Cushioned by a stable banking sector, ample commodity resources and increasing export links with the emerging markets, the country has remained sheltered from the worst of the storms.
But Canada is not completely impervious to the events in the wider markets. In May, the effects of the earthquake on Japan, the countrys third largest export counterparty, along with wildfires in Alberta, pushed the countrys GDP down 0.3%, the largest decline since 2009.
Throughout the volatility though, Canadas public sector borrowers have continued to raise financing CMHC even issued a transaction in the week following the US downgrade. But they have done so with an awareness of the fragility of the markets, and of the requisite of diversifying their funding sources to cushion any further blows.In the third annual EuroWeek Canadian Public Sector Roundtable, market participants discussed how their issuance plans have been affected by the global volatility, their outlook for the sector and the importance of balancing their domestic and international issuance. They met in Royal Bank of Canadas boardroom at its headquarters in the South Tower of the Royal Bank Plaza in Toronto.
Participants in the roundtable were:Grant Berry, managing director, debt capital markets, RBC Capital MarketsMark Chamie, treasurer, Canada Mortgage and Housing Corporation (CMHC)Wayne Foster, director, financial markets division, Department of Finance CanadaBrian Laffin, vice president and treasurer, Export Development Canada (EDC)Mike Manning, executive director, capital markets division, Ontario Financing AuthorityJigme Shigsar, managing director, debt capital markets, RBC Capital MarketsBernard Turgeon, associate deputy minister, Québec Ministry of FinanceNina Flitman, syndicated loans and leveraged finance editor, EuroWeek
EUROWEEK: As we approach the final few months of 2011, what have been the key developments for the Canadian economy in the last year? Wayne Foster, Department of Finance Canada: The Canadian economy has come out of the global recession in much better shape than many of its peers. It went into the financial crisis with a number of strengths. Along with a very strong fiscal situation at the federal level, as demonstrated by the lowest debt to GDP ratio in the G7, we had very strong, well capitalised banks. So we were in a good position to respond to the crisis. We didnt have to bail out our banks, and we had fiscal room to inject stimulus into the economy.
Since then, with the exception of the past quarter, we have had 11 straight quarters of economic growth. Weve recouped all of the lost output and all of the lost jobs the only G7 country to have done that. Weve been able to start to work towards a balanced budget again.
We are now looking to be back in balance by 2014-15, subject to economic conditions. We have built in a lot of prudence into the projections, so despite the slowdown that weve seen in the last quarter or so, were still well on track in terms of our fiscal plans. There will be an update of our fiscal outlook in the fall.
We have seen a strengthening in the dollar, and though its down from its peak its consistently over par. Our housing market is also doing well. We didnt have a housing boom going into the crisis. We did see some decline in housing prices, although thats fully been recouped since. In the recovery, in fact, house prices have now exceeded the pre-crisis levels.
So were in good shape, though there are headwinds from abroad. Canada has been affected by these, but it is starting in a good position to face the kind of uncertainties that we see emanating from Europe and the US and what seems to be a global slowdown in growth.EUROWEEK: Mark, there is some speculation about a bubble forming in the housing market. How do you rate the markets health? Mark Chamie, CMHC: While some are concerned that the real estate markets are becoming overheated, the latest results from CMHCs ongoing analysis suggest that prices are broadly in line with long-term fundamentals. Prudent lending and mortgage insurance practices and strong banking regulations have helped Canadas housing market remain healthy.
Housing starts last year were about 189,000. This year, theyre forecast to be about 183,000 and were expecting a very similar number for next year as well. On average, homeowners with outstanding CMHC-insured mortgages had equity of 44% in their homes at the end of 2010 and, at less than 0.5%, the rate of arrears of CMHC-insured loans remains historically low.
So, overall, we remain confident about housing in Canada.EUROWEEK: Wayne mentioned that on a federal level, youre looking to be back in balance by 2014/2015. Are the provinces working on a similar timescale? Bernard Turgeon, Québec Ministry of Finance: Actually, in the case of Québec, its one year earlier. We have a target of 2013/2014 for budget balance and were on track to reach that objective. The government reached an agreement with the labour unions last year on a growth rate of wages of 6% for five years. This will be very helpful to reach the spending objectives. In our government, salaries account for more than 50% of the spending, so when you control salaries well, you have a big chunk of the job done. We have taken some revenue measures, mainly increasing the rate of the retail sales tax by 1% last January to 8.5%; and the tax will be increased by another 1% next January to 9.5%. Its a very reasonable rate.
