes the Minister of Finance, with the approval of the Governor in Council, to issue securities and undertake related activities, including entering into financial contracts and transactions of derivatives.
To satisfy the requirements under the FAA, anticipated borrowing and planned uses of funds are presented in the next section. Actual borrowing and uses of funds compared with those forecast will be reported in the 2009–10 Debt Management Report, and detailed information on outcomes will be provided in the 2010 Public Accounts of Canada. Both documents will be tabled in Parliament in the fall of 2010.
To determine the amount of borrowing authority to be requested from the Governor in Council, a margin for prudence is added to facilitate intra-year management of the debt and foreign exchange reserves.
In November, the Governor in Council approved an aggregate borrowing limit of $296 billion for 2008–09, an increase of $90 billion over the original 2008–09 Submission to Council.1 This intra-year increase in the borrowing limit was required to finance the first $25 billion installment of the Insured Mortgage Purchase Program (IMPP) and to support the Bank of Canada’s increased liquidity operations. A second increase in the borrowing limit in the current fiscal year may be required before the end of March 2009.
For 2009–10, the aggregate borrowing limit that will be requested from the Governor in Council to meet Budget 2009 financial requirements and provide a margin for prudence will be $370 billion.
The sources and uses of borrowings are described in the following section, and are set out in Table A4.1.
The aggregate principal amount of money required to be borrowed by the Government from financial markets in 2009–10 to meet Budget 2009 stimulus measures, refinancing needs, and other financial requirements is projected to be $312 billion.
In 2009–10, refinancing needs are projected to be approximately $232 billion. The main source of refinancing needs during the year stems from the turnover of the treasury bill stock, which has a term to maturity of one year or less. The next largest component is $23 billion in bonds that will mature in 2009–10. Other lesser amounts include retail debt (Canada Savings Bonds and Canada Premium Bonds) and foreign-denominated bonds that mature in 2009–10.
The other main determinant of borrowing needs is the Government’s financial source or requirement. If the Government has a financial source, it can use the source for some of its refinancing needs. If it has a financial requirement, then it must meet that requirement along with its refinancing needs.
The financial source/requirement measures the difference between cash coming into the Government and cash going out. This measure is affected not only by the budgetary balance but also by the Government’s non-budgetary transactions.
The budgetary balance is presented on a full accrual basis of accounting, recording government liabilities and assets when they are incurred or acquired, regardless of when the cash is paid or received.
Non-budgetary transactions include changes in federal employee pension accounts; changes in non-financial assets; investing activities through loans, investments and advances (including loans to three Crown corporations—the Business Development Bank of Canada, Farm Credit Canada, and Canada Mortgage and Housing Corporation); and other transactions (e.g. changes in other financial assets and liabilities and foreign exchange activities).
For 2009–10, a budget deficit of $34 billion and a financial requirement of $101 billion are projected. As the planned amount to be borrowed is lower than the planned uses of borrowings, the year-end cash position is projected to decrease by $20 billion. However, the actual cash position at fiscal year-end will be influenced by a number of factors, notably Bank of Canada liquidity operations.
The 2009–10 financial requirement includes $65 billion for currently-planned initiatives under the new Extraordinary Financing Framework. This includes $50 billion for an augmentation in the IMPP. These measures do not increase the federal debt, or accumulated deficit, as they are offset by interest-bearing financial assets.
Actual borrowing for the year may differ from the forecast due to uncertainty associated with economic and fiscal projections, the timing of cash transactions and other factors, such as changes in foreign reserve needs and Crown borrowings. A full account of actual borrowing against the plan presented here will be provided in the 2009–10 Debt Management Report, which will be tabled in Parliament in the fall of 2010.
|Sources of Borrowings|
|Payable in Canadian currency|
|Total payable in Canadian currency||307|
|Payable in foreign currencies||5|
|Total cash raised through borrowing activities||312|
|Uses of Borrowings|
|Payable in Canadian currency|
|Regular bond buybacks||2|
|Cash management bond buybacks||4|
|Canada Pension Plan bonds and notes||0|
|Total payable in Canadian currency||225|
|Payable in foreign currencies||7|
|Total refinancing needs||232|
|Pension and other accounts||-3|
|Loans, investments and advances|
|Entreprise Crown corporations||24|
|Insured Mortgage Purchase Program (net of redemptions)||45|
|Total Loans, investments and advances||70|
|Total non-budgetary transactions||68|
|Total financial source/requirement||101|
|Total uses of borrowings||332|
|Net Increase or Decrease (-) in Cash||-20|
|Notes: Numbers may not add due to rounding. A negative sign
denotes a financial source.
