Archived - Debt Management Report 2001-2002: 1

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Foreword by the Minister of Finance

I am pleased to table before Parliament the Debt Management Report of the Government of Canada for fiscal year 2001-02. This report provides a detailed account of the federal government's debt operations - the largest component of net debt - including the composition of the debt, its distribution, and the mechanisms and activities that ensure its prudent management in the interests of Canadians.

In 2001-02 the federal government recorded its fifth consecutive budget surplus - the first time this has happened in 50 years. As with each of the preceding four years, this surplus went to reduce our net debt, including market debt. Over this period Canada's net debt has been reduced by almost $47 billion, and our debt-to-GDP (gross domestic product) ratio now stands at just over 49 per cent, down from its peak of about 71 per cent in 1995-96.

These debt reduction efforts mean that the Government is paying $3 billion less each year in interest service charges. These are funds that are now being used to meet the priorities of Canadians. As well, reducing our debt means that Canada is less vulnerable to interest rate shocks sparked by events beyond our borders.

Despite our progress in this area, there is more work to be done. Interest payments on our net debt, which account for almost 22 cents of every revenue dollar taken in by the Government, are still the largest single expenditure item in our budget.

For this reason, the Government remains fully committed to prudent management of the nation's finances. Sound financial management is a key part of our strategy to sustain an economic environment that can offer Canadians a better standard of living - more jobs and higher incomes - and a better quality of life.

This report is designed to provide Canadians with timely, comprehensive and transparent information about how the debt is managed so they can hold the Government accountable for its decisions - decisions that affect the long-term financial security of the nation and the well-being of individuals.

 

 

The Honourable John Manley, P.C., M.P.
Minister of Finance
Ottawa, December 2002

Purpose of the Report

The Debt Management Report provides a detailed account of the federal government's borrowing and cash management operations in the past fiscal year (April 1, 2001 to March 31, 2002).

Debt-servicing costs are the largest spending program of the federal government, and the effective management of the programs that give rise to these costs is important to all Canadians. This report provides a comprehensive account of the context within which the debt is managed, its composition and changes during the year, and actions taken on strategic initiatives set out in the 2001-02 Debt Management Strategy, which was published before the start of the fiscal year.

Timely and transparent information of this kind is of use to market participants and ensures public accountability. To this end, the Debt Management Strategy and the Debt Management Report are tabled annually in Parliament and are available on the Department of Finance Web site at www.fin.gc.ca.

Highlights of 2001-2002

In 2001-02 the federal government continued to reduce its level of indebtedness. The Government's net public debt was reduced to $536.5 billion, which includes a $5.8-billion reduction in interest-bearing debt, a $3.0-billion decline in other liabilities and a $0.1-billion increase in assets. Net public debt is down $46.7 billion from its peak in 1996-97. Net public debt as a percentage of gross domestic product (GDP) dropped to 49.1 per cent in 2001-02 from a peak of 70.9 per cent in 1995-96. This is the sixth consecutive year in which the debt-to-GDP ratio has declined, and it is at its lowest level since 1984-85. This year alone debt-servicing charges were down $4.4 billion as a result of the decline of $5.8 billion in interest-bearing debt and a decline of 70 basis points, down to 6.9 per cent, in the average interest rate on that debt.

The Government's principal debt strategy objectives for 2001-02 continued to be the maintenance of low-cost, stable financing and the maintenance and enhancement of the functioning of the Government of Canada securities market. These objectives were reflected in a number of specific initiatives, which were set out in the Debt Management Strategy, published in March 2001. The major focus of the 2001-02 initiatives was to enhance the functioning of the market for Government of Canada securities in an environment of declining borrowing needs. Other important initiatives involved improving risk management through the introduction of new frameworks for cash and reserves management.

All of the 2001-02 Debt Management Strategy initiatives were successfully implemented over the course of the year. In addition, based on feedback from market participants, supplementary actions were taken to further enhance the functioning of the Government of Canada securities market. A summary of the 2001-02 Debt Management Strategy initiatives and the Government's actions can be found on pages 17 and 18 of this report. The remainder of the report provides detailed information on the Government's borrowing programs and debt strategy initiatives.