The deficit this year is going to go down to C$3.8bn, which represents 1.2% of GDP. And in two years time, it will be zero. And this objective is legislated, so the government has to reach it.EUROWEEK: What are the key focuses for Ontario?Mike Manning, Ontario Financing Authority: The recovery has allowed us now to exceed some of the pre-recession levels for employment, GDP and consumer spending, so thats all positive. We had real GDP growth last year of 3% and in the first quarter, it was quite strong as well on an annualised basis of 3.2%.
So the economy definitely is getting back on track, but as already mentioned, there are headwinds. We wont get our second quarter numbers for Ontario for a little while yet, but were still very confident. We have a 2.4% real GDP growth estimate for 2011, which is still slightly below the private sector consensus of 2.6%. Were looking to achieve balance over a slightly longer time horizon by the 2017-18 fiscal year and thats on track.
We went into the last fiscal year with an expectation of a C$19.7bn deficit. We modified that later to C$16.7bn by the start of this fiscal year, but it actually came in at C$14bn. Thats a C$5.7bn improvement over one year. Progress was mainly due to government spending coming in almost 4% below our original expenditure plans.
Weve also been able to lower our deficit forecast for the current fiscal year. We started off with a forecast of C$16.3bn and have now reduced that to C$16bn. Well probably be taking a fresh look at that once again when we do our fall economic statement.EUROWEEK: Do you anticipate theres going to be any impact from the forthcoming elections in the province?Manning, Ontario Financing Authority: Its hard to say. We think that well be able to access the domestic markets on a continuous basis right up until the election. I think in international markets, there might be a slightly longer blackout, but were not really expecting it to be too long.
Having said that, there could be a little bit of uncertainty if theres a change of government. Right now, the polls are quite close, so were trying to get a little bit ahead of pace with financing so that we have a bit of room after the electionEUROWEEK: We heard about the slightly weaker than expected second quarter results for Canada. What have been the greatest challenges in the second quarter of the year?Foster, Department of Finance Canada: The results are a reflection of developments in Europe with the sovereign debt crisis and the uncertainty that has resulted. Combined with that, the housing market in the US has yet to hit a floor, and there has been some uncertainty about the economic policies and fiscal and borrowing programmes in the US.
Were hopeful that the second quarter results are just a small dip and that we will get back to growth. Were in a good position here to weather the slowdown, but there does need to be some actions taken in other jurisdictions to address the underlying weaknesses that I think are reducing investor and consumer confidence.Grant Berry, RBC: Id like add to Waynes comments by saying that in Canada, at the federal, provincial and municipal levels everyone is on the same page in terms of fiscal responsibility and its been like that for sometime. There are five provincial elections this fall and there will be a no wavering in opinion on the need for strict fiscal policy. In contrast, weve witnessed a very of wide range different fiscal policy directions globally for some years. Foster, Department of Finance Canada: The sovereign debt crisis in Europe and the debt ceiling issue and downgrade in the US has really reinforced an already strong sentiment around fiscal constraint in Canada. It has brought the point home that we cant go back to perennial deficits and that we need to tackle that problem. EUROWEEK: How much of an impact has the US downgrade had on Canada, especially given that its the countrys largest trading partner?Brian Laffin, EDC: I would agree with Wayne that Canada could benefit on a relative basis as we would be perceived as an even stronger AAA credit, but that has yet to be tested. However, I think it is important to remember that the US is split-rated, and is likely considered AAA by most investors. On a relative basis, its still stronger than many other alternatives out there, and it remains the market with the most liquidity. From a market perspective, if anything, weve seen US rates rally since the downgrade.
