Provincial Government Liquidity Outlook

Published: June 25, 2020
  PDF

Abstract

Economic uncertainties generated by the public health response to COVID 19 and record low oil prices have disrupted financial markets. Beginning in March, there was an abrupt global flight to cash, which began to constrain credit access for provincial governments, among other Canadian issuers of debt. Soon after, the Bank of Canada intervened to directly support liquidity in provincial governments’ funding markets by buying short-term and long-term debt, and by purchasing provincial debt on a temporary basis using term repurchase operations. The purpose of this report is to address questions from several parliamentarians about potential uptake of the new Bank of Canada (the Bank) provincial liquidity-support programs. The Bank’s liquidity support programs are designed to address temporary financing challenges. Overall, PBO estimates that provincial governments will have liquidity requirements of at least $195 billion by the end of 2021. This accounts for $67 billion in COVID-related provincial spending, $119 billion of provincial debt that must be refinanced in 2020 or 2021, and $9 billion in planned deficits (pre-COVID-19). On 31 May, the Bank held $59 billion in provincial debt. Relative to their provincial economies, the governments of Manitoba and Newfoundland and Labrador have the largest estimated liquidity needs until 2021. Long-term fiscal sustainability for provincial governments is determined by structural factors and would not be meaningfully affected by these liquidity-support programs.