RUNNING DEFICITS

BlackRock predicts Canada’s borrowing spree is about to catch up to its businesses,

Aborrowing spree by the Canadian government and the country’s provinces is threatening to increase costs for companies just as the economy turns, according to BlackRock Inc.

Public-sector borrowing is set to swell as issuers, including the federal government, Ontario — already the world’s largest issuer of subsovereign debt — and Alberta, continue to run budget deficits, said Aubrey Basdeo, the head of Canadian fixed income for the global investment manager.

“When the economy is strong as it is, governments should be issuing less, not more,” Toronto-based Basdeo said in an interview. “You’re getting these issuers crowding out corporate issuers.”

Government debt increased more than 10 per cent over the last three years to $1.98 trillion at the end of the third quarter, according to Statistics Canada. And outstanding federal government debt will rise 2.9 per cent to $707 billion in the fiscal year starting in March, government projections released last month show.

The increase in public-sector debt comes as the pace of growth in Canada’s $2.2-trillion economy is set to slow to 2.1 per cent this year compared with 3per cent last year, according to weighted average consensus of analysts compiled by Bloomberg. Next year, the country’s economic growth may decelerate to 1.9 per cent.

Futures traders, who until early December were mostly betting on an interest hike by January, now aren’t expecting rates to rise until April. BlackRock is even more dovish as it expects that Bank of Canada’s benchmark rate to remain unchanged during the first half as governor Stephen Poloz waits to assess the economy, Basdeo said.

After adjusting for volatility, government bond yields maturing between two and five years are already more attractive than corporates, he said.

That disparity has weighed on private-sector bonds.