The equity markets reacted negatively and that seems to be more on fears of a double-dip and combined with economic concerns about Europe there are certainly strong headwinds that trade is facing. The second quarter was slightly down, but there has been a bit of a bounce-back and the July numbers are better. Part of that is because of Japan coming back on line. We talk a lot about the sovereign debt crisis, but there have been other events this year, and the Japanese earthquake, Australian floods and a spike in oil prices also had an impact on exports. We are beginning to see the effects of these dissipate.EUROWEEK: How important is it for Canada to develop new trading counterparties in Asia? Laffin, EDC: We view the emerging markets as key strategic markets, and a large part of those will be in Asia. Over the last five years, there has been a shift and weve seen our business volume tied to emerging markets grow from about 20% to 30%. Weve put more people on the ground in a lot of these markets and this strategy is paying dividends. These will be growth venues for a lot of Canadian firms, and weve seen them start to diversify their supply chains in each of those markets. We have a major presence in Latin America and Asia, along with representation in Germany, Turkey and the Middle East. EUROWEEK: What sort of feedback you have seen from international investors, and how the outside world is viewing the Canadian product?Laffin, EDC: Certainly when I travel internationally there is interest from people who want increased diversification. Partly, were benefiting from the unfortunate position of others, but there is almost unlimited demand right now for the stronger triple-As including Australia, Norway and Canada.
The good news for us is that were triple-A because we dont issue a lot of debt, which makes it difficult for investors as they have a hard time getting their hands on our bonds.Turgeon, Québec Ministry of Finance: I can tell you that the interest of international investors is quite strong even for provinces that are not triple-A. Jigme Shingsar, RBC Capital Markets: Its funny that we were talking about the Canada advantage three years ago, and I really wasnt expecting it to last this long. But if anything, the story has become more acute when you consider all the events globally, whether its Japan, Europe or the US. Canada dealt with some economic issues quite painfully in the 1990s, and its now reaping the rewards of those actions as it has been able to stave off recent events more easily than those who papered over the cracks at that time. Laffin, EDC: We have seen more demand in the international community for Canadian product, not just from those of us who issue in dollars or euros internationally, but even for Canadian dollar product. Chamie, CMHC: Yes, we certainly are seeing increased foreign investor interest, not just increased foreign investor interest, not just in US dollar issues. Shingsar, RBC: Across all currencies. Foster, Department of Finance Canada: We get a lot of visits from investment banks looking for Canada to issue in foreign markets. They also indicate that investors want Canadian dollar product.
The Canadian dollar has been added to eligible lists for central banks and other big global investors, because there are not that many options now in terms of a really floating currency with a relatively deep securities market.Chamie, CMHC: In August, we saw 51% interest from investors outside of Canada on our 10 year deal, which was a record for that maturity. So far this year more than 35% of all our issues has been distributed outside Canada. That equates to about C$9bn this year alone out of the C$27bn that we issued. So it has been quite substantial actually.
The number of investors that were seeing in the programme as well has grown significantly. Since last year, weve increased the number of investors in the programme by about 28% on a primary basis only, and many of those are international accounts.EUROWEEK: How important is it to get the international accounts investing in Canadian dollars? Is that a key focus for the issuers?Chamie, CMHC: We do focus on it, but the important part for us is growing the investor base, not just internationally. With the diversification and the expansion of the investor base, we have a better chance of stronger performance and increased liquidity in the long run.
Our focus is on investors setting up new Canadian dollar portfolios, or just looking for alternatives to what they typically invest in. For those investors that would be new to the Canada story and to Canadian dollars, we like to sing the praises of the strength of the Canadian credit and the liquidity that we can provide as an alternative investment.
In the Canadian dollar space, central banks used to make up about 3% of our portfolio. This year, they make up about 10% of our portfolio, so thats an especially high growth area.Laffin, EDC: I find its a global phenomenon. Two or three years ago, I was rarely asked how much Canadian dollars I issue. Now, the third or fourth question in most meetings is whats your Canadian dollar programme? Theres a real interest in not just Canadian names and international currency, but Canadian dollar product as well. Shingsar, RBC: International interest in the Canadian dollar hasnt been this high since the early 1990s. The difference is that in the early 1990s Canada needed to borrow a lot and investors appetite was really about a yield pick-up versus the US. Now its about real diversification and credit quality. Its a much nicer thought process than just how much more it will pay me versus the US. I think thats a great development for Canada and speaks again to this whole Canada story and the relative performance.