2001-2002 Debt Management Environment

Changes in the level of the Government's debt and its annual debt costs are affected by developments in two areas: the Government's fiscal results and the path of interest rates over the year. This section provides a brief summary of these developments and their consequences.

Fiscal Results

Budgetary Results

The Government recorded a budgetary surplus of $8.9 billion.

In 2001-02 the Government recorded a budgetary surplus of $8.9 billion, including a $5.8-billion decline in interest-bearing debt, a $3.0-billion reduction in other liabilities and a $0.1-billion increase in assets. This followed revised surpluses of $3.8 billion in 1997-98, $3.1 billion in 1998-99, $12.7 billion in 1999-2000, and $18.1 billion in 2000-01. ^[1] Over the past five years the Government's net public debt has been reduced by $46.7 billion. It stood at 49.1 per cent of GDP in 2001-02, down from a peak of 70.9 per cent in 1995-96. This ratio is generally recognized as the most appropriate indicator of the debt burden as it measures debt relative to the ability of the Government and the country's taxpayers to finance it. In 2001-02 the net debt-to-GDP ratio declined by 2.1 percentage points. This is the sixth consecutive year in which the debt-to-GDP ratio has declined, and it is at its lowest level since 1984-85 (see Chart 1).

Financial Requirements/Source

There was a financial source, including foreign exchange transactions, of $2.9 billion.

The budgetary surplus of $8.9 billion, including a net requirement of funds from non-budgetary transactions of $4.2 billion, produced a financial source (excluding foreign exchange transactions) of $4.7 billion, following a financial source of $19.0 billion in 2000-01 and $14.6 billion in 1999-2000. The results for 2001-02 mark the sixth consecutive year that the Government has recorded a financial source (excluding foreign exchange transactions). Including foreign exchange transactions, primarily relating to supplementing foreign exchange reserves, the net financial source was $2.9 billion in 2001-02. This financial source was used, in conjunction with the reduction in cash balances, to reduce market debt by $4.1 billion.

Canada is the only G-7 nation to record a financial source for six consecutive years.

Financial requirements/source (excluding foreign exchange transactions) is a measure of the Government's financial position that is broadly comparable to the measure of budgetary balance used by other major industrialized countries, including the United States. On this basis, Canada is the only Group of Seven (G-7) country to report a financial source for six consecutive years.

The Budgetary Surplus and Financial Source, 2001-02
	($ billions)
Budgetary surplus	8.9
Net source of funds from non-budgetary transactions	-4.2
Financial source (excluding foreign exchange transactions)	4.7
Net requirement of funds from foreign exchange transactions	-1.8
Net financial source	2.9
The budgetary balance is presented on a modified accrual basis of accounting, recording government liabilities when they are incurred, regardless of when the cash payment is made, and recording tax revenues only when the cash is received. In contrast, financial requirements/source measures the difference between cash coming in to the Government and cash going out. It differs from the budgetary balance in that it includes transactions in loans, investments and advances, federal employees' pension accounts, other specified purpose accounts and changes in other financial assets and liabilities. These activities are included as part of non-budgetary transactions.

Composition of the Federal Debt

There are several measures of debt.

Reports on the federal government's debt and debt management strategy use certain terms to describe the debt: gross public debt, market debt, non-market debt and net public debt.

Gross Public Debt

Gross, net and market debt have all declined in recent years.

Gross public debt is made up of two major components: market debt and non-market debt. Gross public debt at the end of March 2001 totalled $624.1 billion, down $8.8 billion from the previous year and $16.6 billion from a peak of $640.7 billion on March 31, 1997 (see Chart 2).

Market Debt

Market debt is the portion of debt that is funded in the credit markets and is, for the most part, actively managed by the Government. It consists of marketable bonds, Treasury bills, Canada Savings Bonds, Canada Premium Bonds, foreign-currency-denominated bonds and bills, and bonds held by the Canada Pension Plan. At March 31, 2002, market debt outstanding was $442.3 billion, down $4.1 billion from the previous year (see Chart 2).

