Canadian Provinces Face Rising Borrowing Costs Amid US Tariffs Threat
Impact on Provincial Finances
US tariffs on Canadian goods threaten to stifle economic growth, leading to concerns for Canadian provinces. Reduced trade will diminish provincial tax revenues, requiring higher borrowing. This may translate into increased risk premiums on provincial debt, raising borrowing costs.
Vulnerability to Retaliatory Measures
Retaliatory tariffs or export limits from Canada could exacerbate the situation. Analysts believe tariffs are currently not factored into provincial spreads, but widening is a potential risk.
Impact on Bond Market
Ontario's recent bond sale saw investors demanding a premium of 60 basis points over the government benchmark. Analysis indicates that even a 20% tariff, excluding commodities, could widen provincial spreads on 10-year maturities by 12 basis points. This could increase interest payments by approximately C$162 million per year, assuming a borrowing estimate of C$135 billion for fiscal 2025.
Reliance on Domestic Funding
Tariffs may disproportionately affect Canadian government credit in the global market, leading provinces to rely more on domestic funding. Increased supply may lead to premium demands from investors.
Pre-Funding and Mitigating Factors
Canadian provinces have a habit of pre-funding debt, providing a head start on refinancing maturities. Ontario has outlined a slow-growth scenario, suggesting increased borrowing needs. However, the fixed-income market and pre-funding create some capacity to absorb these needs.
Other Considerations
Tariffs may drive provinces to diversify exports away from the US and increase inter-provincial trade. However, existing trade barriers within Canada pose challenges to achieving this.
Conclusion
US tariffs pose risks to Canadian provincial finances, potentially raising borrowing costs and burdening provincial balance sheets. Provinces will need to consider the implications and adapt their strategies to mitigate the impact of these trade measures.