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2012 Canada Euroweek Nbc Sponsored Yearly Report

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Canada, AAA, Quebec, Ontario, Alberta, British Columbia, CMHC, Provinces

Canada, AAA, Quebec, Ontario, Alberta, British Columbia, CMHC, Provinces


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  • 1. June 2012 Ontario Manitoba British Columbia Canada Housing Trust Alberta Quebec Canada Investor Relations Series Interviews with Selected Public Sector Borrowers Sponsor000 Cover Canada IR 2012.indd 1 11/06/2012 19:17
  • 2. Euroweek Euroweek Canada: Reaping the Canada: Reaping the benefits of past reforms benefits of past reforms by Krishen Rangasamy, Senior Economist by Krishen Rangasamy, Senior EconomistCanada’s economic fortunes have rarely been There are some concerns from the central bank instrumental. Population growth for people The outlook for investment in real assets isin such sharp contrast with other OECD nations. about household debt accumulation which it aged 20-44, the age cohort generally associated positive, but so is the potential for a ramp up inWhile the latter have generally struggled views as “the biggest domestic risk” – thanks to with marginal demand for a residential asset, investment in Canadian financial assets. Canada’sto achieve economic growth and meet deficit rising rates of home ownership, the oft-mentioned has picked up significantly since 2007 and is government bonds have never looked as good intargets, particularly in Europe, Canada’s growth debt to disposable income ratio is now at a record projected to remain positive through the next a shrinking AAA universe. With the public sectoris proceeding at a decent pace. As a result, 150%. Currently, debt servicing is quite decade, in sharp contrast with the rest of the OECD. well on track to balance the budget and reducingthe federal and most provincial governments manageable for most households with mortgage overall debt over the coming years, Canada’s fiscal Canada: Why are home prices outperforming the OECD?are well on their way towards balancing their payments as a percentage of disposable income Real house price growth since 2007Q1 Annual growth for population rectitude shines when compared to countriesrespective budgets. remaining close to the average of the last decade IRL -42.2 1.4 % aged 20-to-44 experiencing missed deficit targets and a growing USA -37.9 despite home prices soaring over 40% in the last DNK -25.8 1.2 debt load.It has not always been that way. Less than two ESP -23.0 1.0 …remains supported by positive demographics ten years. Thank record low mortgage rates GRC GBR -22.4 -13.3decades ago, Canada was grappling with similar ITA -12.3 The surge in 0.8 Canadian general government net debt relatively low for that. NZL NLD -10.1 -7.9 home prices in Canada … 0.6 At year end, as % of GDP (IMF projections for 2012 to 2017)challenges to those currently facing several JPN KOR -7.7 -1.4 0.4 Canada FRA 0.5European economies, with massive debt and The risk, of course, is a sudden sharp increase in DEU FIN 1.2 3.1 0.2 0.0 90 % of GDP 2011 BEL 80deficits culminating in an S&P ratings downgrade. interest rates. That scenario is highly unlikely in AUS 7.9 9.2 -0.2 Canada: 33.3 SWE 10.1 OECD 70 U.S.: 80.3Canada’s leadership at the time saw opportunity our view. While rates are set to rise, they should NOR CHE 10.6 13.4 -0.4 60 Eurozone: 68.4 CAN 18.2 -0.6 OECD: 72.4in adversity, and implemented major structural do so very gradually. The BoC would be aware ISR 40.5 % -0.8 50 -50 -30 -10 10 30 1990 1995 2000 2005 2010 2015 2020 40reforms that were designed to be sustainable and of the threat posed by an overshooting currency NBF Economy & Strategy (data via OECD, Statcan, Teranet - National Bank, United Nations) 30 Canadatherefore credible. Those crucial policy actions should the overnight rate stray too far from the 20 U.S. 10 Eurozonecontinue to bear fruit today. A well-managed Fed Funds rate which itself is destined to remain So notwithstanding temporary dips, residential OECD 0economy, vast natural resources and favourable near zero for the next few years. Moreover, the investment should generally remain in decent 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016demographics all boost Canada’s credentials as a BoC would prefer an orderly ramp down in debt shape. Non-residential investment should also Source: IMF, Fiscal Monitor April 2012country that is open for business and with solid rather than provoke, via aggressive rate hikes, a be well supported. According to a recent Statisticsprospects for continued prosperity. disorderly de-leveraging (the latter tends to be Canada survey, non-residential investment is Foreigners will also be enticed by the stable hazardous to the economy if recent US experience expected to grow 7.2% or $19.8 billion this year. investor base for our government bonds, givenThe Bank of Canada now stands alone among is any guide). There are already promising signs that over 40% of gross government debt is held bymajor world central banks in considering tighter on that front, with consumer credit growth Canada: Investment intentions remain positive in 2012 domestic institutional investors in Canada.monetary policy. The BoC’s stance rests on an falling on its own to the lowest levels in almost Non-residential investments (2012: intended) 2012 intended non-residential investment growth, $B and % Canada: A stable investor base for government bondsimproving economy which has allowed both $ billion $ billion two decades. 300 9 Oil & gas Holdings of government debt by AAA club could become even more selectCanadian output and employment to recover 280 260 Total 8 14.8% …oil & gas domestic institutional investors* Private sector accounting for CANfrom the Great Recession and to rise to more than That said, residential credit growth remains strong 240 220 7 except oil & gas more than 40% 4.7% SWE Australia rating AAA outlook Stable of the increase Canada AAA Stable5% above 2007 levels, in sharp contrast to the and is one of the reasons why the Canadian 200 6 Public entreprises FRA Denmark AAA Stable 180 5 Finland AAA Negativeperformance stateside. housing market continues to outperform. With 160 4 17.3% GBR Germany AAA Stable Private sector USA Hong Kong AAA Stable 140 Canadian housing prices surging in recent years, 120 3 ITA Liechtenstein AAA Stable Canada: Recovery has been smooth relative to the US Luxembourg AAA Negative Real GDP Employment there are concerns about a sharp correction in 100 80 2 Public DEU Netherlands AAA Negative Non-residential investments expected admin. Norway AAA Stable ESP 106 Index = 100 (Jan 2007) 106 Index = 100 (Jan 2007) the pipeline. While we do not rule out temporary 60 to reach a new high in 2012… 1 1.1% NLD Singapore AAA Stable 105 40 Sweden AAA Stable 105 104 price declines in some cities and some segments 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 0 0 10 20 30 40 Switzerland AAA Stable 104 NBF Economy and Strategy, (data from Statistics Canada) % of gross general government debt United Kingdom AAA Stable 103 103 of the housing market (condo prices in Toronto 102 * Pension, insurance and mutual funds 102 101 and Vancouver come to mind as potential risk That is a new record, for both total non-residential NBF Economy & Strategy (data via IMF April 2012 Fiscal Monitor, Standard & Poors) 101 100 areas), the outlook remains positive for Canadian investments and those of the private sector. More That, combined with well anchored inflation 100 99 99 98 housing as a whole. than 40% of the growth is expected to come from expectations and fiscal discipline, bode well for 98 97 oil & gas extraction (+14.8% or $8.3 billion). The Canada’s bond market. Clearly, in Canada’s case, 96 Negative real interest rates and a healthy 97 95 strong showing in business investment will help reforms of the past are gifts that keep on giving. 96 94 labour market have played an important role in 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 offset the impacts related to the end of several supporting housing demand and prices so far, NBF Economy & Strategy (data via Global Insight) federal infrastructure programs. but favourable demographics have also beenThe information in this article is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. National Bank of Canada Financial Marketsis a trademark of National Bank of Canada used under licence. National Bank Financial Inc. is an indirect wholly-owned subsidiary of National Bank of Canada, and is regulated by IIROC anda member of CIPF. National Bank of Canada Financial Inc. and NBF Securities (USA) Corp. are indirect wholly-owned subsidiaries of National Bank of Canada, and are regulated by FINRA andmembers of SIPC. NBF Securities UK is a branch of National Bank Financial Inc. and is regulated by the FSA. Please refer to our full disclosure at http://www.nbcn.ca/disclosure_english.jhtml