1 These securities are rolled over, or refinanced, a number of times during the year. This results in a larger number of new issues per year than the stock outstanding at the end of the fiscal year, which is presented in the table.
2 Other transactions are comprised primarily of the conversion of accrual adjustments into cash, such as tax and other account receivables, provincial and territorial tax collection agreements, and tax payables and other liabilities.
The 2008–09 borrowing program has changed from the 08–09 Debt Management Strategy plan published as part of Budget 2008. This deviation is due to the surge in financial requirements stemming from the Government’s actions to strengthen the position of Canada’s financial system.
Notably, the Government is supporting the availability of longer-term credit in Canada by purchasing up to $75 billion in insured mortgage pools by the end of the fiscal year under the IMPP—through the Canada Mortgage and Housing Corporation. This action is providing Canada’s financial institutions with significant and stable access to longer-term funds that they can then make available to consumers, homebuyers and businesses in Canada. The IMPP earns a modest rate of return for the Government with no additional risk to the taxpayer.
Borrowings undertaken by the Government to fund IMPP operations and to help the Bank of Canada inject liquidity into the financial system do not increase the federal debt, or the accumulated deficit, as they are offset by interest-bearing financial assets.
Financial requirements for 2008–09 are expected to be $104 billion, up from the initial projection of $15.4 billion (Table A4.2).
|(billions of dollars)|
|Consolidated borrowings of BDC, and FCC||15||18|
|Insured Mortgage Purchase Program (net of redemption)||–||75|
|Other non-budgetary transactions||3||10|
|Note: A negative sign denotes a
1 From Budget 2008 and 2008–09 Debt Management Report.
As a result of the increase in financial requirements, the gross bond program is expected to be $76 billion in 2008–09 compared with the original plan of $34 billion, while the treasury bill stock is expected to attain levels of roughly $194 billion by the end of 2008-09, compared with the original plan of $140 billion.
To date, the increase in issuance of Government of Canada securities has been well received by the market, due to strong demand for government securities. Both treasury bill and bond auctions continue to perform well.
The main objectives of the 2009–10 federal debt strategy are to efficiently raise funding, to refinance maturing debt, and to cover projected 2009–10 financial requirements. These include Budget 2009 fiscal stimulus measures and further actions by the Government to inject liquidity into the financial system and help sustain the availability of credit in Canada.
Through its debt strategy, the Government will continue to strive to maintain a well-functioning Government of Canada securities market, which helps to keep debt costs low and contributes to efficient capital markets by providing key pricing and hedging tools.
In general, achieving stable, low-cost funding involves striking a balance between cost and risk in the debt structure, which is itself achieved through the selection of debt instruments.
The main operational measure used to describe the debt structure is the fixed-rate share, which is the proportion of all interest-bearing debt that does not mature or need to be repriced within one year relative to the total amount of Government of Canada interest-bearing debt. The fixed-rate measure is used in combination with other measures to assess the Government’s exposure to changes in interest rates over time.2
As a result of the rapid increase in issuance levels stemming from the need to fund the IMPP and other measures—planned to be achieved through a relatively higher proportion of short-term debt—the fixed-rate share of the debt is expected to fall to 57 per cent by the end of 2008–09, and to 56 per cent for 2009–10, down from an estimated 63 per cent in 2007–08.
Having access to a well-functioning Government securities market ensures large volumes of funding can be raised efficiently to meet the Government’s rising operational needs in difficult economic times. To support a liquid and well-functioning market for its securities, the Government has strived to maintain transparent, regular and diversified borrowing programs. The promotion of competition and participation at Government securities auctions and in the secondary market also helps to keep debt costs low and benefits a wide array of domestic market participants.
Going forward into 2009–10, changes to the planned debt program may be required depending on the evolution of government financial requirements and financial markets. Any changes to the debt program would be published in advance, and market consultations would be undertaken during the year, as required.
