DBRS: Canada’s 2009 Budget Manageable but Risks Remain

The Government of Canada’s (the Government or Canada) 2009 budget released February 27, 2009 (the Budget) confirms DBRS’s view that the risks for Canadian public finances remain to the downside. The Government is forecasting deficits of $33.7 billion in 2009-10 and $29.8 billion in 2010-11, which equate to roughly 2% of GDP. However, these risks appear to be manageable as a result of Canada’s strong track record of responsible fiscal policy and its intention to return the budget to balance by 2013-14. While the Canadian dollar is not a global reserve currency, Canada has low debt levels (25% unmatured debt-to-GDP in 2007-08), credible fiscal and monetary policies, a flexible exchange rate, and continues to maintain two of DBRS’s key conditions for AAA ratings – a fundamentally sound financial system, and unquestioned liquidity. Canada is rated AAA and R-1 (high) with Stable trends.

Given the current economic environment and limited fiscal cushion carried by the federal government in its last budget, the return to deficits is not surprising, as DBRS had already noted a degree of downside fiscal risk at the time of its last rating review (April 21, 2008). For the current year, the Budget forecasts a deficit of $1.1 billion, which has largely come as a result of weaker tax revenues, while program spending is projected to be well contained, coming in slightly below budget.

Excluding additional measures proposed in the Budget to stimulate spending, the Government forecasts deficits of $15.7 billion in 2009-2010 and $14.3 billion in 2010-11. However, new measures being introduced to encourage spending and housing construction and to build infrastructure result in Government deficit projections of $33.7 billion in 2009-10 and $29.8 billion in 2010-11. While the majority of fiscal stimulus is intended to be temporary, roughly $3.8 billion represents permanent tax reduction (by 2013-14), which DBRS believes could lead to a structural deficit if the assumed economic recovery takes longer to materialize.

Economic conditions will remain challenging for Canada. Based on a survey of private sector forecasters, the Budget assumes real GDP will decline by 0.8% in 2009, followed by a strong rebound to 2.4% in 2010. This forecast is notably weaker than what was indicated at the time of the fall 2008 economic statement but does remain above the latest IMF forecast, which projects real GDP to fall by 1.2% in 2009 and then rise by 1.6% in 2010. DBRS notes that the Budget incorporates an element of uncertainty through its below-average nominal GDP forecast, but that downside risks remain.

While the magnitude of near-term deficits is greater than what was expected at last year’s review, DBRS notes that through a series of strong fiscal results and over a decade of declining debt burden, the Government has equipped itself with considerable flexibility to provide temporary fiscal stimulus. This supports the Stable ratings trend. If government intentions to reduce the deficit weaken over the medium term, or if financial stress requires government intervention in financial entities, thereby increasing the deficit, public debt or contingent liabilities to a level no longer consistent with a AAA-rated sovereign, the Stable trends could come under downward pressure.

DBRS notes that with this Budget, the Government is taking further steps to improve access to credit to business and consumers, including the purchase of additional insured mortgages ($50 billion) through the Canada Mortgage and Housing Corporation; additional funding for Crown corporations including Export Development Canada and the Business Development Bank of Canada to support Canadian business financing needs; $12 billion in vehicle and equipment loans and leases to ensure availability of consumer financing; an extension of the Canadian Lenders Assurance Facility (CLAF); and the introduction of a new facility to support term debt issuance for Canadian life insurance providers based on terms similar to the CLAF. DBRS views these measures positively as they should help reduce the impact of tightening credit conditions globally for businesses and consumers in Canada.

Based on the Budget, financing requirements are forecast at $101 billion for 2009-10. This will lead to an increase in total market debt to $592 billion in 2009-10, up from $394 billion in 2007-08. However, the Government’s measurement of its debt burden (accumulated deficit) is expected to rise only slightly, to 29.8% of GDP in 2009-10 from 28.6% in 2008-09, as financing requirements under the Extraordinary Financing Framework will be offset by interest-bearing assets. DBRS notes that Canada has made considerable progress in paying down its debt over the last several years. This, along with the Government’s commitment to return to balanced budgets, provides DBRS comfort that additional debt can be managed without unduly eroding Canada’s strong credit profile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.