Non-Market Debt

Non-market debt includes liabilities held by the Government outside the credit markets. This includes money owed to public sector pensions, the Canada Pension Plan and other accounts, and the Government's current liabilities and allowances. In 2001-02 non-market debt totalled $181.8 billion, down $4.7 billion from 2000-01.

Net Public Debt

Net public debt is gross public debt minus financial assets. Financial assets include cash, foreign exchange accounts and loans. Net public debt declined by $8.9 billion, from $545.4 billion in 2000-01 to $536.5 billion in 2001-02. The Government's financial assets increased by $0.1 billion to $87.6 billion, as the decrease in the Government's cash balances and accounts receivable was more than offset by increases in foreign exchange reserves and loans, investments and advances.

The net public debt-to-GDP ratio dropped to 49.1 per cent in 2001-02, its lowest level in 17 years and down from a peak of 70.9 per cent in 1995-96.

Market Developments

After a sharp but temporary downturn in the first half of fiscal year 2001-02, the Canadian economy rebounded strongly in the second half of the year. Core inflation remained within the 1 to 3 per cent target range throughout this period. The Canadian dollar traded between about US63 cents to US66 cents. During the latter half of the fiscal year, the US dollar appreciated against most international currencies, benefiting from substantial safe-haven flows.

Short-term interest rates declined, reflecting the global economic slowdown.

Short-term interest rates trended downward from the start to the end of the fiscal year in response to the global economic slowdown that became more evident as the year progressed, with a sharper drop coming in the wake of September 11. The Bank of Canada's target rate for overnight loans fell from 5 per cent to 2 per cent over the first three quarters, where it remained for the rest of the year. These developments were consistent with those in the US.

The yield curve steepened as the year progressed.

Short-term interest rates were noticeably lower than long-term interest rates (i.e. the yield curve was positively sloped) in both Canada and the US during 2001-02, reflecting the substantial amount of monetary stimulus in the economy. From the end of December to the end of the fiscal year, the yield curve steepened as market expectations adapted to a tightening monetary policy and higher long-term interest rates (see Charts 3, 4, 5 and 6).

Public Debt Costs

Public debt charges continue to fall relative to GDP.

The Government spent about 22 cents of every dollar of revenue in 2001-02 to pay the interest on the public debt, down from a peak of 36 cents in 1995-96; it is now at the same level as in 1980-81. Public debt charges as a percentage of GDP declined to 3.5 per cent in 2001-02 from 4.0 per cent in 2000-01 (see Chart 7).

2001-2002 Debt Management Initiatives

Plan as set out in 2001-2002 Debt Management Strategy	Results for fiscal year 2001-2002
Debt Structure
Maintain target of having two-thirds of the Government's total interest-bearing debt in fixed-rate form.	The fixed/floating ratio was maintained at the target level of two-thirds.
Domestic Debt Programs
Planned initiatives in 2001-02 to enhance cost-effectiveness and maintain a well-functioning market in Canadian-dollar-denominated securities:
Keep bond and Treasury bill programs at levels similar to previous year	The bond and Treasury bill programs were kept at levels similar to the previous fiscal year.
Increase the benchmark bond target range sizes for 10- and 30-year bonds from $9 billion-$12 billion to $12 billion-$15 billion, respectively, to enhance liquidity.	The benchmark sizes were increased as per the plan.
Reduce the targeted turnaround time for publication of the results for Government of Canada securities auctions from 30 minutes to 15 minutes to reduce market risk for participants and encourage broader participation	The auction turnaround time was reduced to 15 minutes in May 2001.
Facilitate cash management by changing the 30-year benchmark issuance pattern from spring/fall to summer/winter to match the issuance cycle to cash flow needs.	The 30-year cycle change was implemented.
Continue the pilot cash management bond buyback program to reduce the peak levels of government cash balances and reduce variability in Treasury bill auctions.	The pilot cash management buyback program was continued.
Develop a new collateral-based framework for management of cash balances to reduce risk and broaden access.	The new collateral-based framework was developed during the fiscal year and subsequently implemented in September 2002.
As a result of ongoing consultations with market participants, several other initiatives were undertaken to supplement those set out in the 2001-02 Debt Management Strategy: The time of regular Government of Canada bond buyback operations was changed from 2:00 p.m. to 1:15 p.m. to reduce market risk for participants and encourage broader participation. The range of eligible bonds for the bond buyback program was expanded to support the maintenance of a liquid new bond issue market. To stimulate participation of existing participants in buyback operations, the first pilot buyback operations on a switch basis occurred in February 2002. The pilot cash management bond buyback floor was lowered from $6 billion to $4 billion to enhance the effectiveness of the program.
Plan as set out in 2001-2002 Debt Management Strategy	Results for fiscal year 2001-2002
Foreign Debt Programs
With respect to the management of the Government's foreign debt and assets, the following plan was set out for 2001-02:
Continue cross-currency swaps in order to provide cost-effective funding.	The federal government entered into 79 cross currency swaps worth US $4.1 billion during the year.
Further reduce excess foreign liabilities over foreign assets.	Excess liabilities were reduced by $0.2 billion and are on track to be eliminated in the near term.
Complete the implementation of a new comprehensive collateral management framework to better manage the Government's risk to financial institution counterparties associated with its cross-currency swaps, forward contracts and deposits with financial institutions.	Counterparties signed a new collateral framework contract in April 2001, with implementation ongoing.

