Question

The government of Ontario is the largest sub-national borrower in the world, owing a whopping $359 billion as of March 31, 2019. Ontario debt to GDP ratio current stands at 41%. Please review the fiscal policy chapter and try to assess the fiscal policy of the government of Ontario. Include analysis on Ontario's economic situation by listing GDP growth rate, inflation rate, unemployment rate, etc. Try to base your analysis by answering the following questions:

1.The government of Ontario has issued a sizable portion of its debts in foreign currencies. What are advantages and disadvantages of issuing foreign currency debts?

Answer 1

Ontario is the most populous state of Canada. The state also has the largest economy in the country. The nominal GDP of Ontario was worth C$763.263. Its debt-to-GDP ratio in 2018 is41%. As of March 31, 2018, the Ontario government's total debt is projected to be CDN$348.79 billion.

The real GDP growth of Ontario was 2.2% in 2018 and the annual inflation rate was 1.5%. The annual unemployment rate stood at 5.9%.

As mentioned above, the government of Ontario has issued a sizable portion of its debts in foreign currencies. Debt issued in foreign currencies has its advantages and disadvantages.

Advantages:-

The biggest advantage is that the interest rate may be lower than the domestic interest rate.

Investors of sovereign debt may not have to worry about inflation eating into their returns.

Disadvantage:-

Issuing foreign currency debt exposes a nation's economy to exchange rate risk because if their local currency drops in value, paying down international debt becomes costlier.