Canada's Ontario province boosts deficit forecast to $15 billion

TORONTO (Reuters) - Canada’s most populous province, Ontario, on Friday accepted a recommendation made by a commission of inquiry that it should more than double its budget deficit projection for 2018-19, sending bond yields higher.

FILE PHOTO: A Canadian dollar coin, commonly called a "Loonie" and an American dollar bill are seen in this staged photo in Toronto, March 17, 2010. REUTERS/Mark Blinch/File Photo

The Independent Financial Commission of Inquiry, launched by the province’s new conservative government, recommended in a report that the province revise its projected deficit for the current fiscal year to C$15 billion ($11.6 billion) to reflect the commission’s proposed accounting adjustments and adjustments for revenue and expense projections.

Ontario, which is home to many of Canada’s manufacturers and automakers, has one of the largest sub-sovereign debts in the world, at nearly C$350 billion in March.

The previous Liberal Party government had projected a C$6.7 billion deficit in a pre-election budget in March that included increased spending on health care and child care.

Ontario’s 10-year yield rose 1.5 basis points to 3.101 percent. The gap between the province’s 10-year yield and the yield on the Government of Canada’s 10-year benchmark widened by 1 basis point to a spread of 67.4 basis points.

The spread had widened by as much as 2 basis points after the report was released before buyers stepped in, according to IFR.

“Only when the Government of Ontario truly accounts for its real deficit position can we begin to put the province back on a path to balanced fiscal sustainability,” Ontario Minister of Finance Vic Fedeli said in a news release.

Among the commission’s other recommendations was for the province to set a long-term goal of restoring its triple-A credit rating. Its bonds are rated A+ by Standard & Poor’s.

“It seems that in the short term there will be more financing and issuance required,” said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management.

“Over the next few years, if they manage to balance the budget it would be positive for the spreads. And if they get us the AAA rating over the much longer term it would be just fantastic.”

The Progressive Conservative Party, led by populist Doug Ford, won a majority in the June provincial election, ending 15 years of Liberal rule.

($1 = 1.2909 Canadian dollars)

Reporting by Fergal Smith; Editing by Phil Berlowitz