Report on 2001-2002 Borrowing Programs

Market debt declined from $446.4 billion to $442.3 billion in 2001-02.

As of March 31, 2002, market debt outstanding comprised $277 billion in fixed-coupon marketable bonds, $16.8 billion in real return bonds (RRBs), ^[2] $94 billion in Treasury bills, $24 billion in retail debt (Canada Savings Bonds and Canada Premium Bonds), $3.4 billion in Canada Pension Plan (CPP) bonds and $27 billion in foreign-currency-denominated securities (see Table 1). Foreign currency debt and swaps are used for the purpose of funding the Government's international reserves portfolio. The Government had $2 billion in interest rate swaps and $29.9 billion in cross-currency swaps outstanding as of March 31, 2002. Taking into account the effect of cross-currency swaps, foreign currency obligations were 12.9 per cent of market debt.

This section provides details on the operations of each major debt program. In 2001-02 the stock of Treasury bills increased by $5.3 billion, which was largely offset by a $2.9-billion decrease in fixed-coupon marketable bonds and a $2.1-billion decrease in retail debt. Issuance levels were in accordance with levels set out in the Debt Management Strategy at the beginning of the fiscal year. For information on the federal debt management framework, see Annex 1. For descriptions of the individual programs, see Annex 2.

Table 1
Composition of Federal Market Debt, 2001-02

	April 1, 2001 Outstanding	New issues	Maturing	Repurchase	March 31, 2002 Outstanding	Change
	($ billions)
C$-denominated
Fixed-coupon marketable bonds	279.9	40.2	26.0	17.1 d	277.0	-2.9
Real return bonds a	15.1	1.7	-	-	16.8	1.7
Treasury bills b	88.7	197.0	191.7		94.0	5.3
Retail debt	26.1	2.4	4.5	-	24.0	-2.1
Total domestic debt	409.8				411.8	2.0
Foreign-currency-denominated
Canada Bills	7.2	23.2	27.1	-	3.4	-3.9
Foreign bonds c	20.7	0.2	1.6	-	19.3	-1.4
Canada Notes	1.6	-	0.4	-	1.2	-0.4
Euro Medium-Term Notes	3.7	0.0	0.5	-	3.2	-0.5
Total foreign debt	33.2				27.0	-6.1
CPP bonds and notes	3.5	-	0.1	-	3.4	-0.1
Total market debt	446.4				442.3	-4.1
Note: As at March 31, 2002, the total amount of interest rate and cross-currency swaps outstanding stood at $31.9 billion (see Reference Table XI). Cross-currency swaps convert C$-denominated government debt into foreign currency obligations for the purpose of funding the international reserves portfolio. Numbers may not add due to rounding. a  Includes CPI adjustment b  These securities are issued at a 3-, 6- and 12-month maturities and are therefore rolled over a number of times during the year for refinancing. This results in a larger number of new issues per year than stock outstanding at the end of the fiscal year. c  Includes $492.0 million in securities assumed by the Government of Canada on February 5, 2001, on the dissolution of Petro-Canada Limited. d  Includes the bond buyback program, the pilot cash management bond buyback program and the pilot switch program. Source: Public Accounts of Canada.