With regard to new investors, official money growth has been very strong over the last decade and recent events have highlighted the value of diversification for these investors. As both the US and Europe have problems, the likes of Australian and Canadian dollars and Norwegian kroner are almost only limited by market size and liquidity.
EUROWEEK: What steps are you taking to bring new investors into the market, or are you finding that Canada is such an attractive proposition that it just speaks for itself? Foster, Department of Finance Canada: We dont have a real proactive investor relations programme targeting international investors like some other issuers might, but we have certainly seen an increased flow of large foreign investors central banks, sovereign wealth funds and others seeking time to talk with us about Canada and our debt products. Turgeon, Québec Ministry of Finance: We have a long tradition of going to Europe at least once a year to meet investors. We also go to the US and for the last 10 years, weve visited Asia quite regularly.
Over the past two years, meetings with investors have been longer, more interesting, and with more questions asked. Sometimes at the end of the meeting, the investor asks us when are you going to issue?, which is something very nice to hear.EUROWEEK: Mike, is that something that youve found as well?Manning, Ontario Financing Authority: Weve been beefing up our investor relations programme over the last three or four years, focusing both domestically and abroad, and yes, we are definitely seeing a lot of interest from international investors. We are also getting new investors coming in through our investment dealer group, and even folks we havent met before, all of a sudden want to have a meeting with us, which is a very positive development.
Over the last two years, there has been a growth in demand for domestic bonds coming from offshore investors, and this has allowed us to do a lot more domestic borrowing than otherwise would be the case. For example, this year, weve done about 76% of our funding in the domestic market. Last year, it was 59% domestic, and 49% the year before. The trend is good to see, as you get duration in the domestic market that you cant get in other markets.Berry, RBC Capital Markets: Weve spent a fair amount of time with new investors looking at the Canadian dollar market over the past number of years. Dealers have been very active seeking out offshore interest, and not just from obvious accounts like the central banks. The main questions new investors centre around are how the bonds trade and how the new issue process works. In addition weve assisted in working through the mechanical parts of the process, helping large investors through their credit committees and seeing how it all fits together.
New investors moving beyond Government of Canada bonds typically first go into CMHC, Ontario and Quebec for liquidity and then look at some other provinces too. Weve also seen provinces being added for diversity and credit.
The secondary market provides substantial liquidity and can accommodate international primary participation despite the timezone as well.EUROWEEK: Bernard, when speaking with investors in Europe have you seen their appetite decline as the volatility in the eurozone has worsened? Turgeon, Québec Ministry of Finance: No, I think its the opposite. Over the past year, with everything going on in Europe, investors want to diversify. While before they would have considered countries such as Greece, Italy, Spain and so on, now they look to us. The interest from European investors is great. EUROWEEK: Do you think well see any euro denominated deals this year?Turgeon, Québec Ministry of Finance: We are very interested in the euro market. Since 2001, we have done six benchmark deals in the euro market, and we want to continue. We want to be a regular borrower in the US market as well, and investor demand from there is very good. A few weeks ago we did a $1.4bn deal in the US market on the day that the 10 year Treasuries fell below 2%. It was a challenging time to price a deal, but we had more than 50 high quality names in the book, and 85% of the deal was distributed in North America. Europe also took about a 10% share. EUROWEEK: How difficult is it to get deals done swiftly and with the flexibility that you need when markets are so volatile and yet also target international investors? Turgeon, Québec Ministry of Finance: Its the price we have to pay to operate in a global environment. To target investors in Asia, Europe and the US we need at least 24 hours to make a deal. And we must live with the volatility that is now inherent in the markets. EUROWEEK: Have other issuers found difficulty finding clear and open windows this year which to get global deals done when so much is happening in the markets?Manning, Ontario Financing Authority: I think all borrowers have had that experience, and theres not too much you can do about it. Its part of the game. I think you try to gauge your windows as carefully as you possibly can and take steps to reduce some of the execution risk. But the volatility has certainly made international borrowing more difficult, and I would argue that borrowers like ourselves have probably done less issuance in some of those markets for that very reason. EUROWEEK: How important is it to diversify in terms of the currencies used in order to tap into as many investor pockets as possible?Laffin, EDC: Its certainly part of our philosophy. We offer benchmarks generally twice a year in US dollars, and we issue benchmarks in the Australian dollar and in Sterling markets. For us, these markets are attractive as the central bank community is active in them from a reserve perspective, and we are also accessing the domestic investor base. We are also benefiting from international investors who are now expanding into those currencies.
