May 16, 2018 / 11:05 AM / 6 months ago

Bond investors seek proof of Ontario Conservative leader's fiscal prudence

TORONTO, May 16 (Reuters) - Bond investors are looking for clarity on the deficit reduction plans of Doug Ford, the likely next premier of Ontario who has promised to slash spending, before they turn more bullish on the plentiful debt of Canada’s most populous province.

Ford is the leader of the center-right Progressive Conservative party, which is aiming to end 15 years of Liberal government rule in Ontario. The probability of the Conservatives winning a majority in the June 7 provincial election is more than 90 percent, according to the CBC Poll Tracker, an aggregation of public polling data.

Ford, the brother of Toronto’s late, crack-smoking mayor, Rob Ford, has said he will cut spending by at least C$6 billion a year by finding efficiencies and will restore Ontario to fiscal health. But his campaign provinces have lacked the comprehensive information required by bond investors.

“Until I know the details I am not changing my portfolio strategy,” Ed Devlin, head of Canadian portfolio management at Pacific Investment Management Co, said in a recent interview.

Ford has not released a fully costed platform, which could provide reassurance that the deficit would not worsen and that the supply of bonds would slow. At nearly C$350 billion ($272 billion) in March, Ontario has one of the largest sub-sovereign debts in the world.

“We are still concerned around the possibility of a ‘kitchen-sink’ year with a new government,” said Sunil Shah, a portfolio manager at Aviva Investors, referring to the situation where all the bad news is absorbed at once.

There is “no clear indication that issuance pressure would abate meaningfully,” Shah said.

Investors have been disappointed by the Liberal Party’s plan to run a C$6.7 billion deficit in the 2018-19 fiscal year, and further deficits in subsequent years, just one year after balancing the books for the first time since the global financial crisis.

“To have locked in such structural and intractable fiscal deficits at the peak of the economic cycle isn’t borderline irresponsible, it is just plain irresponsible,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. “The fiscal future of Ontario is up for grabs in this election.”

Ontario had the outlook on its “Aa2” credit rating downgraded last month by Moody’s to negative from stable. It costs more for the province to borrow in the bond market than some provinces, such as Quebec and British Columbia, that are running balanced budgets.

In 2010, Quebec paid as much as 32 basis points more than Ontario to borrow for 10 years. It now pays 4 basis points less, data from Thomson Reuters showed.

As jarring as the Liberals’ projected deficits were for investors, the province’s auditor general found in a report last month that the deficits have been underestimated by billions of dollars.

Still, the Conservatives have a history of deficit reduction, while cutting spending and taxes. If Ford follows through on a promise to cut Ontario’s corporate tax rate to 10.5 percent from 11.5 percent it could ease investor concern that the province is losing competitiveness to the United States.

“It’s not just about runaway fiscal deficits. It’s also about a completely uncompetitive tax regime, that will create disincentives to invest, and that in turn comes at the expense of job creation,” Rosenberg said. ($1 = 1.2867 Canadian dollars) (Reporting by Fergal Smith in Toronto Editing by Denny Thomas and Matthew Lewis)

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