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) with Stable trends. While still facing notable challenges, Canada’s fiscal and economic performance continues to be the envy of many sovereign peers with its strong credit profile supported by a manageable debt burden, prudent fiscal management and sound financial system. The Government exceeded budget expectations in 2010-11 and in the latest budget, made plans to accelerate its return to balance by a year to 2014-15. Despite the uncertainty surrounding global fiscal consolidation plans and European debt troubles, Canada has considerable flexibility to withstand these headwinds without compromising its strong credit profile.

Based on preliminary results, Canada posted a deficit of $36.2 billion in 2010-11 compared to a $49.2 billion shortfall originally anticipated. This equates to a moderate 2.2% of GDP and leaves Canada well ahead of G7 peers in its fiscal recovery efforts. Further improvement is anticipated this year with the deficit budgeted to fall to $32.3 billion, or less than 2.0% of GDP. While the Government remains on track with its budget plan to return to balance by 2015-16, it has committed to finding an additional $4 billion in annual savings in direct program spending by 2014-15, allowing for a return to balance that year. The Government has remained committed to not raising taxes or cutting transfers thus leaving it dependent on strong cost management and supportive economic conditions to achieve its fiscal targets.

Following a stronger-than-expected recovery in 2010, the economy is expected to grow by 2.9% in 2011, which appears in line with the current private-sector consensus and recent International Monetary Fund (IMF) forecast. The budget assumes real GDP growth of 2.8% in 2012 which is somewhat above the IMF forecast, presenting downside risks given the current uncertainty surrounding fiscal consolidation in the United States, and efforts already underway in Europe where sovereign debt troubles could cause further disruptions in global demand.

Canada’s debt-to-GDP ratio (as measured by DBRS) is projected to have finished 2010-11 at 36%, down from 37% one year earlier. At this level, debt is easily manageable for the rating and remains low by international standards. Debt is expected to grow somewhat faster in 2011-12, in part due to the Government’s plan to boost liquidity. As economic growth begins to slow, the debt-to-GDP ratio could rise slightly again. The solid economic and fiscal performance in 2010-11 is unlikely to be repeated. As a result, DBRS believes that disciplined expenditure management will be required to achieve fiscal targets, and potentially even further fiscal measures, beyond those already contemplated, if economic conditions prove unfavourable.

Note:
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.