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) at AAA and R-1 (high) with Stable trends. Canada’s credible fiscal recovery plan and strong track record of outperformance leave it well-positioned in relation to many sovereign peers. As a result, Canada’s debt burden is expected to remain very manageable, which, along with a diverse and growing economy and sound financial system, adds considerable support to the credit profile. While the European sovereign debt crisis and a slow economic recovery in the United States continue to cause headwinds for the global economy, DBRS believes that Canada has considerable flexibility to manage these challenges without damaging its strong credit profile.

In 2011-12, the central government deficit is estimated at $24.9 billion compared with $32.3 billion projected at the time of the June 2011 budget. This marks a notable improvement year-over-year and equates to a modest 1.4% of GDP. For the current fiscal year, a deficit of $21.1 billion, or 1.2% of GDP, is anticipated, followed by a gradual return to balance by 2015-16. In 2011, the Government announced its plan to identify $4 billion in ongoing annual program expense savings. The latest budget indicates that the Government is expecting to achieve a total of $5.1 billion in annual program savings by 2014-15. Given the small size of the projected shortfall in 2014-15 – just $1.3 billion – there is a strong possibility that Canada could return to balance a year earlier than budgeted. DBRS takes comfort in the demonstrated track record of exceeding fiscal targets and acknowledges that the very modest deficit outlook makes Canada stand out among its sovereign peers.

Canada’s economic recovery continued in 2011, although growth moderated in relation to the previous year with real GDP up 2.4%. For 2012, the budget assumes real growth of 2.1%, which remains in line with the current private-sector consensus and the latest International Monetary Fund (IMF) forecast. A further advance of 2.4% is assumed for real GDP in 2013, although DBRS cautions that significant global headwinds are very likely to persist. Potential contagion from the sovereign debt crisis in Europe threatens to disrupt global demand and shake consumer confidence while the expiration of certain tax cuts and the onset of automatic spending cuts in early 2013 could interrupt the U.S. recovery following the fall presidential election.

Slower-than-expected debt growth in 2011-12 left Canada’s debt-to-GDP ratio (as measured by DBRS) unchanged at 36%. The debt-to-GDP ratio could increase slightly in 2012-13 as the pace of debt growth exceeds that of nominal GDP before beginning to trend downward thereafter based on budget projections. Canada’s debt burden is considered to be very manageable and compares favourably among G7 peers. Nevertheless, Canada will need to remain vigilant in the face of challenging economic conditions to ensure that fiscal targets can be met and its strong credit profile maintained.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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