Its a very good way to get a broad investor base away from US dollars or the EuroMTN market. The euro and US dollar benchmark spaces look very similar to us, so these other markets give us unique opportunities to diversify.EUROWEEK: Are there any other currencies that could be interesting options for issuance?Laffin, EDC: As the export agency of the government, we tend to look at a number of different markets on an ongoing basis to support exporters. As conditions improve and when we have natural demand to go into some of these currencies, we want to be in position to support our customers.
For a long time we have been an arbitrage currency player in the Eurobond market and we want to leverage that knowledge for the benefit of Canadian exporters.
As the firm continues to develop foreign markets for exporters, I expect that we will become increasingly active in accessing more foreign domestic markets. We certainly look at some markets in both Asia and South America from the perspective of a potential bond issuance, but with the current market volatility we havent seen the asset demand materialise the way we thought it would. That will come, Im sure.Foster, Department of Finance Canada: Its good to have programmes in a number of countries as that gives you options in rough markets. For the Federal government, we only borrow foreign currencies for international reserves which are basically 60% US dollars and around 40% euros. So we borrow on those two currencies, primarily through cross-currency swaps, which are very cost-effective and flexible for us.
We have ventured over the last three years to do a couple of global bond deals, so we are diversifying our funding sources, and well continue that. Because we match-fund our reserves we will focus on euros and US dollars, although we could look at other currencies and diversify a bit more as we did in the past.Manning, Ontario Financing Authority: Last year diversification was really helpful for us, and we borrowed about C$16.4bn in international markets in eight different foreign currencies. In one instance, almost all of the international markets were pretty much closed down because of the financial crisis in Europe, yet the Japanese yen market was open, so we were able to do a Japanese yen transaction. These types of opportunities enhance access across your overall programme. Shingsar, RBC Capital Markets: There are a couple of tactical elements to currency diversification. Obviously, its a nice thing to do, but it also plays a pretty important capacity management role, particularly for a borrower like Ontario. But when you dont have a capacity management issue, then you can just be opportunistic, like EDC is, and look at whether a certain currency fits a particular requirement, or whether it is cost effective. It really depends on the situation.
But with Canada credit being very much in the spotlight, I think theres increased demand generally in any currency for Canada.EUROWEEK: Mark, from an issuance point of view, how far through your funding plans are you this year?Chamie, CMHC: Our funding plans are relatively variable. Its dependent upon a number of different factors, not least the requirement for funding by the mortgage providers themselves, and the capacity of demand for the product from investors.
Generally, Id say our issuance is going to be around what weve seen over the last few years, which has been in the C$35bn-C$45bn range.EUROWEEK: And, Mike, how about you? Manning, Ontario Financing Authority: Were in pretty good shape right now. Our growing programme for the year is C$35bn. It was C$39.9bn last year, and C$43.8bn the year before. Weve raised C$17.3bn so far, which is about 49% done, and were about 5%-6% ahead of an even pace.
Weve been able to do a good proportion of that in the domestic market: at less than half way through the current fiscal year, weve completed 13 syndicated issues so far compared to 30 that we did last year.EUROWEEK: Is that a similar situation for Québec?Turgeon, Québec Ministry of Finance: Yes, its about the same, but our borrowing programme is lower. Its C$17.4bn and so far we have realised about 50% of it. Some 80% of that has been done on the Canadian market, which is about the average of the last 10 years. Berry, RBC Capital Markets: We have seen some very big surprises this year nobody would have predicted the developments in North Africa and tsunami and nuclear meltdown in Japan. Weve seen that the worst can happen, and that staying ahead in the borrowing programme is obviously more important than it used to be. Given these risks, do you have more reserves than you would have had five years ago? Manning, Ontario Financing Authority: We do a lot of planning at the start of the fiscal year to try and determine the overall parameters of our borrowing programme.
We look at worse case scenarios that could happen that would mean being out of the market for an extended period of time. Liquidity is very important to us and wre running higher levels of cash reserves now than weve ever run before. Now our cash levels are about C$20bn. If you went back five years ago, they might have been more like C$6bn or C$7bn.