  • 3. Euroweek Euroweek Canada: Reaping the Canada: Reaping the benefits of past reforms benefits of past reforms by Krishen Rangasamy, Senior Economist by Krishen Rangasamy, Senior EconomistCanada’s economic fortunes have rarely been There are some concerns from the central bank instrumental. Population growth for people The outlook for investment in real assets isin such sharp contrast with other OECD nations. about household debt accumulation which it aged 20-44, the age cohort generally associated positive, but so is the potential for a ramp up inWhile the latter have generally struggled views as “the biggest domestic risk” – thanks to with marginal demand for a residential asset, investment in Canadian financial assets. Canada’sto achieve economic growth and meet deficit rising rates of home ownership, the oft-mentioned has picked up significantly since 2007 and is government bonds have never looked as good intargets, particularly in Europe, Canada’s growth debt to disposable income ratio is now at a record projected to remain positive through the next a shrinking AAA universe. With the public sectoris proceeding at a decent pace. As a result, 150%. Currently, debt servicing is quite decade, in sharp contrast with the rest of the OECD. well on track to balance the budget and reducingthe federal and most provincial governments manageable for most households with mortgage overall debt over the coming years, Canada’s fiscal Canada: Why are home prices outperforming the OECD?are well on their way towards balancing their payments as a percentage of disposable income Real house price growth since 2007Q1 Annual growth for population rectitude shines when compared to countriesrespective budgets. remaining close to the average of the last decade IRL -42.2 1.4 % aged 20-to-44 experiencing missed deficit targets and a growing USA -37.9 despite home prices soaring over 40% in the last DNK -25.8 1.2 debt load.It has not always been that way. Less than two ESP -23.0 1.0 …remains supported by positive demographics ten years. Thank record low mortgage rates GRC GBR -22.4 -13.3decades ago, Canada was grappling with similar ITA -12.3 The surge in 0.8 Canadian general government net debt relatively low for that. NZL NLD -10.1 -7.9 home prices in Canada … 0.6 At year end, as % of GDP (IMF projections for 2012 to 2017)challenges to those currently facing several JPN KOR -7.7 -1.4 0.4 Canada FRA 0.5European economies, with massive debt and The risk, of course, is a sudden sharp increase in DEU FIN 1.2 3.1 0.2 0.0 90 % of GDP 2011 BEL 80deficits culminating in an S&P ratings downgrade. interest rates. That scenario is highly unlikely in AUS 7.9 9.2 -0.2 Canada: 33.3 SWE 10.1 OECD 70 U.S.: 80.3Canada’s leadership at the time saw opportunity our view. While rates are set to rise, they should NOR CHE 10.6 13.4 -0.4 60 Eurozone: 68.4 CAN 18.2 -0.6 OECD: 72.4in adversity, and implemented major structural do so very gradually. The BoC would be aware ISR 40.5 % -0.8 50 -50 -30 -10 10 30 1990 1995 2000 2005 2010 2015 2020 40reforms that were designed to be sustainable and of the threat posed by an overshooting currency NBF Economy & Strategy (data via OECD, Statcan, Teranet - National Bank, United Nations) 30 Canadatherefore credible. Those crucial policy actions should the overnight rate stray too far from the 20 U.S. 10 Eurozonecontinue to bear fruit today. A well-managed Fed Funds rate which itself is destined to remain So notwithstanding temporary dips, residential OECD 0economy, vast natural resources and favourable near zero for the next few years. Moreover, the investment should generally remain in decent 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016demographics all boost Canada’s credentials as a BoC would prefer an orderly ramp down in debt shape. Non-residential investment should also Source: IMF, Fiscal Monitor April 2012country that is open for business and with solid rather than provoke, via aggressive rate hikes, a be well supported. According to a recent Statisticsprospects for continued prosperity. disorderly de-leveraging (the latter tends to be Canada survey, non-residential investment is Foreigners will also be enticed by the stable hazardous to the economy if recent US experience expected to grow 7.2% or $19.8 billion this year. investor base for our government bonds, givenThe Bank of Canada now stands alone among is any guide). There are already promising signs that over 40% of gross government debt is held bymajor world central banks in considering tighter on that front, with consumer credit growth Canada: Investment intentions remain positive in 2012 domestic institutional investors in Canada.monetary policy. The BoC’s stance rests on an falling on its own to the lowest levels in almost Non-residential investments (2012: intended) 2012 intended non-residential investment growth, $B and % Canada: A stable investor base for government bondsimproving economy which has allowed both $ billion $ billion two decades. 300 9 Oil & gas Holdings of government debt by AAA club could become even more selectCanadian output and employment to recover 280 260 Total 8 14.8% …oil & gas domestic institutional investors* Private sector accounting for CANfrom the Great Recession and to rise to more than That said, residential credit growth remains strong 240 220 7 except oil & gas more than 40% 4.7% SWE Australia rating AAA outlook Stable of the increase Canada AAA Stable5% above 2007 levels, in sharp contrast to the and is one of the reasons why the Canadian 200 6 Public entreprises FRA Denmark AAA Stable 180 5 Finland AAA Negativeperformance stateside. housing market continues to outperform. With 160 4 17.3% GBR Germany AAA Stable Private sector USA Hong Kong AAA Stable 140 Canadian housing prices surging in recent years, 120 3 ITA Liechtenstein AAA Stable Canada: Recovery has been smooth relative to the US Luxembourg AAA Negative Real GDP Employment there are concerns about a sharp correction in 100 80 2 Public DEU Netherlands AAA Negative Non-residential investments expected admin. Norway AAA Stable ESP 106 Index = 100 (Jan 2007) 106 Index = 100 (Jan 2007) the pipeline. While we do not rule out temporary 60 to reach a new high in 2012… 1 1.1% NLD Singapore AAA Stable 105 40 Sweden AAA Stable 105 104 price declines in some cities and some segments 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 0 0 10 20 30 40 Switzerland AAA Stable 104 NBF Economy and Strategy, (data from Statistics Canada) % of gross general government debt United Kingdom AAA Stable 103 103 of the housing market (condo prices in Toronto 102 * Pension, insurance and mutual funds 102 101 and Vancouver come to mind as potential risk That is a new record, for both total non-residential NBF Economy & Strategy (data via IMF April 2012 Fiscal Monitor, Standard & Poors) 101 100 areas), the outlook remains positive for Canadian investments and those of the private sector. More That, combined with well anchored inflation 100 99 99 98 housing as a whole. than 40% of the growth is expected to come from expectations and fiscal discipline, bode well for 98 97 oil & gas extraction (+14.8% or $8.3 billion). The Canada’s bond market. Clearly, in Canada’s case, 96 Negative real interest rates and a healthy 97 95 strong showing in business investment will help reforms of the past are gifts that keep on giving. 96 94 labour market have played an important role in 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 offset the impacts related to the end of several supporting housing demand and prices so far, NBF Economy & Strategy (data via Global Insight) federal infrastructure programs. but favourable demographics have also beenThe information in this article is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. National Bank of Canada Financial Marketsis a trademark of National Bank of Canada used under licence. National Bank Financial Inc. is an indirect wholly-owned subsidiary of National Bank of Canada, and is regulated by IIROC anda member of CIPF. National Bank of Canada Financial Inc. and NBF Securities (USA) Corp. are indirect wholly-owned subsidiaries of National Bank of Canada, and are regulated by FINRA andmembers of SIPC. NBF Securities UK is a branch of National Bank Financial Inc. and is regulated by the FSA. Please refer to our full disclosure at http://www.nbcn.ca/disclosure_english.jhtml
  • 4. Sponsored statement Sponsor: Ontario National Bank of Canada Financial Markets is a trademark used by National Bank Financial Inc. and National Bank of Canada Financial Inc. under non-exclusive licence. Deficit-fighting Ontario is on the up Ontario has redoubled its commitment to reducing its fiscal deficit by a clear focus on restraint in spending. introducing tough measures on tax and expenditure. This, twinned with a solid Expenditure control dominates the forecast economic recovery, will continue to underpin demand for its bonds among local deficit reductions.” and international investors. The cut in the Moody’s credit rating was O ntario intensified its attack on its not entirely unexpected, given that Ontario deficit in April when the govern- had been on negative outlook since mid- ment announced plans for a new December 2011, when the agency’s rating “deficit-fighting” tax bracket. By increas- of Aa1 was two notches higher than the ing income tax by two percentage points S&P and DBRS ratings. on individuals with an annual income of For Ontario, cutting the deficit is C$500,000, the government hopes to gen- regarded as an imperative, not a luxury, if erate additional revenue of $280m in 2012- future generations are to enjoy the same 13 rising to $470m in 2013-14 and $470m living standards as their parents and grand- in 2014-15. parents. Ontario calculates that for every Ontario hopes this new measure will help 1% increase in interest rates, its debt servic- turbo-charge its moves to pare its deficit to ing costs would rise by about $467m in the $14.8bn in 2012-13, $12.8bn in 2013-14 first year. If no action were taken to balance and $10.1bn in 2014-15. According to the the budget now, Ontario would find itself new plan, the deficit will be eliminated by paying almost as much to service its debt in 2017-18, by when it expects to register a 2017-18 as it spends on its entire education small surplus of $500m. budget today. Analysts were surprised when Moody’s Extensive spending cuts need not, how- downgraded Ontario’s credit rating just ever, mean that essential social services will one day after the announcement of its be a casualty. The province prides itself on deficit-fighting initiative. After all, the new the quality of its healthcare and education, tax bracket, which will be removed when with a recent McKinsey study classifying the deficit has been eliminated, and adds Ontario’s schools as the best in the English- to deficit-cutting initiatives introduced speaking world. While some spending cuts by the government in its March budget. will be unavoidable, Ontario’s Action Plan Accelerating Ontario’s plan to balance the budget (NBF) com- As National Bank Financial for Health Care, outlined earlier this year, mented in a recent analysis: “Ontario’s will shift the focus to delivering improved 2012-13 budget marked a distinct change value for money. in the province’s fiscal management, with Encouraging signs Accelerating Ontario’s plan to Ontario’s deficit-cutting drive will be sup- balance the budget ported by an improving macroeconomic climate, along with greater investment in Fiscal machinery and equipment, which rose by 1 7 3 5 6 2 8 4 10 -1 -1 -1 -1 -1 -1 -1 Balance -1 15.2% in 2010 and by 19.8% in 2011. - 11 17 10 16 12 14 15 13 09 ($bn) 20 20 20 20 20 20 20 20 20 5 Medium-Term Although forecasts for economic expansion Actual Interim Plan Outlook Extended Outlook 0.5 have been revised down over the last year, 0 the projected growth trajectory remains -3.5 encouraging, with GDP forecast to grow -5 -4.2 by 1.7% in 2012, 2.2% in 2013 and 2.4% -7.2 in 2014. -7.8 -10 -10.1 “The growth picture has remained -12.8 -10.7 broadly positive,” says Mike Manning, -14 -15 -15 -14.8 -13.3 executive director of capital markets at -17.3 -15.9 Ontario Financing Authority (OFA) in -19.3 -19.7 Toronto. “Since the depths of the recession -20 Revised outlook 2012 budget plan* our GDP is up by 6.4%, so the economy -24.7 Fiscal forecast** is recovering well relative to Canada itself. -25 * For 2009-10 and 2010-11, actual results are presented The same is true on the employment ** Forecast for 2012-11 to 2012-12 based on the 2010 budget. Projection for 2009-10 from the 2009 Ontario economic outlook and fiscal review front. Since the recession Canada has cre- -30 ated about 700,000 new jobs, roughly Source: Ontario Ministry of Finance 350,000 of which have been in Ontario. 4004-005 Ontario 2012.indd 4 11/06/2012 19:19
  • 5. Sponsored statement Ontario So although the growth story has been Historically, the size of its funding Manning explains. “The euro-dollar basis impacted by the international economy, programme has meant that Ontario has swap made it too costly, and the volatility Ontario is still generating new jobs.” The been the most regular issuer among the caused by the Eurozone debt crisis meant pace of job creation in Ontario since June Canadian provinces in the international that there were fewer windows of opportu- 2009 is ahead of the US and the UK. capital markets. In 2011, however, the nity for issuance.” Unemployment fell from 9% in 2009 provinces enjoyed strong demand from Looking ahead, Manning doubts that to 8.7% in 2010 and 7.8% in 2011, and local as well as international investors in Ontario will be able to complete as much the government’s projections are for a con- the Canadian dollar market. As a result, of its funding programme in the domestic tinued decline to 6.7% by 2015. This will Ontario funded 81% of its programme in market in FY2012 as before. “Last year be supported by ambitious infrastructure the domestic market last year, which was may have been unique and there was investment. Over the next three years, way above its original projection for 2011, probably more demand for Canadian dol- Ontario plans to invest more than $35bn which anticipated a 60/40 split between lars in 2011 than we’ll be able to count in infrastructure projects that will create domestic and international funding. on in 2012,” he says. “One reason for or preserve over 100,000 jobs on average “The main characteristic of our fund- the demand last year was the strength of each year. ing programme is its flexibility,” says Canada’s economic fundamentals. Another Much of this will be financed through Manning. “Because we recognise that was that there were some specific portfo- Ontario’s Alternative Financing and we would be unable to fund the entire lio shifts by investors that benefited our Procurement (AFP) initiative which will programme in the domestic market, we domestic market. This year we think the allow the specialist agency, Infrastructure are always on the lookout for the oppor- domestic market will account for at least Ontario (IO) to transfer risk to the tunity to issue in overseas markets at an 70% of our programme, but this will be private sector. Similar to Public Private after-swap cost that is competitive with the subject to market conditions.” Partnerships (PPP), the AFP programme Canadian dollar market.” has supported more than 50 big projects In 2011, the strength of the domes- Extended maturity worth some $23bn since it was launched tic bid meant that those opportunities Ontario took full advantage of the dynam- in 2005. were few and far between. In September, ics working in favour of the Canadian The economic recovery since 2009 has Ontario maintained its presence in the dollar market in FY2011. As the market also supported a healthy and well-balanced dollar market by printing a $2bn five is open to the issuance of large volumes housing market in Ontario. Home resales year global bond. This generated demand at the long end of the yield curve, the are expected to moderate in 2012 after a of $2.2bn, which was an encouraging province was able to extend the average strong rise in recent years, while modest response from the international inves- term of its new borrowing to 13 years, and steady growth in demand for new tor community at a time of heightened compared with 12.8 in 2010 and 8.1 in homes will help to keep housing afford- volatility. 2009. “Extending the average maturity of able and minimise the risk of a housing In niche markets, Ontario was able our funding two years in a row was very bubble emerging. to grasp small but compelling funding satisfying because it helps to minimise While growth will be an important opportunities in the Norwegian kroner refinancing risk,” says Manning. “It has component to trimming the province’s and Australian dollars. “These were oppor- also given us more flexibility with regard deficit, the main pillar of Ontario’s pro- tunities where the take-out was of course to maturities, because it has opened up gramme to return to surplus is a clear smaller than in the core currencies but the some room for us to do some three-year focus on cutting expenditure. Over the funding costs were significantly lower,” borrowing if necessary.” next three years, expenditure reductions says Manning. Ontario also explored new ways to cater amounting to more than $17bn will be The same was not true of the euro to large orders. “In October we put a new achieved through an aggressive combina- market, where Ontario has been a popular procedure in place to accommodate large tion of public sector wage restraint, admin- issuer in the past. “It was not possible to orders in our domestic syndicated deals,” istrative savings and other cost reductions. issue in euros last year for two reasons,” Manning explains, adding this can be acti- At the same time, the province vated for orders of $600m or more will intensify its programme to for issues under 10 years of matu- combat tax evasion. rity, $500m or more for issues with terms of 10 to 29 years, and $400m Ontario in the capital or more in the case of 30 year deals. markets “We were pleasantly surprised by Although its recent deficit- how often we were able to use this fighting measures have reduced procedure, which simultaneously Ontario’s funding needs, it is allows us to satisfy demand from still comfortably the most heav- large investors and issue bonds for ily indebted of Canada’s prov- smaller accounts.” inces in absolute terms, with Ontario used this system four net debt estimated at 37.2% of times between October and the GDP as of March 2012. end of the fiscal year in March, It also has the highest bor- and Manning says the last of these rowing requirements of all deals was especially noteworthy. the provinces. Manning says “We had indications of demand for that in 2012/13, Ontario will a large order of more than $400m have a funding requirement of for a 30 year bond together with $34.9bn, of which $14.8bn will additional demand for 30 and 10 be for deficit financing, with year bonds,” says Manning. “This $10.5bn allocated for capital Toronto rivals New York as North America’s most attractive meant we were able to complete investment and $17.3bn ear- business location, while Ontario accounts for 40% of national a dual tranche $1.4bn issue split marked for refinancing existing GDP and is Canada’s financial hub into a $900m 30 year bond and a debt. $500m 10 year tranche.” K 5004-005 Ontario 2012.indd 5 11/06/2012 19:19
  • 6. Sponsored statement Sponsor: Manitoba National Bank of Canada Financial Markets is a trademark used by National Bank Financial Inc. and National Bank of Canada Financial Inc. under non-exclusive licence. Manitoba — a diversified driver of national growth Geographically and economically, Manitoba stands at the heart of Canada. The Manitoba’s geographical location at the province’s diversified economy and the consistency of its fiscal management heart of Canada has played an big part in underpins its stability and the resulting warm endorsement it continues to its development as a manufacturing and receive from ratings agencies and investors alike. wholesale distribution centre for north- western Ontario, the western prairies and M anitoba prides itself on its track the northern territories, Budhia says. record of economic stability. Another notable source of stability Between 2005-10, it was the for Manitoba’s economy, says Budhia, is best-performing of Canada’s provinces, the highly diversified distribution of its posting real annual average GDP growth exports. “Manitoba has a unique trade of 2.4%, comfortably above the nation- pattern between interprovincial and wide average over the same period of international destinations,” he says. “Our 1.2%. In 2009 Manitoba fared better than exports are also more diversified than those other Canadian provinces by avoiding a of other provinces. Over the last decade, sharp contraction in real GDP. 49.5% of exports went to other provinces, Manitoba also compares