S&P Affirms 'AAA' Rating on Canada; Outlook Stable
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On Nov. 13, 2013, Standard & Poor's Ratings Services affirmed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on Canada. The outlook on the long-term rating is stable.
The transfer and convertibility (T&C) assessment of Canada is 'AAA'. Our T&C assessment reflects our view of the extremely low likelihood of the sovereign or central bank restricting nonsovereign access to foreign exchange needed for debt service.
RATIONALE
The ratings on Canada reflect its strong public institutions, prosperous and resilient economy, fiscal and monetary flexibility, and effective policymaking. The ratings also incorporate the sovereign's high dependence on the U.S. economy and its net external liability position, which is edging above 20% of GDP.
Real per capita GDP is likely to grow 0.6% in 2013 and accelerate above 1% next year. Economic recovery in the U.S. will sustain growth. However, domestic demand will likely exceed GDP growth in 2013 and in the next year. Over the next three years, business investment and external demand are likely to play a bigger role in sustaining GDP growth, compensating for public-sector restraint and greater consumer caution. The country's trend per capita growth rate is likely slightly less than 1% per year. Moderate economic growth will constrain the pace of job creation, with unemployment likely remaining about 7% in 2013 and into 2014.
Household debt now exceeds a record of 163% of disposable income. The growing debt burden, combined with rising housing prices, raises the risk of an abrupt correction in the real estate market in the event of an unexpected rise in unemployment. A sharp decline in housing prices could depress consumer demand, constrain GDP growth, and weaken bank asset quality. We do not believe such a scenario would destabilize Canada's financial system, however, because of its strong capital levels and the rigor of regulation and supervision.
Unlike many central banks of the other Group of Seven governments, the Bank of Canada did not have to resort to quantitative easing after the Great Recession. The Bank of Canada has also been a leader in using forward guidance to shape investor and consumer expectations. We believe that inflation will likely remain below 2% this year and next, with little chance of outright deflation.
We expect fiscal deficits and net general government debt to slowly decline in coming years. General government interest payments are likely to remain less than 10% of general government revenues, while net general government debt will hover at about 50% of GDP in the next three years.
Canada's success in the past decade in achieving credible monetary and fiscal policy, along with its openness to trade and its flexible, market-determined exchange rate, will continue to support its economic performance. Continued growth of energy production, along with high investor confidence and a flexible labor market, should sustain long-term growth and provide the government with ample room to undertake countercyclical policies if needed during future economic downturns. We expect current account deficits to remain between 2.5% and 3% of GDP, funded in part by substantial energy investment.
The country's net external liability position could rise to 24% of GDP in 2016 from only 3% in 2006.
OUTLOOK
The stable outlook reflects our expectation that rising GDP growth and declining fiscal deficits at all levels of government will contribute to the net general government debt burden stabilizing at about 50% of GDP in the coming year, against a backdrop of modest current account deficits and considerable monetary flexibility. We expect broad continuity in economic policy over the next three years, including after the next federal elections that must be held before late 2015. During this interval, we expect that the federal government will make faster progress than provincial governments in balancing the budget.
Adverse external or internal shocks, including an abrupt correction in the housing market, could hurt GDP growth. That, along with an unexpected shift in economic policies, could result in rising public- and private-sector debt burdens, asset-quality problems in the financial system, and weaker investor confidence. Sustained erosion in the sovereign's economic profile, along with a perceived deterioration in the effectiveness and timeliness of policymaking, could result in a downgrade.
The transfer and convertibility (T&C) assessment of Canada is 'AAA'. Our T&C assessment reflects our view of the extremely low likelihood of the sovereign or central bank restricting nonsovereign access to foreign exchange needed for debt service.
RATIONALE
The ratings on Canada reflect its strong public institutions, prosperous and resilient economy, fiscal and monetary flexibility, and effective policymaking. The ratings also incorporate the sovereign's high dependence on the U.S. economy and its net external liability position, which is edging above 20% of GDP.
Real per capita GDP is likely to grow 0.6% in 2013 and accelerate above 1% next year. Economic recovery in the U.S. will sustain growth. However, domestic demand will likely exceed GDP growth in 2013 and in the next year. Over the next three years, business investment and external demand are likely to play a bigger role in sustaining GDP growth, compensating for public-sector restraint and greater consumer caution. The country's trend per capita growth rate is likely slightly less than 1% per year. Moderate economic growth will constrain the pace of job creation, with unemployment likely remaining about 7% in 2013 and into 2014.
Household debt now exceeds a record of 163% of disposable income. The growing debt burden, combined with rising housing prices, raises the risk of an abrupt correction in the real estate market in the event of an unexpected rise in unemployment. A sharp decline in housing prices could depress consumer demand, constrain GDP growth, and weaken bank asset quality. We do not believe such a scenario would destabilize Canada's financial system, however, because of its strong capital levels and the rigor of regulation and supervision.
Unlike many central banks of the other Group of Seven governments, the Bank of Canada did not have to resort to quantitative easing after the Great Recession. The Bank of Canada has also been a leader in using forward guidance to shape investor and consumer expectations. We believe that inflation will likely remain below 2% this year and next, with little chance of outright deflation.
We expect fiscal deficits and net general government debt to slowly decline in coming years. General government interest payments are likely to remain less than 10% of general government revenues, while net general government debt will hover at about 50% of GDP in the next three years.
Canada's success in the past decade in achieving credible monetary and fiscal policy, along with its openness to trade and its flexible, market-determined exchange rate, will continue to support its economic performance. Continued growth of energy production, along with high investor confidence and a flexible labor market, should sustain long-term growth and provide the government with ample room to undertake countercyclical policies if needed during future economic downturns. We expect current account deficits to remain between 2.5% and 3% of GDP, funded in part by substantial energy investment.
The country's net external liability position could rise to 24% of GDP in 2016 from only 3% in 2006.
OUTLOOK
The stable outlook reflects our expectation that rising GDP growth and declining fiscal deficits at all levels of government will contribute to the net general government debt burden stabilizing at about 50% of GDP in the coming year, against a backdrop of modest current account deficits and considerable monetary flexibility. We expect broad continuity in economic policy over the next three years, including after the next federal elections that must be held before late 2015. During this interval, we expect that the federal government will make faster progress than provincial governments in balancing the budget.
Adverse external or internal shocks, including an abrupt correction in the housing market, could hurt GDP growth. That, along with an unexpected shift in economic policies, could result in rising public- and private-sector debt burdens, asset-quality problems in the financial system, and weaker investor confidence. Sustained erosion in the sovereign's economic profile, along with a perceived deterioration in the effectiveness and timeliness of policymaking, could result in a downgrade.
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