As in past years, market participants were consulted as part of the process to develop the debt strategy. Consultations conducted in December 2008 focused on obtaining feedback on the market impacts of recent measures introduced by the Government and the Bank of Canada to support liquidity in the financial system, with a focus on the IMPP.
Market participants indicated that while liquidity in the Canadian fixed income market has declined significantly as a result of the current global credit crisis, liquidity in Government of Canada securities has been less adversely affected. They unanimously agreed that the measures taken by the Government and the Bank of Canada have helped relieve the situation. On issues related to bond auctions, participants indicated that additional issuance, especially in short-term bonds, could be absorbed readily. With regard to the treasury bill program, market participants unanimously agreed that it is working well despite the higher level of issuance.
Market participants also highlighted the importance of the Government’s ability to communicate changes to the debt management or issuance strategy in a timely and predictable manner.
More details on the subjects of discussion and the views expressed during the consultations can be found at www.bankofcanada.ca/en/notices_fmd/index.html.
As originally announced in Budget 2007, the Government has, since the start of 2008–09, fully consolidated the borrowings of three financial Crown corporations—the Business Development Bank of Canada (BDC), Canada Mortgage and Housing Corporation (CMHC) and Farm Credit Canada (FCC)—into the federal debt program.
Under the arrangement, BDC, CMHC and FCC unmatured debt—issued prior to consolidation—continues to remain outstanding in the marketplace. The Minister of Finance approves all Crown borrowing plans within the context of annual corporate plan approvals. Crown corporations are responsible for the governance and management of their treasury functions, including decisions about how much to borrow from the Government of Canada.
The consolidation of Crown borrowing activity does not affect the federal debt (accumulated deficit) or total government net debt, since increased federal borrowing is matched by assets in the form of loans to the Crown corporations.
On December 22, the Government and CMHC posted a calendar of upcoming operations for the final quarter of 2008–09 to provide greater transparency with respect to IMPP operations. This coordinated effort with CMHC has been well received by the market. The details and schedule of future IMPP operations related to the additional $50 billion outlined in the budget plan will be announced in a similar fashion.
The size of the bond program is based on the expected financial source/requirement, the amount of bonds maturing, forecast Crown corporation borrowing requirements, the plan for regular buybacks and the need for fixed-rate borrowing for other purposes, such as funding the foreign reserves.
In 2009–10, the level of gross bond issuance will be about $82 billion, $6 billion higher than the projected $76 billion for 2008–09 (Table A4.3).
The total stock of bonds is planned to increase by $54 billion to $349 billion (Tables A4.3 and A4.4).
|2007–08 Actual||2008–09 Estimated1||2009–10 Planned1|
|(billions of dollars)|
|Gross bond issuance||35||76||82|
|Maturing bonds and adjustments2||-32||-29||-26|
|Change in bond stock||-5||42||54|
|1 Includes bond issuance to fund the
IMPP and Crown corporation loans.
2 Includes cash management bond buybacks and the inflation adjustment for Real Return Bonds.
|2007–08 Actual||2008–09 Estimated||2009–10 Planned|
|(billions of dollars)|
|Treasury bill stock||117||194||223|
|Foreign debt stock||10||10||8|
|CPP bond stock||1||1||1|
|Total market debt||394||512||592|
The bond program for 2009–10 will support liquidity in the key maturities (i.e. 2-, 5-, 10- and 30-years), and re-introduce a 3-year nominal bond maturity.
Re-introducing a 3-year bond maturity will provide additional flexibility to accommodate increased funding requirements, while helping to smooth the debt maturity profile. A March/September auction cycle is being considered for this bond.
In 2009–10, the 2-, 5-, 10- and 30-year minimum benchmark target sizes will be maintained, and the new 3-year bond will have a target benchmark size of $7 billion to $10 billion. An additional benchmark is being considered for the 2- and 5-year bonds.
For bond issues that are fungible with existing old benchmarks (2- and 5-year bonds with a June 1 maturity), minimum benchmark target sizes are deemed to be attained once the combined size of the new benchmark and the old benchmark have largely reached the minimum target sizes mentioned above. In 2009–10, maximum benchmark target sizes will be exceeded in most sectors.