favourably with with the remaining 50.5% sent to coun- the other provinces by other economic tries outside Canada. This ratio is the most yardsticks, with unemployment, household balanced among the Canadian provinces debt and net provincial debt to GDP all and ensures that economic growth is more well below the national provincial average. aligned with overall national growth than Narendra Budhia, director of economic with foreign markets.” and financial analysis at Manitoba Finance Manitoba’s export base, however, is Department in Winnipeg, attributes this becoming increasingly diversified, with a relative strength to a number of factors. marked decline in its dependence on the Foremost among these is the diversity of US, whose share of exports has fallen to the economy, which Moody’s recently 61%, from 79% in 2001. Exports to Asia, called “a major source of credit strength”. meanwhile, have doubled from 11% to Industrial diversity is a key reason why 23% over the same period. Manitoba continues to be one of the most Two other sources of economic stability stable provinces in terms of growth, says are the healthy state of household balance Budhia. “No single industry dominates in sheets and the resilience of the labour the province,” he says. While manufactur- market. “Manitobans have the lowest ing remains the largest sector, its contri- household debt per capita in Canada,” bution to GDP is just under 11%, with says Budhia. “Likewise, mortgage arrears transportation, agriculture, electric energy in 2011 were just 0.28%, which is the generation, mining and finance and insur- lowest among the provinces and below the ance all well represented in the economy. national rate of 0.41%.” In the jobs market, meanwhile, Manitoba has traditionally had among the highest provincial labour force participa- tion and lowest unemployment rates. In 2011, its unemployment rate was 5.4%, the second lowest among the provinces and 2% below the national average. None of this is to suggest that Manitoba’s economy has been immune to the global downturn, nor to other unpre- dictable factors such as the weather. The manufacturing sector contracted by an annual average of 0.3% between 2006-11, led lower by the fragility of the interna- tional economy. Agriculture, meanwhile, declined by an annual average of 2.8% over the same period, reflecting the dam- Manitoba’s capital Winnipeg epitomises the province’s steady growth aging impact of extensive flooding in the spring of 2011 and growing restrictions on 6006-007 Manitoba 2012.indd 6 11/06/2012 19:20
  • 7. Sponsored statement Manitoba US imports of Canadian livestock. cutting programme, which aims to bring This fiscal year, says Steski, Manitoba The underperformance of manufactur- the province back to fiscal balance by will not require any deficit funding. ing and agriculture have been more than 2014-15. Another key component of this “Although we are still running a deficit, adequately compensated for, however, by fiscal plan is spending restraint, which we are projecting to recover the money other key sectors. Construction expanded will limit increases in overall expenditure that we borrowed in the last fiscal year by an annual average of 6.8% between to an annual average of 2% from 2011- to cover the emergency expenditure we 2006-2011, supported by the govern- 12 to 2014-15. incurred as a result of the flooding,” he ment’s stimulus programme launched in While the current five year fiscal plan explains. “The portion of the money response to the global recession, support- continued to allocate investment to front- we are due from the federal government ing key projects in the province. line services such as health care, education is expected to come through this year. Last October, for example, the new ter- and policing, innovative ways of cutting Coupled with the planned contribution minal at Winnipeg International Airport spending are also a key feature of the from our Fiscal Stabilisation Fund, this opened. Aside from providing a stimulus plan. These include reducing the number will net out any deficit funding require- for construction, airport passenger num- of regional health authorities, rolling back ment for fiscal 2012.” bers, rose by close to 8% in the first quar- salaries for government ministers by 20%, Over the next few years, says Steski, ter of this year. reducing travel costs across all govern- Manitoba expects its annual borrowing Retail trade is another vibrant sector, ment departments and implementing needs to be between C$3.5bn-C$b4bn. growing by an annual average of 3.4% portfolio management reviews. “While the total will be stable, we expect between 2006-11, and the potential for The Canadian banks have warmly the funding mix to change,” says Steski. continued growth has not gone unno- endorsed the plan. “The part the agencies “We have now finished covering the ticed by the world’s largest retailers. As most like is the balance we are achieving province’s unfunded pension liability, Budhia points out, Ikea is one example between raising revenues and cutting and our five year fiscal plan means that of a successful multinational preparing to costs as a means of bringing the budget our deficit funding should also continue open its first outlet in Winnipeg. to balance,” says Budhia. to decrease. However, Manitoba Hydro’s The strength of these sectors, twinned funding requirement will increase to with expectations of a gradual acceleration Manitoba in cover its capital investment programme.” in global demand, bodes well for economic the capital markets growth in Manitoba. So does the outlook Manitoba’s net debt rose from just Funding shift for population growth, which is an impor- under C$19.4bn at the end of 2009 to This shift in the funding mix, says Steski, tant pillar of GDP expansion in a multi- C$22.9bn as of March 31, 2011. Of is likely to have an impact on the overall ethnic province with high levels of net that total, about C$1.1bn was raised average maturity of Manitoba’s debt port- immigration. Immigration to Manitoba has for capital spending programmes, and folio. “Because Manitoba Hydro’s needs more than tripled from 4,600 in 2002 to C$0.9bn to fund capital spending at are for long term funding, we would almost 16,000 in 2011, which is the largest Manitoba Hydro, with C$1bn covering expect our yield curve to start stretching influx since 1946. This supported a 1.3% the province’s deficits and unfunded pen- out in the next few years,” he says. growth in the population, ahead of Canada’s sion liability and C$0.5bn for a number Its modest annual funding require- rate for the second consecutive year. of other crown corporations and agencies. ment means that Manitoba will never be Budhia says Manitoba’s economy is Total net debt to GDP is projected to be a prolific borrower in the international set to grow steadily over the next two 27.4% at March 2013, which is below markets, although it aims to maintain a years. “The Manitoba Finance survey the average for the Canadian provinces. consistent presence outside the Canadian of economic forecasters conducted in Garry Steski, director of capital mar- dollar market. “We put a lot of time into March projects that Manitoba’s real GDP kets at the treasury division in Winnipeg, our investor relations work with overseas will expand by 2.3% in 2012, above the says the total net funding requirement investors, because we want to maintain national increase of 2.1%,” says Budhia. for 2012 will be around C$3.7bn, in our access to international markets as and “In 2013, Manitoba’s real GDP is expect- line with previous years. Refinancing will when opportunities arise to issue at levels ed to increase by 2.4%, matching the account for C$2bn (of which C$1.4bn that are competitive with the Canadian projected rate of national growth.” will be for the province and C$600m for dollar market,” says Steski. “International This solid growth will provide impor- Manitoba Hydro), with the balance ear- funding accounts for 20%-25% of our tant support for Manitoba’s deficit- marked for new capital spending. annual programme and I would expect this share to remain stable.” Like other Canadian provincial bor- Manitoba real GDP growth — 2006-13f rowers, Manitoba has benefited from international investors’ appetite for top- quality SSA borrowers. There was plenty of demand for its most recent global bond, a six year $600m deal in February. “We thought that if we could price at below 20bp over swaps, that would be a great achievement,” says Steski. “But demand built up quickly and we had at least 80 investors in the book, all of them good quality names. That meant we were able to increase the deal from the mini- mum of $500m, and to price at mid- swaps plus 19bp. Our syndicate banks say Manitoba outperforms Manitoba expected to exceed or our name continues to be added to the Canada 2006-09 match Canada in 2012f-13f books of international investors that have not previously bought into the Manitoba Source: Manitoba Bureau of Statistics, Manitoba Finance credit, which is very positive.” K 7006-007 Manitoba 2012.indd 7 11/06/2012 19:20
