DBRS Confirms Government of Canada at AAA and R-1 (high)

DBRS has today confirmed the long- and short-term ratings of the Government of Canada (the Government or Canada) at AAA and R-1 (high), respectively, with Stable trends. Despite a budget that forecasts sizeable deficits for the next two years before gradually returning to balance in 2013-14, Canada’s credit profile remains solid, supported by a relatively low debt burden following several years of meaningful surpluses and debt reduction, along with a still-sound financial system. However, the effects of the global economic downturn are being felt, and debt growth is gaining momentum due to planned deficits and further measures designed to add liquidity to the financial system.

The dramatic reversal in Canada’s fiscal situation is symptomatic of the economic deterioration both in the United States and globally, and the fact that Canada is a small open economy largely dependent on exports. As outlined in its January 2009 budget, the Government plans to increase spending, mainly for infrastructure projects, and enact further tax reduction measures alongside a contraction in economic activity that is expected to considerably depress tax revenues. As such, deficits of $33.7 billion for 2009-10 and $29.8 billion in 2010-11 are projected by the Government, following an estimated $1.1 billion deficit for the fiscal year just ended. In its budget overview released on January 29, 2009, DBRS highlighted the notable downside risks in the budget outlook as a result of deteriorating economic conditions and believes the deficit target for this fiscal year is unlikely to be met. Considerable downside risk is also present in next year’s outlook, due to the possibility of a prolonged economic slowdown and the potential for further coordinated fiscal stimulus required globally.

The budget assumes real GDP growth of -0.8% for 2009 and 2.4% for 2010, which was consistent with private sector forecasts at the time of the budget. The Government also adjusted downward the private sector nominal GDP forecast for planning purposes. Nevertheless, the outlook used in the budget now appears optimistic in light of the current consensus.

After declining steadily for eleven straight years, unmatured debt rose notably in 2008-09 and will continue to do so in 2009-10, pushing the debt-to-GDP ratio to approximately 38% by March 31, 2010 (compared with 25% at March 31, 2008). This is largely a result of the Government’s efforts to ensure the stability of the financial system and to enhance credit availability through the Extraordinary Financing Framework (EFF), which includes the purchase of insured mortgages and increased lending to Crown corporations to encourage access to financing for consumers and business. However, the accumulation of interest-bearing assets through EFF measures will partially offset the impact of higher debt servicing costs. Furthermore, as these assets begin to mature without the need to be refinanced, unmatured debt will resume its downward trend over the medium term. As a result, Canada benefits from a relatively conservative debt burden, which, combined with a sound financial system and fiscal prudence, will provide considerable resilience to the credit profile throughout the current downturn.

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.