In 2009–10, there will be quarterly auctions of 2-, 3-, 5- and 10-year bonds and semi-annual auctions of 30-year bonds, which will be announced through the Quarterly Bond Schedule on the Bank of Canada website before the start of each quarter (Table A4.5) (www.bankofcanada.ca/cars/bd_auction_schedule.html).
|Fiscal Year 2008–09||Fiscal Year 2009–10|
The order of bond auctions within each quarter may be adjusted to facilitate cash management operations, and there may be multiple auctions of the same benchmarks in some quarters.
In 2009–10, the Government and the Bank of Canada will continue to closely monitor fiscal, economic and capital market conditions. If required, changes to planned issuance would be communicated to market participants in the most timely and transparent way possible.
Two types of bond buyback operations will continue to be conducted: regular bond buybacks and cash management bond buybacks.
The size of the regular bond buyback program will be scaled back to $2.4 billion in regular bond buyback operations, $2.9 billion less than in 2008–09. In 2009–10, bond buyback operations will be conducted on a switch basis only. A reduction in the volume of bond buyback operations is appropriate as the bond stock becomes concentrated in fewer old benchmark bonds, and in light of the financial requirements for 2009–10.
The date of each operation will be announced through the Quarterly Bond Schedule.
The cash management bond buyback program helps manage the Government’s cash requirements by reducing the high levels of cash balances needed ahead of large bond maturities. The cash management bond buyback program will likely be less active in 2009–10.
By the end of 2009–10, the treasury bill stock is projected to be $223 billion, about $29 billion higher than the end-of-year level projected for 2008–09. The Government plans to continue issuing 3-, 6- and 12-month maturities on a bi-weekly basis. A return to weekly treasury bill operations would be considered if it was deemed necessary to maintain the smooth functioning of the auctions.
Cash management bills (CMBs) (i.e. short-dated treasury bills) help the Government manage its cash requirements in an efficient manner. The Government intends to continue to actively use CMBs in 2009–10.
The objectives of the Retail Debt Program for 2009–10 are to balance potential cost reduction opportunities with the need to maintain public awareness and provide Canadians with access to Government of Canada retail-savings products (Canada Savings Bonds and Canada Premium Bonds).
In 2009–10, the redemptions are expected to exceed sales in an environment of continued competition from other retail-savings instruments in the marketplace. As a result, the retail debt stock is expected to decline. Over the coming year, the Government will continue to look for opportunities to reduce overall program delivery costs.
Further information on the retail debt program is available at www.csb.gc.ca.
The Government’s foreign currency reserves are financed through foreign currency liabilities to minimize exposure to currency risk. The purpose of the Exchange Fund Account (EFA) is to aid in the control and protection of the external value of the Canadian dollar. Assets held in the EFA are managed to provide foreign currency liquidity to the Government and to promote orderly conditions for the Canadian dollar in the foreign exchange markets, if required.
The Government has access to a range of direct sources of funding for its foreign currency assets. These include a short-term U.S.-dollar paper program, medium-term note issuance in various markets, international bond issues, short-term purchases and sales of U.S. dollars in foreign exchange markets and cross-currency swaps involving the exchange of domestic liabilities for U.S.-dollar and euro-denominated liabilities.
The mix of funding sources used in 2009–10 will depend on a number of considerations, including relative cost, market conditions, and the objective of maintaining a prudent foreign-currency-denominated debt maturity structure. The Debt Management Strategy assumes that all foreign liabilities maturing during the year will be refinanced. However, the amount of foreign currency funding may vary from the plan, depending on market conditions and government foreign currency needs. It is expected that cross-currency swaps of domestic obligations and direct foreign currency borrowing will be used to fund reserves.
Further information on managing foreign currency reserves and funding objectives is provided in the Report on the Management of Canada’s Official International Reserves, which is available on the Department of Finance website.
1 Approved Orders in Council are available on the Privy Council Office website at http://www.pco-bcp.gc.ca/oic-ddc.asp?lang=eng&Page=secretariats
2 More precisely, the fixed-rate share is calculated on a net basis by excluding components of the debt that are matched with financial assets of the same term and therefore do not represent an exposure to interest rate risk. The federal liabilities netted out from the fixed-rate share calculation include liabilities funding the assets in the Exchange Fund Account; debt securities matched with corresponding loans to Crown corporations; Government of Canada debt securities held by the Bank of Canada; and the debt offset by Receiver General cash and deposit balances.Table of Contents - Previous - Next