Domestic Debt

Fixed-Coupon Marketable Bonds and Bond Buybacks

Gross bond issuance totalled $40.2 billion.

Fixed-coupon marketable bonds are issued at 2-, 5-, 10- and 30-year maturities on a quarterly basis, with the exception of 30-year bonds, which are issued semi-annually. The Bank of Canada announces the quarterly auction calendar shortly before the start of each quarter. These bonds are non-callable and pay semi-annual coupon payments. In 2001-02 gross issuance of bonds totalled $40.2 billion, consisting of $14 billion in 2-year bonds, $10 billion in 5-year bonds, $9.9 billion in 10-year bonds and $6 billion in 30-year bonds. During the year $26 billion worth of bonds matured.

There are three types of bond buybacks: buybacks on a cash basis, buybacks on a switch basis, and cash management buybacks.

The Government of Canada carries out three types of buybacks of its bonds. Bond buybacks on a cash basis, in which bonds are bought from investors for cash, take place following nominal bond auctions. Buybacks on a switch basis, in which the currently offered bond is exchanged for older bonds, take place several times each quarter. The first buyback on a switch basis took place in February 2002. Both of these types of buybacks have the objective of maintaining a liquid new-issue program by buying back older, less liquid bonds. Cash management buybacks of bonds, which involve buying back bonds with less than 12 months to maturity, are used to smooth the Government's cash requirements by reducing the peak levels of government cash balances needed to redeem upcoming benchmark bond maturities and to reduce the variability in the Treasury bill program. Bond buybacks on a cash basis totalled $5.3 billion, buybacks carried out on a switch basis totalled $0.4 billion and cash management bond buybacks totalled $11.5 billion.

Net new issuance declined by $2.9 billion.

Net new issuance of fixed-coupon marketable bonds during the year, taking into account buybacks and maturities, declined by $2.9 billion (gross issuance less repurchases less maturing issues), bringing the stock of outstanding marketable bonds down to $277 billion as at March 31, 2002.

Real Return Bonds

$1.35 billion in RRBs were issued.

Government of Canada real return bonds (RRBs) are issued at the long-term maturity of around 30 years. In contrast to fixed-coupon marketable bonds, whose coupon payments are fixed, interest payments on RRBs are adjusted for changes in inflation. More specifically, RRBs pay a real yield on a principal amount that is indexed to the CPI.

2001-02 issuance of RRBs totalled $1.35 billion, increasing the level of outstanding RRBs from $13.5 billion to $14.8 billion (from $15.1 billion to $16.8 billion including the CPI adjustment) as at March 31, 2002 (see Reference Table X).

Treasury Bills

The stock of Treasury bills increased by $5.3 billion.

Treasury bills are auctioned every two weeks in 3-, 6- and 12-month maturities and pay out at maturity at par (face) value. The stock of outstanding Treasury bills increased by $5.3 billion during the 2001-02 fiscal year to $94 billion at March 31, 2002. In 2001-02 the Government issued $197 billion in new Treasury bills, up from $174.3 billion in 2000-01 (see Reference Table VI).

Cash management bills (CMBs) are issued periodically by the Government of Canada. CMBs are Treasury bills with maturities of less than 3 months (they can be as short as one day) used as a source of short-term financing for the Government. CMB auctions can take place on any business day, typically for next-day delivery, but on some occasions for same-day delivery.

Retail Debt

The retail debt stock fell by $2.1 billion.