  • 8. Sponsored statement Sponsor: British Columbia National Bank of Canada Financial Markets is a trademark used by National Bank Financial Inc. and National Bank of Canada Financial Inc. under non-exclusive licence. Sharing the burden Given the strength of British Columbia’s recent track record of economic and revenues will increase by an annual average debt management, it is easy to see why demand for its benchmarks remains so of 2.9%. robust. “This was a gem,” one investor said in response to the province’s two- This does not mean cutting back on tranche $1.5bn global offering in April. essential public services, with $10.7bn of B ritish Columbia is unambiguous taxpayer-supported capital investments in about its principal fiscal objective. the current fiscal plan allocated towards Following deficits of almost $2.5bn hospitals, schools, post-secondary facilities, in 2011-12 and a projected $968m in transit and roads. The 2012 budget targets 2012-13 it aims to have eradicated its average annual spending growth in the budget deficit by 2013-14, generating a health sector of 3.2% between 2012-13 modest surplus of $154m, rising to $250m and 2014-15, down from 4.8% between in 2014-15. 2009-10 and 2011-12 and 7% between To emphasise its commitment to the 2005-6 and 2008-09. Annual spending task, BC’s government has warned that the growth slows more dramatically in the cur- corporate tax rate will rise by 1%, albeit rent fiscal plan to 0.6% in K-12 education from a very low base, if required in 2014- and 1.6% in post-secondary. 15. “We feel comfortable about sending Collective belt-tightening has meant out an early signal about how we plan to that the majority of public sector employ- safeguard our targets for a balanced budget ees have accepted pay freezes enshrined against any unanticipated economic down- in initiatives such as the Net Zero Wage turn,” says Sabine Feulgen, assistant deputy Mandate (2010 and 2011). They will minister and deputy secretary to the treas- also be asked to accept modest increases ury board. combined with offsetting productivity sav- The business community has responded ings under the Co-operative Gains Wage constructively to this warning. “The corpo- Mandate (2012 and 2013). rate sector and the general public recognise This public engagement in fiscal the value of our triple-A credit rating and management is one reason why Feulgen that this is part of the medicine we may is convinced that BC will deliver on its need to take to protect the fiscal plan,” says targets. Its track record of sticking to its Feulgen. fiscal objectives is another. “We haven’t set It is a medicine that large cross-sections ourselves unreasonable targets, but we have of the BC population are being required been very focused on achieving them,” she to take in a collective endeavour to balance says. the budget as annual expenditure growth The drive to balance the budget will also is limited to 2% over the next three years. be supported by a benign macroeconomic Over the same period, it is estimated that climate, with BC’s finance ministry pro- jecting real GDP growth for the province of 1.8% in 2012, 2.2% in 2013 and about 2.5% a year between 2014 and 2016. These projections are more conserva- tive than those of the Economic Forecast Council, which is expecting growth in BC of 2.2% in 2012 and 2.5% in 2013. Combining the lower economic forecast, contingencies and other prudent measures, the fiscal plan has over $2bn for manag- ing downside risks. The result is that debt remains affordable at an estimated 16.4% in 2011-12, and peaking at 18.3% in 2014-15 before returning to a downward trend. BC’s finance ministry’s lower forecasts for growth reflect its caution over the outlook for the global economy in general Vancouver: gateway to Asia and the US economy in particular, as well as uncertainty about the prospects for 8008-009 British Columbia 2012.indd 8 11/06/2012 19:21
  • 9. Sponsored statement British Columbia Europe. With housing starts on the rise exports, China for 14.9% and other Asia Canadian dollar position, which was in again, there is also a question mark over for 12%. yen. the outlook for the BC housing market, This large and growing share is due in “We keep a daily vigil on opportunities given the relatively high level of house- part, as Hopkins acknowledges, to BC’s in all offshore markets,” says Hopkins. hold debt in the province. Jim Hopkins, proximity to Asia. But it also a product “We are constantly looking to achieve assistant deputy finance minister, says of a carefully developed strategy to bol- savings for the BC taxpayer, and we rec- there are few signs of the same specula- ster trade by building a transportation ognise that by diversifying our investor tive broth that may have characterised infrastructure second to none. The $22bn base and ensuring we maintain access to a BC house prices in previous cycles. “We Gateway Strategy has been built around broad range of capital markets around the don’t see houses being flipped as they the refurbishment and expansion of the world we can reduce our funding costs were in the early 1990s when the ratio ports at Prince Rupert and in the Lower over the long term and ensure access to of houses being bought and sold again Mainland and improvements to road liquidity in turbulent markets.” within six months was close to 10%,” he and rail transportation facilities through- In the US dollar market, a favour- says. “Today, it is close to normal levels of out the province, all aimed at speeding able credit differentiation favouring the about 2%.” up the shipment of goods through the province has allowed BC to achieve The outlook for more solid growth in province and eradicating bottlenecks at competitive funding levels while ensuring BC is supported by a number of key indi- the key entry and exit points. The result that transactions are priced attractively cators. The labour market remains steady is that goods can be transported from, for investors. “When we approach an off- and the province’s unemployment rate say, Shanghai to Chicago about 60 hours shore public market, we are always mind- stood at 6.2% in April 2012, down from faster through British Columbia than via ful that the timing, sizing and pricing of 8.1% in March 2011. the principal US west coast ports. our offerings are such that they generate Retail sales have also recovered ahead a positive performance for investors,” says of those of most other provinces, rising by British Columbia in Hopkins. “We want to be certain that we 5.4% in 2010 and 3.1% in 2011. In the the capital markets will be welcome next time we come to first two months of 2012, retail sales were BC’s borrowing requirement for this fis- the market.” up by 5.9% compared to the same period cal year is projected at $8.5bn. This will In 2011, offshore funding accounted in 2011. fall in 2013-14 and 2014-15 to between for an unusually large 35% share of the Business confidence in BC is supported $7bn-$7.6bn as the government moves province’s total issuance for the year as a by a corporate tax rate among the lowest towards its target of achieving fiscal bal- whole, which amounted to $6.7bn. in the G7. It also has the lowest provincial ance, and trims its capital spending budg- The success of its first offshore issue personal income tax burden in Canada ets closer to historical levels. of FY2012 suggests that there would for individuals earning up to $120,000 BC’s strategy in the capital market be enough demand to underpin a a year, and the second lowest tax rate for has been to generate most of its funding similar share this year. With demand for the highest wage earners. from the domestic market, with 85% of Canadian public sector borrowers very Another encouraging pointer towards its debt portfolio sourced from Canadian strong among investors looking for expo- its long term growth prospects is the dollar public and private markets. sure to top-quality SSA borrowers, the increased diversity of BC’s exports. “We The balance has been raised offshore, Aaa/AAA rated BC was able to generate now have a much better balance in our almost all of which is swapped back into well-diversified demand for a benchmark exports than we had 10 years ago, when Canadian dollars. BC adheres to a firm in April split into a $1.25bn five year glo- the US was our dominant trading part- policy of issuing outside the domestic bal and a $250m 10 year tranche. ner,” says Feulgen. Between 2009-11, the market only when offshore funding costs While there is no question about the US accounted for an average of just 46% can improve upon those available in the strength of international demand for of BC’s exports, with trade links between domestic market on an after-swap basis. exposure to BC, domestic demand has BC and the fast-track Asian economies Although BC can maintain unhedged also been pushing the province’s spreads expanding at a very healthy clip. In 2011, exposure in foreign currencies, it recently to increasingly low levels and further Japan accounted for 14.1% of BC’s closed down the government’s only non- through its domestic peers. And as Budget 2012 expenditure track Hopkins explains, the domestic market is especially compelling at the longer end Budget 2012 expenditure track of the curve, with the basis swap making issuance beyond 10 years in US dollars 44.3 uncompetitive. The average maturity of (C$bn) 43.5 BC’s debt is now seven years, which is Budget 2011 42.8 spending track 41 41.8 longer than its benchmark, and spreading the province’s issuance out across the yield Three-year 39.4 40.3 average curve is an important component of its 38.3 annual growth: debt management strategy for minimizing 2.0% Expenditure refinancing risk. 36.6 management Another important component of impact to date – average annual BC’s funding strategy is its use of Public 34.2 growth: 3.0% Private Partnerships (PPP), for which it is Before recognised as a North American pioneer. 32.2 economic Since 2003, more than 35 key projects downturn – B d t Budget 2012 average annual Fiscal Plan worth some $12bn have been completed growth: 5.9% on a PPP basis, all of which are reported 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 on-balance sheet. Blazing a trail in the PPP sector with a 1 For comparative purposes, the Budget 2012 expense amounts exclude refundable tax credit transfers, which were netted strong track record complements the suc- from revenue in Budget 2011. cesses scored by BC in the dollar global Source: Government of British Columbia market. K 9008-009 British Columbia 2012.indd 9 11/06/2012 19:21