Weve also increased the size of our short-term borrowing programmes. Currently, we can issue up to C$35.5bn in Ontario treasury bills and US commercial paper. Again, thats a big safety net if things dont work out. I think as well that all large borrowers are more comfortable when theyre ahead of the pace in their borrowing programmes.Turgeon, Québec Ministry of Finance: With the events of the last few years, we have more liquid reserves than we had in the past. We also have a tradition of doing pre-financing of around C$3bn at the end of the year, and we will certainly try to do the same thing at the end of this year. Laffin, EDC: That has been a theme since 2008 when most people went back and reviewed their liquidity approaches. Like, Ontario, we increased our commercial paper capacity, and made other adjustments, but I dont feel quite as much pressure to be as far ahead at this time of year.
Having said that, by mid-year, we had completed around 70% of our borrowing programme. However, it isnt like two years ago where you had to target 70% by mid-year. This year if the opportunities were there and at the right levels, we stepped forward and did the funding; two years ago, you would have been forcing yourself into the market to get ahead.EUROWEEK: So its no longer a key priority to be pre-funded so far in advance, but its still important?Laffin, EDC: I cant remember our credit being in such high demand. The spreads in our European CP programme are now flat to our US CP programme. Traditionally we would have paid a slight premium to issue CP in Europe, where were not as well known. Thats an indication that theres a lot of demand in what we would have considered a non-traditional market. But we keep a very close eye on credit spreads in the marketplace and on our liquidity indicators, and if those start to move, we would adjust our plans. Were much more proactive in watching the market.
So when you see those types of spreads come down, you have some comfort that the Canadian story is strong, and that there is less pressure to get too far advanced on the programme. However, even with strong demand, we wont let too many issuance windows slip by, we dont want to fall behind the curve. Weve all learnt that markets can turn quickly.Foster, Department of Finance Canada: And weve taken the same lesson: there can be events that just shut down the markets, and it can affect any borrower irrespective of credit. As part of our debt strategy for the year, we announced our updated prudential liquidity plan. Under that plan, over a three year period, were going to grow our domestic cash balances, held at the Bank of Canada and at banks, and our international reserves by about C$35bn. And added to our existing holdings of cash and reserves, we have about a months worth of liquidity that would allow for payment of bills, maturing debt, and so on.
So were building our holdings, but we know that you cant pre-fund your way out of a solvency crisis. It only gets you so far, and there may be carry costs involved with higher liquidity levels that must be considered.EUROWEEK: Has it become more important to look at other products, such as FRNs and real return bonds?Manning, Ontario Financing Authority: Ontario has a wide menu of instruments that we can access, and Im sure thats true of other provinces too. For the domestic market, for example, we can do syndicated deals, FRNs, RRBs (inflation indexed bonds) and MTNs. FRNs are very important to us, and weve generated about C$3.1bn this year from that source. The nice thing with having a good menu of different products is that although they dont all fit at the same time, as market conditions change you can use the product that best suits. Turgeon, Québec Ministry of Finance: Its important to always be ready to satisfy investor demand. The investors tell us what they want. So if they want to have FRNs, we provide them with FRNs. We always make sure that all our legal documentation is ready to make a deal in any currency, so that we may execute transactions very rapidly. Manning, Ontario Financing Authority: Its about maintaining the flexibility and listening to the investor base. Turgeon, Québec Ministry of Finance: Absolutely. Laffin, EDC: Were a smaller programme, so we dont carry as many instruments, but certainly you have to be able to respond if the market suddenly goes to, say, FRNs. Foster, Department of Finance Canada: Do you have some sort of strategy to figure out how much to issue, Mark? Chamie, CMHC: Yes, we expanded our product base in 2008. The CMB programme predominantly issues five year fixed rate bonds, to match up against the types of mortgages it funds. In Canada, the vast majority of mortgages have a five year term, but there are other mortgages as well. To manage risk and to diversify and expand our investor base, since 2008 we have included 10 year terms as well and have been issuing more floating rate notes. FRNs were not a very well explored market in Canada when we entered. We have been pleasantly surprised with the level of demand for floating rate notes. EUROWEEK: Do you think investors are now quite flexible and experimental, and are willing to look at new products?Chamie, CMHC: Not all investors can look at both the floating rate and fixed rate products. Those that can are certainly looking at the relative value of one product versus the other, and making the investment decisions that way. Thats great as it adds to the efficiency of the market in pricing and liquidity. EUROWEEK: Speaking of liquidity, what the markets in Canada are like in terms of the secondary trading?Manning, Ontario Financing Authority: As issuers, we always want to see more liquidity. Chamie, CMHC: Yes, liquidity is important for us. Investors are looking for credit quality and liquidity, and we have seen a marked increase year after year in the programme. Secondary trading volumes were about C$500bn in 2009 and C$600bn in 2010. This year, volumes in the first half of the year are 40% ahead of where they were last year. I would attribute at least part of that to the growth of the overall investor base, and the increased appetite for Canada in general. Berry, RBC Capital Markets: The market is in pretty good shape and, quite frankly, is remarkably transparent. We have very few issuers compared to, say, the US, so everyone knows where the good offers are. Also, there is a huge incentive for us to provide the liquidity. To win mandates, youve got to be trading the bonds, actually putting capital on the table to hold inventories to provide primary and secondary activity.
