BlackRock Warns Canada’s Borrowing Is ‘Crowding Out’ Companies
(Bloomberg) -- A borrowing spree by the Canadian federal and provincial governments is threatening to increase costs for companies just as the economy turns, according to BlackRock Inc.
Public-sector borrowing is set to swell as issuers including the federal government, Ontario -- already the world’s largest issuer of sub-sovereign debt -- and Alberta continue to run budget deficits, BlackRock’s head of Canadian fixed income Aubrey Basdeo said.
“When the economy is strong as it is, governments should be issuing less not more,” Toronto-based Basdeo said in an interview. “You’re getting these issuers crowding out corporate issuers.”
Government-related debt increased more than 10 percent over the last three years to C$1.98 trillion ($1.48 trillion) at the end of the third quarter, according to Statistics Canada. Outstanding federal government debt will rise 2.9 percent to C$707 billion in the fiscal year starting in March, government projections released last month show.
The increase in public-sector debt comes as the pace of growth in Canada’s C$2.2 trillion economy is set to slow to 2.1 percent this year compared with 3 percent last year, according to weighted average consensus of analysts compiled by Bloomberg. Next year, the country’s economic growth may decelerate to 1.9 percent.
The slowdown in economic growth may in turn reduce the room to maneuver for public administrations to put their finances in order. Ontario this week had its credit rating cut by Moody’s Investors Service for the first time in six years. The ratings firm expects the country’s largest provincial economy will post “multiple years of material consolidated deficits.”
Futures traders, who until early December were mostly betting on an interest hike by January, now aren’t expecting rates to rise till April. BlackRock is even more dovish as it expects the Bank of Canada’s benchmark rate to remain unchanged during the first half as Governor Stephen Poloz waits to assess the economy, Basdeo said.
After adjusting for volatility, government bond yields maturing between two and five years are already more attractive than corporates, he said.
That disparity has weighed on private-sector bonds. Yields on the Bloomberg Barclays Canada Aggregate 300M Corporate Total Return Index have risen almost 70 basis points since the start of the year to 3.57 percent, while during the same period the spread over government debt widened 46 basis points.
Even so, some are skeptical.
“We don’t expect a crowding out effect for corporates. We think there is plenty of a liquidity available to fund high-quality borrowers here domestically in our market,” said Marc St-Onge, global head of debt capital markets at Canadian Imperial Bank of Commerce.
Canadian companies took advantage of lower rates over the last decade to tap the bond markets at a record pace. Almost 80 percent of the country’s non-financial corporates covered by Moody’s Investors Service have a stable outlook, the highest proportion since 2010, and revenues are expected to continue growing over the next 12 to 18 months, the rating company said earlier this month.
©2018 Bloomberg L.P.