  • 10. Sponsored statement Sponsor: Canada Mortgage and Housing Corporation (CMHC) National Bank of Canada Financial Markets is a trademark used by National Bank Financial Inc. and National Bank of Canada Financial Inc. under non-exclusive licence. Promoting competition in the Canadian mortgage market International investor demand for exposure to the strongest public sector est on CMB are guaranteed by CMHC, Canadian borrowers remains robust. Their liquidity, transparency and which is a crown corporation, they are undisputed credit quality make Canada Mortgage Bonds — which carry the full ultimately backed by the Government of faith and credit of Canada — a firm favourite among local as well as Canada,” says Mark Chamie, CMHC’s international investors. Ottawa-based Treasurer. “This is why they are rated AAA and will continue to track I n 2011, demand among central banks the rating of the Canadian government.” and official institutions for Canada The CMB market has played a key role Mortgage Bonds (CMB) continued to in promoting the stability of the Canadian rise, with their share of total distribution housing market, which was widely reaching 9%, compared with 7% in 2010 regarded as being a notable reason for the and 2% in 2009. resilience of Canada’s economy during the This growing demand is significant for global downturn of 2008 and 2009. As two reasons. First, it reflects the increasing- Canada had no US-style subprime sec- ly important role that the Canadian dollar tor, there was no destabilising speculative is playing as a reserve currency in the port- boom and bust in the Canadian housing folios of central banks across the world, market in the 2000s, with housing starts which in itself is a vote of confidence in steady and MLS (Multiple Listing Service) the stability of the Canadian economy. sales remaining stable. According to the Second, this growth in demand is testa- Canadian Bankers Association (CBA), as of ment to investors’ comfort with the credit January 2012 just 0.38% of mortgages in profile of CMB, which are regarded as a Canada were in arrears. “The rate of arrears proxy for Canadian government risk. The is more than 10 times higher in the US CMB programme was originally set up in [than in Canada],” noted the CBA. June 2001 to support Canada’s mortgage An accelerated expansion in the market by guaranteeing mortgage-backed Canadian economy, taken with the con- bonds, underpinning the provision of tinuing rise in the number of new jobs and low-cost funding for lenders and therefore an increase in household debt, are all fac- promoting competition in the Canadian tors that support arguments for sustained mortgage market. CMB are issued by the strength in the housing market. Canada Housing Trust (CHT) and fully The consensus among economic fore- guaranteed by the Canada Mortgage and casters is that Canada’s economy, as meas- Housing Corporation (CMHC). “Because ured by gross domestic product (GDP), the timely payment of principal and inter- will grow in the mid-to-low 2% range over Predictions for the continuing strength of Canada’s housing market are supported by the expansion of the economy and the corresponding rise in the number of new jobs 10010-011 CMHC.indd 10 11/06/2012 19:22
  • 11. Sponsored statement Canada Mortgage and Housing Corporation (CMHC) in the market that it was able to issue a highly successful $10bn two-tranche bond two days after the collapse of Lehman Brothers in the autumn of 2008. “The five year fixed rate CMB is the cornerstone of our programme, and will continue to account for the bulk of our issuance, complemented by 10 year and FRN bonds,” says Chamie. CMB issuance in FRN format dates back to 2005, while its first 10 year bonds were launched in 2008. “However, the expecta- tion that Canadian interest rates are likely to rise may generate more demand for FRNs from investors.” One notable feature of the CMB programme in recent years has been the rise in secondary market trading The absence of a US-style subprime sector meant Canada’s housing market volumes, supported by a 12-member maintained steady housing starts and stable sales despite the financial crisis market-making syndicate, which in 2011 reached more than $750bn. “This was a 2012 and 2013, with 2013 being the tial mortgage sector, “the housing boom notable increase over 2010’s total of just stronger of the two years. This growth will more likely cool than correct”. over $600bn, and the $560bn we saw in will help drive moderate employment As CMHC’s Chamie points out, CMB 2009,” says Chamie. CMB are included gains and gradual reductions in Canada’s carry the government guarantee and the in the DEX Universe Bond Index and unemployment level. quality of the CMB portfolio is very high. are listed on the Euro MTF of the The impact of a stronger economy on The vast majority of CMHC-insured Luxembourg Stock Exchange. the housing market, however, is expected mortgages have loan-to-value (LTV) ratios Rising liquidity in the CMB pro- to be offset by a gentle rise in interest of 80% or less, based on updated valu- gramme is one of a number of reasons rates. On April 17, the Bank of Canada ations. Additionally, the average equity why the market has been increasingly announced that it was leaving the target in CMHC’s insured portfolio in 2011 appealing in recent years to international for the overnight rate unchanged at 1%. remained constant from 2010, at 44%. investors. Others include the 0% risk- Subsequently, in its April Monetary Policy Nevertheless, Chamie says that the weighting under BIS guidelines, the Report, the Bank commented that there government is mindful of the risks associ- absence of any Canadian withholding is reduced slack in the economy and some ated with house price inflation and has tax, and the optimum rating assigned signs of firmer inflation. Mortgage rates, been monitoring lending activity closely. to CMB by Moody’s, S&P and DBRS. particularly adjustable mortgages, are “Since 2008 the government has tight- Additionally, in a world in which the sup- closely correlated with the Bank’s target ened up the rules on mortgage lending ply of top-quality triple-A assets is dimin- for the overnight rate. Consequently, three times,” he says. “Today, it is recom- ishing, Canadian public sector bonds mortgage rates are likely to remain stable mending that consumers be prudent in have been in demand as relatively safe throughout most of 2012 before increas- their home purchases and not overextend haven assets. ing modestly towards the end of the year. themselves.” The result is that in 2011, 28% of Although there have been considerable Over the immediate future, Chamie CMB bonds were distributed outside swings in monthly estimates of housing says he foresees no change in the CMB Canada, compared with 22% in 2009, starts activity, the trend rate of housing programme. “The objective has been, although a number of individual transac- starts has been rising slowly, reaching and will continue to be, the promo- tions were characterised by unusually 208,700 units as of April 2012. Strong tion of competitiveness in the Canadian high overseas demand. In the case of the labour market conditions will continue to mortgage market by ensuring a consistent 10 year bond issued in August 2011, drive the construction of new homes, but supply of low cost financing for lending for example, 52.1% of the bonds were some deceleration of the current robust institutions,” he says. bought by investors outside Canada. pace is expected later this year and next To meet that objective, Chamie says Unsurprisingly, US investors continued year, particularly once mortgage rates that total issuance of CMB this year will to lead international demand for CMB begin to edge up. be in line with 2011. “Based on our issu- in 2011, accounting for 15% of original Total residential sales through the ance in the first quarter of 2012 we expect distribution. Europe took 4%, while Asia Multiple Listings Service (MLS) increased total volume to be around $40bn,” he says. accounted for 3% and the Middle East 0.4% in the first quarter of 2012 and are As of the start of March 2012, and other regions for 6%. expected to remain relatively stable over $174.5bn of the $206.2bn outstanding Despite this demonstrable strength the remainder of this year and into in the CMB market was accounted for of demand for CMB, Chamie says that 2013. This stability will help maintain by fixed rate bullet maturity bonds, with CMHC has no immediate plans to issue balanced market conditions in most the balance in floating rate notes (FRNs). outside the Canadian dollar market. “At parts of Canada, which implies that price The bulk of fixed rate issuance is in the some point in the future we may look growth over the next year and a half will five year maturity, in which benchmarks at international markets, but it is not be roughly in line with inflation. The are issued in March, June, September and something we are considering in the short average MLS price rose by 2.2% dur- December, with 10 year fixed rate bonds term,” he says. “The main reason is that ing the first quarter of 2012, and future and five year FRNs offered in February, any issuance in foreign currencies would growth is expected to be somewhat more May, August and November. CMHC’s need to be hedged back into Canadian subdued. issuance policy has always been based on dollars, and it is still unclear how the As BMO Capital Markets concluded in consistency and transparency. Indeed, final regulations on OTC derivatives will a recent analysis of the Canadian residen- it was due to CMHC’s regular presence impact the currency swaps market.” K 11010-011 CMHC.indd 11 11/06/2012 19:22
