March 20, 2020 / 4:32 PM / in 2 months

Canada's government borrowing is set to soar: here's how much

TORONTO (Reuters) - Canada is set to ramp up borrowing as Ottawa’s C$27 billion ($19 billion) stimulus package, announced this week to stave off a potential recession due to the coronavirus outbreak, blows out the fiscal deficit, market strategists said.

FILE PHOTO: The Canadian flag is seen on top of a flagpole in the midst of high-rise buildings in the financial district of Toronto April 3, 2009. REUTERS/Mark Blinch

Together with maturing bonds and refinancing of T-bills, emergency measures could lift Canadian dollar borrowing to about C$375 billion for the upcoming fiscal year, up nearly 40% from an estimated C$270 billion for 2019-20, according to Reuters calculations. Canada’s fiscal year ends March 31.

But Canada’s triple A-rated debt and the current climate of risk aversion means the government could find enough buyers for increased borrowing.

The government’s planned purchase of up to C$50 billion of insured mortgage pools through the Canada Mortgage and Housing Corporation will likely be financed by government debt, say strategists and economists, while an expected spike in the budget deficit for the 2020-21 fiscal year will also add to supply.

The deficit will approach C$80 billion, nearly triple the government’s C$28.1 billion December estimate, according to Derek Holt, Scotiabank vice president of capital markets economics.

Holt’s estimate takes account of this week’s stimulus, as well as a C$10 billion loan support program and an adjustment for weaker economic activity.

Economists have warned the export-reliant economy could slip into recession in the absence of government stimulus. Canada went into recession in 2008-09 during the global financial crisis, and experienced a severe downturn during the 2015 oil price crash.

Canada is a major exporter of commodities, including oil. The price of oil has plunged as much as 69% from its January peak, hitting a near two-decade low on Wednesday at about $20 a barrel. Record household debt levels add to the economy’s vulnerability.

Ottawa’s plan to leave C$55 billion in the pockets of Canadians by deferring tax payments could add to funding needs over the coming months.

“Gross debt issuance including T-Bills will be very substantial in the coming year,” said Maria Berlettano, head of Canadian government credit strategy at CIBC Capital Markets.

The expected jump in debt issuance would be the largest since the global financial crisis.

Andrew Kelvin, chief Canada strategist at TD Securities says markets will expect low inflation and the Bank of Canada to cut its key interest rate to 0.25% or below and hold it there for a few years, while he sees risk appetite remaining weak.

“All of which will support strong demand for (Government of Canada) bonds,” Kelvin said.

Reporting by Fergal Smith; Editing by Chris Reese

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