We track trading volumes minute by minute throughout the day. Investors tend to gravitate to the likes of CMHC, Ontario and Quebec first of all because they can get big chunky size. In fact CMHC, Ontario and Quebec account for 75% of all spread product in the Canadian domestic market, all been done at 0.5 bp bid-offer markets.
While liquidity can dry up when we go through those eventful periods, like we saw earlier this year, but weve never seen markets seize up and completely stop. Through all that turmoil though, the big Canadian SSAs continued to issue in the marketplace. They did change their behaviour a little bit, but over the last two years these borrowers have been able to get large benchmark names.EUROWEEK: How much do people understand what the effects of the Basel rules will be on the market? Will it change issuers balance of international and domestic funding? Berry, RBC Capital Markets: Theres been plenty of work done by all market participants to understand the implications of Basel III. The liquidity coverage ratio will require banks to hold adequate levels of high quality unencumbered assets for potential stress. This should lead to the higher demand for high quality bonds and should be quite positive for public sector borrowers. Foster, Department of Finance Canada: On the other hand, it might also reduce liquidity in those bonds that are already being held. But we may have already seen increased demand for high quality sovereign bonds that qualify for that liquidity coverage. Banks are not sitting back and waiting for the final rules. They are planning and are already acting on what they think the new rules will be. Chamie, CMHC: Yes, the banking sector has been a growing investor base in our programme perhaps in part due to the anticipation of the new rules coming into force. Laffin, EDC: We do know that theres regulation coming and thats going to change the landscape, which on the whole we believe to be somewhat beneficial to high quality issuance. Bank treasuries, without a doubt, are now a true investor class, where two or three years ago they were perceived as fast money. As an issuer, were trying to develop an understanding of who they are, what their motivations are, what the rules are. There is a sense that this is going to be a different environment and we are certainly monitoring the markets and making adjustments. Foster, Department of Finance Canada: We would agree with that. EUROWEEK: Grant, is that a view that you take as well?Berry, RBC Capital Markets: It makes a lot of sense that banks are a legitimate sector of investors. Whats really interesting is the behaviour from bank to bank. Some treasury desks are right into the market but some are not. It will be very interesting to see this play out. EUROWEEK: What do you think could be the greatest challenges for the market over the next 18 months?Turgeon, Québec Ministry of Finance: The sovereign debt question in Europe is probably going to challenge us most over the next 18 months. But I am optimistic that political leaders are going to sit down and make the right choices. It may be bumpy at times, and it has already been, but I dont think we can do anything else than be optimistic, because the stakes are too high for Europe and for the rest of us. Berry, RBC Capital Markets: Our biggest challenge is in our definition of normal: some people still look at the growth of 2001 to 2006 when everything was just wonderful and stocks profiles were going up 10% a year. We all thought that was going to go on forever. That was not normal.