  • 12. Sponsored statement Sponsor: Alberta National Bank of Canada Financial Markets is a trademark used by National Bank Financial Inc. and National Bank of Canada Financial Inc. under non-exclusive licence. Alberta: the three-card trick In fiscal year 2011-12, Alberta made full use of its extensive natural resource basis. There is little evidence to suggest base to deliver a range of macroeconomic indicators that exceeded the national that buoyant retail sales have exerted any average and the province’s original projections for the fiscal year. upward pressure on inflation or house prices. Alberta’s monthly inflation rate has T he provincial government’s been falling in every month since October revenues in 2011-12 reached 2011, with April’s inflation hitting 0.8%, $40.3bn, up $1.8bn from the the lowest in Canada. original forecast for the year due to a “We’ve seen some very positive robust labour market and buoyant tax economic numbers,” says Lowell Epp, receipts. Last year, employment growth in executive director of capital markets at Alberta was 3.8%, which was the highest Alberta Treasury Board and Finance in rate among the Canadian provinces. Edmonton. “But beyond the numbers, we Alberta accounted for almost 30% of have also seen many new oil sands projects new jobs created in Canada over the last being announced. If all announced year, nearly triple its population share. projects proceed, economic activity in the Unemployment averaged just 5.5% last province will ramp up substantially.” year, with employment growing by 77,000 Still, making precise projections about people, to more than 2.1m. the provincial government’s revenues Investment in Alberta, meanwhile, is difficult. Every $1 drop in the WTI was more than $88bn in 2011, more oil price leads to a decline in annual than double the national average on a provincial government revenues of per capita basis. Much of that investment $223m, while every $0.10 fall in the price is being channelled into the oil and gas of natural gas prompts a decline of $28m. sector. Alberta has proven oil reserves of The export-driven nature of Alberta’s 171.3bn barrels, 169.9bn of which are in economy makes government revenues the form of bitumen and the remaining sensitive to currency fluctuations. For 1.4bn in conventional oil. Alberta’s every one cent rise in the value of the reserves are the third largest in the world Canadian dollar relative to the US dollar, and are sufficient to meet Canada’s entire the province’s revenues decline by $247m. oil demand for almost 400 years. Nevertheless, the recent strength of Investment in Alberta’s oil and the Alberta economy underpins the gas sector is having a demonstrable provincial government’s confidence that trickledown impact throughout the its robust revenue stream will allow it to province’s economy. Retail sales rose by perform something of a three-card trick in 9.0% in March 2012 on a year-on-year delivering value for Albertans. Economic activity in Alberta is poised to ramp up substantially 12012-013 Alberta 2012.indd 12 11/06/2012 19:23
  • 13. Sponsored statement Alberta approximately $11bn more in taxes each new borrowing for the province itself, year than they do now. says Epp. Third, Alberta’s robust macroeconomic While Alberta does not borrow indicators will allow the provincial to cover deficits, it is active in the government to increase its investment international capital market on behalf in infrastructure over the next few years. of three provincial corporations Since 2000, infrastructure spending by – Agriculture Financial Services the provincial government has averaged Corporation (AFSC), Alberta Capital $4.2bn per year; in the next three years, Finance Authority (ACFA) and Alberta this will rise to $5.5bn. Alberta’s per Treasury Branches (ATB). The 2012 capita infrastructure spending is already budget estimates that the consolidated about $1,500, well above the national financing requirement of these three average. corporations will fall from $4.2bn in “Our population has grown by 2011-12, to $3.5bn in 2012-13, $3.4bn 10% over the last 10 years,” says Epp. in 2013-14 and $1.6bn in 2014-15. “Given that many western populations Epp explains that as Alberta borrows are stagnant or even shrinking, that is a in the provincial government’s name and dramatic rate of growth, and that growth on-lends to these provincial entities, its Alberta: set to balance its budget before is creating demand for infrastructure like funding strategy is driven principally by Canada’s other provinces hospitals, schools, roads and highways.” the borrowing requirements of AFSC, A key priority for the government ACFA and ATB. “In recent years, this First, Alberta will balance its budget is upgrading highway infrastructure in overall requirement has tended to be ahead of most other Canadian provinces. the province, including Highway 63, fairly short term,” he explains. “This is After 14 years of surplus, Alberta chalked which connects Alberta’s capital city, because the biggest provincial borrower up deficits as financial markets collapsed Edmonton, to the thriving oil sands is ACFA, which has funded primarily and the world sank into recession in town of Fort McMurray in the north of through the use of shorter dated floating 2009. That fiscal trend has turned the province and established oil sands rate notes (FRNs) in recent years.” around, with the province predicting operations north of the town. “In the case of Alberta Treasury a return to surplus in 2013-14. “The Branches, all its funding is in terms of economic activity we’re seeing right Alberta in the capital markets five years and less,” says Epp. Agriculture now is very good for the construction The province has no plans to borrow Financial Services Corporation, industry and retail sales, but the royalty to fund capital projects at the current meanwhile, has much smaller stream from new oil sands projects won’t time and is prohibited from borrowing requirements in pockets of $100m or flow until those projects come on-line,” to cover budget deficits. Alberta’s fast- $200m. says Epp. declining deficit will continue to be In common with Canada’s other Second, the strength of the economy offset by the Sustainability Fund, which provincial borrowers, the bulk of allows Alberta to maintain a tax holds Alberta’s short-term savings built Alberta’s borrowing needs are very regime that is the most competitive in up from past surpluses. The fund, comfortably covered by its domestic Canada. The province has the lowest which had assets of just over $8bn in funding programme, where Alberta’s overall corporate and small business March 2012, is used to help manage bonds tend to trade tighter to the tax burden in the country – with the the effects of revenue volatility, protect government curve than all other lowest fuel tax rate, no capital tax and priority programmes and services, and provinces. Epp says Alberta is receptive Employment Growth no sales tax. Overall, if they were taxed build infrastructure while maintaining to funding opportunities outside the at the same rate as their counterparts Alberta’s competitive tax system during Canadian dollar market, which is why (Year-over-year change) in other Canadian provinces, Albertans challenging economic times. it recently restored its Global Medium and Alberta businesses would pay The current year’s budget calls for no Term Note (GMTN shelf). Epp says that Alberta has yet to make use of its GMTN programme, chiefly Alberta’s employment growth (year-over-year change) because the province has yet to receive a sufficient volume of reverse enquiry. “We haven’t yet seen much in the way of 6% Alberta reverse enquiry, but at the moment the banks seem to be focusing mainly on the 4% liquid billion dollar global deals, which we don’t have a requirement for at the 2% moment,” says Epp. “When we set up the GMTN we 0% made it very clear that it was all about Rest of Canada identifying opportunistic financing, which usually comes in the form of -2% reverse enquiry,” says Epp. “If we could generate better funding costs in -4% international markets after swapping back into Canadian dollars, we would -6% certainly look at opportunities in US Apr Oc Apr Oc Apr Oc Apr dollars or other currencies. But we 09 t0 10 t 10 11 t 11 12 won’t fund outside the domestic market 9 only to break even with the domestic Source: Statistics Canada market.” K 13012-013 Alberta 2012.indd 13 11/06/2012 19:23
  • 14. Sponsored statement Sponsor: Quebec National Bank of Canada Financial Markets is a trademark used by National Bank Financial Inc. and National Bank of Canada Financial Inc. under non-exclusive licence. Quebec: the next megaproject Quebec has exciting and ambitious plans for the next 25 years, with the Plan Nevertheless, this year Quebec’s debt Nord to develop the north of the province already gathering momentum. At amounts to 55.3% of GDP a total which , the same time, the government is making progress toward balancing the the province is aiming to reduce to 45% budget next year and reducing the province’s debt. by 2026, chiefly by increasing the price of electricity, which is well below the national Q uebec is committed to ensuring average. Starting in 2014, the price will be that future generations are not increased by one cent per kilowatt hour left vulnerable to a repeat of the over a five year period. Receipts from this downturns of the 1980s and 1990s, nor price increase will be put into Quebec’s saddled with high debt burdens. This is Generations Fund to reduce the province’s why an attack on the province’s public debt. This will represent $1.6bn in 2018- debt is at the top of the government’s 2019 and in the following years. economic agenda. As National Bank Bernard Turgeon says that at 11% Financial notes in a recent research of revenues, debt service charges are bulletin, “though fiscal balance is within manageable and well down on the level of reach, this is no time for complacency. In 16 % at the end of the 1990s. our view, the plan to reduce the ratio of Before tackling the debt, Quebec will debt to GDP over the period from 2013 focus on its objective of eliminating its to 2017 is essential for a return to lasting deficit by 2013-14. Impressive progress on soundness in public finances and for a this front was made in the year to March fairer deal among the generations. This 2012, in which the deficit is estimated amounts to the next megaproject for the to have reached $3.3bn, or $600m less Quebec government.” than originally projected. This includes a For Quebec, the fiscal