There are two types of non-marketable retail debt: Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs). CSBs and CPBs are sold for six consecutive months from October to March. Both types of bonds can be registered in the name of Canadian residents and are available in regular and compound interest forms. CSBs are cashable at any time and provide minimum guaranteed interest rates, which may be increased if market conditions warrant. CPBs are cashable once a year and offer a higher rate of interest for a longer period compared to the CSB on sale at the same time. CPBs' announced interest rates for the posted periods do not change once the issue date of the bonds has passed.

In 2001-02 the level of outstanding debt held by domestic retail investors - CSBs and CPBs - decreased from $26.1 billion to $24 billion. The decline in the retail debt portfolio reflects the reduction in federal government debt.

Foreign Debt ^[3]

Canada Bills

Canada Bills outstanding fell by US$2.5 billion.

Canada Bills are promissory notes which mature not more than 270 days from their issue. These securities are denominated in US dollars and are issued for foreign exchange reserve funding purposes only. In 2001-02 the level of outstanding Canada Bills decreased from $7.2 billion (US$4.6 billion) to $3.4 billion (US$2.1 billion), as the Government took steps to reduce the level of short-term foreign currency liabilities, in order to prudently manage rollover risks associated with maturing short-term liabilities.

Canada Notes

Canada Notes outstanding declined by US$200 million.

Canada Notes are promissory notes denominated in foreign currencies structured to meet investor demand. They are issued for foreign exchange reserve funding purposes only. The stock of outstanding Canada Notes decreased from $1.6 billion (US$1.0 billion) during 2001-02 to $1.2 billion (US$0.8 billion).

Euro Medium-Term Notes

EMTNs outstanding declined by US$300 million.

The Euro Medium-Term Note (EMTN) program complements the Canada Notes program. Notes issued under the program can be denominated in a range of foreign currencies. In 2001-02 there were no new EMTN transactions, and the total outstanding decreased from $3.7 billion (US$2.3 billion) to $3.2 billion (US$2.0 billion).

Foreign-Currency-Denominated Bonds

US$1.0 billion in global bonds matured.

There was no new global bond issuance in 2001-02. A total of $1.6 billion (US$1.0 billion) of foreign currency bonds matured in 2001-02. The total outstanding was $19.3 billion (US$12.1 billion).

Cross-Currency Swaps

US$4.1 billion was raised by 79 cross-currency swaps.

Cross-currency swaps consist of the exchange of obligations denominated in Canadian dollars for obligations denominated in foreign currencies, typically US dollars or euros, with the proceeds used to fund Canada's international reserves. Cross-currency swaps of domestic obligations are generally highly cost-effective compared to other sources of foreign currency funds. At the beginning of a cross-currency swap, the Government of Canada receives a principal amount in a foreign currency from the counterparty in exchange for a Canadian-dollar principal payment sourced from domestic bond issues. During the life of the swap, interest payments are made on the principal amounts. At the end of the swap contract the Government repays the foreign currency principal amount and receives the Canadian-dollar principal payment. In 2001-02 the federal government raised $6.4 billion (US$4.1 billion) by entering into 79 cross-currency swaps. At the end of the 2001-02 fiscal year, the total outstanding amount of cross-currency swaps totalled $29.9 billion (US$18.8 billion) (see Reference Table XI).

Notes

¹ The Canada Customs and Revenue Agency (CCRA) collects personal income taxes on behalf of the Government and all provincial and territorial governments except Quebec. On January 29, 2002, the CCRA announced it had identified a problem in tax accounting that resulted in overpayments to provinces under the tax collection agreements. On September 4, 2002, the Minister of Finance announced that the Government of Canada would recover $1.4 billion of the amounts overpaid for the years 1997 to 1999 and use the money to pay down the debt. The net present value of these amounts has been recast to the fiscal years to which they apply. In addition, once the problem was discovered, the federal government took immediate action to prevent further overpayments related to 2000 and subsequent taxation years. This has resulted in a transfer of $1 billion from the tax collection agreements with respect to taxation year 2000 to budgetary revenues in 2000-01. As a result, the budgetary surplus has been revised upward beginning in 1997-98. [Return]

² Includes consumer price index (CPI) adjustment. [Return]

³ All values are in Canadian dollars unless otherwise indicated. [Return]

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