A commitment to fiscal prudence was the most significant development to come out of the G20 summit in Toronto, but many of the G20 countries are unlikely to meet the ambitious targets that they set, according to executives at BMO Financial Group.

At the conclusion of the weekend summit, the G20 leaders released a communiqué agreeing to a commitment to at least halve fiscal deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.

These quantitative goals represent the most tangible commitments to result from the summit, according to Paul Taylor, chief investment officer at BMO Harris Private Banking. But with no indication that these targets are mandatory, he questions whether they’ll be achieved.

“We can all wonder how much credence we can place on the communiqué,” said Taylor, during a conference call on Monday.

He said the G20’s decision to exclude Japan from fiscal prudence commitments “waters down” the public’s confidence in the plan.

Doug Porter, managing director and deputy chief economist at BMO Financial Group, suggested that the targets are unrealistic for some G20 members.

“This is only a goal, and countries with very large budget deficits — such as the U.S. — likely won’t come close to meeting the target,” he said.

Given the “shaky nature” of the global recovery, Porter added that some countries shouldn’t yet be focused on aggressively reducing deficits.

“A very strong case can be made that many members of the G20 — notably China, Korea, even Saudi Arabia — should still be focused more on stimulating domestic demand to better balance global growth,” he said.

It’s positive that the G20 commitment provides flexibility for countries to pursue fiscal consolidation along timetables that are best suited to them, Porter said.

For Canada, the targets are within reach, representing more modest goals than those set out by the government in the 2010 budget, according to Porter.

“We are actually very close to stabilizing the debt ratios within a year or two,” he said.

But other countries will face much greater challenges meeting the targets, Porter said, since Canada’s deficit as a percentage of GDP is significantly smaller than many of its international counterparts.

“It is very different worlds we’re talking about,” he said.

Another significant G20-related advancement this week was China’s announcement that it would move towards a more flexible currency regime program.

Taylor noted that the Chinese currency could move to a market level “meaningfully higher” than where it is now. But he said there is uncertainty around the extent to which the Chinese government will allow the currency to appreciate.

“The actual announcement itself was very vague in terms of ultimately where the currency would get to, and under what timetable,” he said.

Porter projected that the currency would rise by 3% to 5% over the next six months.

“We suspect it’s actually going to be very modest,” he said.

IE