challenge is contingency reserve of $300m. in some respects tougher than in other Turgeon says that he is confident that the provinces, given the size of its debt, which province will meet its targets on eliminating is the highest among the provinces. Part of the deficit and paring the debt, thanks this is the result of an extensive programme chiefly to an uncompromising attack on of infrastructure investment. “Over the expenditure. He says that in recent years last nine years, 80% of the increase in the Quebec has been second only to British debt has been accounted for by what we Columbia in terms of controlling its call good debt,” says Bernard Turgeon, expenditure, and that there is widespread associate deputy minister in Quebec’s commitment to maintaining this rigorous Ministry of Finance. “It has either been approach to expenditure management. used for infrastructure investment or has “On the deficit issue there is definitely a gone to government corporations to foster consensus, and there has been since 1996 economic development. Very little has been when the previous government adopted deficit financing.” zero-deficit legislation for the first time,” The government is continuing its efforts to reduce the debt burden 58 38 Debt representing Gross debt 35.2 accumulated deficits 36 56 55.3 34 35.0 55.0 54 32 54.3 30 52 52.1 27.7 28 26 50 24 48 22 20 46 18 Objective 45.0 Objective 17.0 2011 2012 2017 2026 2011 2012 2017 2026 (as of March 31, as a percentage of GDP) Source: Finances Québec 14014-015 Quebec 2012.indd 14 11/06/2012 19:34
  • 15. Sponsored statement Quebec says Turgeon. “All political the domestic market. In the parties today agree that we last two years, foreign markets need a balanced budget.” have been more often than not One of the main spending the more costly of the two.” measures aimed at returning The consequence was to a balanced budget has that in 2010-11 and 2011- been an agreement with 12, the domestic market the labour unions to limit accounted for 91.8% and pay increases for public 91.9% respectively of Quebec’s sector employees to 6% borrowing, which compares over the five year period with 68.5% in 2008-09. As ending in March 2015. of March 2012, while 83.4% The overall public sector of the government’s total debt payroll, meanwhile, will had been in Canadian dollars, remain frozen until 2013-14, with US dollars accounting and retiring public sector Quebec is making impressive progress towards for 8% and euros for 5%, on employees will be replaced eliminating its deficit by 2013-14 a post-swap basis, 99.5% of its only at the rate of one for gross debt was in the domestic every two retirees. “Salaries represent 55% year and is projected to increase by 7% currency. of programme spending, so if you control in 2012. Investment in manufacturing “We want to maintain a regular salaries you’ve gone a long way towards increased to $5bn in 2011. “Considering presence in the US market, and our aim is controlling overall expenditure,” says that the manufacturing sector is facing to continue to do at least one benchmark Turgeon. challenges created by the strong dollar issue in US dollars per year,” says Turgeon. The other main pillar of Quebec’s plan and competition from low-cost countries, In July 2010 and August 2011, Quebec to return to balance has been a range of $5bn of investment in the sector is very raised $1.5bn and $1.4bn respectively revenue-gathering initiatives, including an encouraging,” says Turgeon. “I think this in well-received US dollar benchmarks. increase in the sales tax of 1% in January reflects the quality of our labour force and The province has also enjoyed a strong 2011 and 2012. Other measures are the our favourable tax regime.” following in Europe, but has not issued in gradual implementation of a general heath Looking to the much longer term, euros since April 2009. care contribution which began in July a conspicuous source of sustainable As Turgeon adds, however, issuance 2010 and is projected to reach $200 in economic growth is the Plan Nord, in Canadian dollars and maintaining 2012 and an increase in the fuel tax by a 25 year project to develop a 1.2m an international investor base are not one cent per litre each year from 2010 to square kilometre region of northern mutually exclusive. Far from it. Attracted 2013. Quebec covering 72% of the province’s by Canada’s safe haven credentials and More broadly, economic expansion territory. This largely unexplored and the diversification benefits offered by will also support rising tax receipts. underdeveloped region is rich in minerals the Canadian dollar, more and more Much of this expansion will be such as gold, nickel, zinc and rare international investors, including central underpinned by a continued robust earths, and has extensive potential in banks, have been increasing their exposure rebound in exports. Having plunged hydroelectric, wind power and forestry to Canadian public sector borrowers in by 7.4% during the downturn of products. the domestic currency. “A number of 2009, exports rose by 0.8% in 2010 The Plan Nord is already generating investors who used to buy us in euros and and by 1.4% in 2011, and are forecast healthy investment inflows. In the Swiss francs now buy Quebec bonds in to expand by 3.4% in both 2012 and mining, oil and gas sector, there was a Canadian dollars,” says Turgeon. 2013. Since the early 1990s, Quebec’s 62% increase in private sector investment Balancing the need to minimise exports have almost doubled, and in the in 2011. In the mining sector alone, funding costs while maintaining a last decade, these have been successfully $4.4bn of investment is expected in commitment to its US dollar investor targeted to fast-growth regions of Asia 2012, which is a record. base has been one notable characteristic of and other emerging markets. While the Quebec’s recent funding strategy. Another share of Quebec’s exports accounted for Quebec in the capital markets has been using robust investor demand by the US dipped from 84.5% to 67.6% In 2011-12, Quebec borrowed $20.1bn, across the yield curve to extend the between 2001 and 2011, in the case of of which $9.5bn was for rolling over maturity of its debt. The average maturity Asia and other countries outside the US maturing debt. This year, the province’s of Quebec’s debt was extended last year and Europe, the share almost tripled, funding programme calls for total to 12 years, compared with 11 at the end from 6.2% to 17.9%. borrowing of $14.95bn (of which 22.4% of 2010, with almost a quarter of the GDP growth in 2011 was impacted had been completed by late May), rising province’s issuance in 2011 in the 30 year by the fragility of the international to $17.77bn in 2013-14. maturity, with 10 year issuance accounting economy, reaching 1.7% versus an original In common with a number of other for 46.9%. projection of 2.2%. GDP expansion is Canadian provinces, Quebec has been Another notable feature of Quebec’s now expected to weigh in at 1.5% in enjoying something of an embarras de funding policy over recent years has been 2012 and 1.9% in 2013, with job creation richesse in the domestic market in recent its decision to increase the province’s rising from 21,300 to 35,700 over the years, which has limited its issuance liquidity as a means of safeguarding two year period. That should ensure that outside the Canadian dollar sector. “The against markets freezing up in any unemployment, while relatively high at domestic market is always going to be our future crisis. “The federal government 7.8% in 2011, is projected to stabilise at main source of funding,” says Turgeon. announced last year it was increasing its around this level in 2012 and 2013. “But we have been a regular borrower in liquidity by $35bn over the next three Encouraging business investment international markets for many decades. years,” says Turgeon. “We think it is trends should underpin job creation in Our policy is to ensure that we don’t pay prudent to do the same, so we’ve decided the next few years. According to Turgeon, more in foreign markets having swapped that over the next two years we will private sector investment rose by 7.7% last back to Canadian dollars than we do in increase our liquidity by $6bn.” K 15014-015 Quebec 2012.indd 15 11/06/2012 19:34
  • 16. NatioNal BaNk of CaNada fiNaNCial Markets BriNgiNg CaNada to the world C$13,900,000,000 C$500,000,000 C$24,750,000,000 Bonds Bonds Bonds Lead Manager Co-Lead Manager Joint Lead Manager June 2011 - May 2012 June 2012 June 2011 - May 2012 C$500,000,000 US$1,200,000,000 C$2,500,000,000 Bonds Bonds Bonds Lead Manager Joint Lead Manager Lead Manager October 2011 February 2012 & May 2012 June 2011 - May 2012 Contacts: National Bank of Canada financial Markets global head of sales New York london Guillaume de Dalmas Paul Badeski Randy Keegan Yoland Cadieux Angus Bailey (212) 632-8625 (212) 632-8610 (212) 632-8614 44-20-7488-9379 44-20-7488-9379 gdedalmas@nbf-us.com pbadeski@nbf-us.com rkeegan@nbf-us.com yoland.cadieux@nbc.ca angus.bailey@nbc.ca Montréal toronto Vancouver Yvan Langlois Ralph Barcan Steven Fleckenstein (514) 879-2341 (416) 869-8612 (604) 623-6752 yvan.langlois@nbc.ca ralph.barcan@nbc.ca steven.fleckenstein@nbc.ca corporate, government & infrastructure finance: underwriting • sales & trading • risk managementnbf.caNational Bank of Canada Financial Markets is a trademark of National Bank of Canada used under licence. National Bank Financial Inc. is an indirect wholly-owned subsidiaryof National Bank of Canada, and is regulated by IIROC and a member of CIPF. National Bank of Canada Financial Inc. and NBF Securities (USA) Corp. are indirect wholly-ownedsubsidiaries of National Bank of Canada, and are regulated by FINRA and members of SIPC. NBF Securities UK is a branch of National Bank Financial Inc. and is regulated by the FSA.Please refer to our full disclosure at http://www.nbcn.ca/disclosure_english.jhtml

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