In the US, first we must see a willingness to come to a compromise, and then they have to deal with the bad situation. It will take time to grind through. Im positive that therell be an agreement, but it may take longer than everyone thinks. The situation were in right now is not one devised in the last three years. Its been cooking for 20 years, so I dont think it can be turned around that fast. Finally, Id just say whatever happens, Canada will be no worse than anyone else on a relative scale. So well rise with the tide and well go down with the tide, but well always be above water.Foster, Department of Finance Canada: The picture is relatively good for Canada, but I think that Europe is a big uncertainty. Theres obviously some real structural problems that have to be fixed and its going to take a while before that is done. We cant predict how that will turn out. But I think the slowdown that weve seen in growth is manageable, and Canada is certainly in a good position to come through it. If the rough waters from Europe tip growth further into negative territory for longer, then I think the risks are more serious.
The US situation is quite manageable, and they are looking at further fiscal restraint. While theres a lot of political to-ing and fro-ing there, and while growth there is almost non-existent, I think financially theyll get their heads around the problem.
But we can turn to the emerging markets. China and Brazil are engines of growth. Hopefully theyll continue and provide some underlying support to overall global conditions.EUROWEEK: Brian, do you think we can look to the emerging markets as a source of growth?Laffin, EDC: I dont think its fair to think of them as the saviour for the markets. Too much of the global economy is in the challenged developed markets. However, for a number of years EDC has been a strong champion that great opportunities and growth can be found in the emerging markets.
While the emerging markets will grow, theyre developing their own domestic economies and a lot of that growth will go internally. Developed economies produce high value propositions, which can be difficult to sell into many emerging markets. I think Canada is well positioned to benefit from it. EDC realizes that can be a challenge and we are constantly evolving our business to support our exporters efforts into these markets.
The developed world is facing a lower rate of growth for longer than a lot of us would hope. Yet I remain optimistic that people and businesses will find solutions, much as they did 20 years ago.EUROWEEK: Jigme, do you think were heading for a double dip recession?Shingsar, RBC Capital Markets: It certainly looks like it. From a risk perspective theres large amounts of event and market risk out there, though Im not always sure whether its getting worse or more of the same. If theres a market disruption we would see re-pricing but Canadian credits are well placed to come out of such an event well.
It is a little bit more difficult to get our arms around the uncertainties regarding regulation of the banks. Its essentially going against what fiscal policy is trying to achieve in terms of increased lending, etc and it changes the tools that we have. Weve talked a lot about diversification of markets and of currencies, and a lot of that execution is dependent on things like cross-currency swaps, and the banks ability to deliver that may change dramatically. Facing uncertainty without knowing whats actually in your toolbox is very difficult.EUROWEEK: Mike, what are your thoughts?Manning, Ontario Financing Authority: I think the focus is on Europe right now. While markets hate uncertainty, thats just what we keep getting more of and thats going to make our lives more challenging. We have seen the flight to quality and investors are in a little bit of a state of shock with low interest rates. The concern I have is that this keeps rolling along for an extended period of time without getting resolved and eventually things start getting worse.
But overall, Im fairly positive. These things are fixable. In the US especially, it seems that people want to take steps to get economic growth back on track and create jobs, so people know what they have to do. Finding out the way to do it is, I think, the difficult part of the exercise.Foster, Department of Finance Canada: But Canada is in a good position. We have got a very sound fiscal position and a plan to take us back to balanced budget. Weve got a financial sector that came through the crisis very well, a growing population and were resource wealthy.
We certainly believe were sitting well for future prosperity, and that these problems in Europe and elsewhere are fixable. We could have some rough periods over the coming year after all Canada is not an island but well get back on track. In the long term, we are the country to watch out for.Shingsar, RBC Capital Markets: Canada is a country in very good shape, were just now waiting for more countries to catch up. Laffin, EDC: There are tremendous opportunities in the current environment. On a federal and provincial level, things have been contained and governments are well positioned to move the country forward. Our banks are strong and well positioned to support growth. Even something like the strong currency can work to our advantage by enabling exporters to buy machinery and become more productive, more affordably than they could have done 10 or 15 years ago. Turgeon, Québec Ministry of Finance: And we are sitting on huge natural resources, oil and all sorts of mineral products. Berry, RBC Capital Markets: The key thing we have right now is very transparent, well regulated, open markets. Weve already been able to go through some pretty nasty markets since 2007, and markets are less challenging than they was back then. Im very positive that we will come through if we just continue being prudent, put our heads down and keep on working.