10:51 AM EDT, 05/23/2024 (MT Newswires) -- Looming bond maturities were another key theme from this budget season, as the shorter-dated issuance that occurred early in the pandemic needs to be refinanced, said CIBC.

With rates higher now relative to the pandemic lows, Canadian provinces will have to refinance at higher coupons, noted the bank. Combining the larger aggregate deficit, increased capital spending and maturities, projected borrowing is expected to be

around C$140 billion this fiscal year.

That is an increase of 40% from the outgoing year, without accounting for any large-scale pre-funding that may take place. If CIBC sees any further fiscal deterioration, Canada could possibly approach the pandemic highs of just under C$160 billion in provincial supply. Meanwhile, due to continued deficit forecasts and higher maturities, next year's borrowing programs are projected to remain at elevated levels.

The 40% of additional supply would pressure domestic spreads if it were all completed in Canadian markets, which leads CIBC

to believe that this upcoming year will experience a higher proportion of international issuance than normal. Indeed, markets have already seen 14 non-domestic bonds issued since mid-March, totaling C$25.4 billion. That represents approximately half of all completed provincial issuance so far in this new fiscal year.

Even though the aggregate story is one of larger deficits and higher borrowing, it should be noted that this isn't necessarily the case across the country. Indeed, relative to where provincial finances stood before the pandemic, there has been a leveling of the playing field.

Higher oil prices mean that commodity-rich provinces are no longer running the large deficits they were in 2019, while some Atlantic provinces have made big improvements in either deficit (Newfoundland & Labrador) or debt levels (New Brunswick).

There has also been a leveling of the playing field economically as well, with immigration-fueled population growth helping to stem the impact of an aging population on employment rates in Atlantic Canada. While that population growth has also brought increased spending requirements, and so hasn't translated into a fiscal improvement in all of those provinces yet, there is a stronger base for future provincial revenues.

Most provincial finances fared much better than initially expected during and after the pandemic, as transfers from the federal government and higher inflation bolstered revenues, while population increases supported economic growth, added the bank.

However, some of the factors that were previously friendly for provincial finances are now turning into foes. Wage negotiations and pay increases for public sector workers have already added to spending and will likely continue to do so while catching up

with the infrastructure needs of a growing population is also likely to be a multi-year affair.

As a result, this year's higher borrowing by provincial governments is unlikely to be a one-off, with elevated funding needs likely to persist into the 2025/26 fiscal year as well, according to CIBC.