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

DBRS has confirmed the long-term local and foreign currency issuer ratings of the Government of Canada (the Government) at AAA, along with the short-term local and foreign currency issuer rating at R-1 (high). All trends are Stable and reflect Canada’s prudent fiscal management, which continues to support a steady path toward fiscal recovery and a debt burden considered to be very manageable. A sound financial system and signs that external headwinds are subsiding add further support to Canada’s strong credit profile.

For 2012-13, preliminary results point to a central government deficit of $25.9 billion, or 1.4% of GDP. Although somewhat larger than planned in last year’s budget, this represents a slight improvement from the prior year and continues to compare favourably with most G7 peers. The budgetary deficit is expected to continue its downward trend, with a projected deficit of $18.7 billion, or just 1.0% of GDP, for 2013-14 and a return to balance scheduled for 2015-16. Despite a weaker economic growth outlook, this target remains unchanged from the previous year. New spending initiatives are relatively modest and include funding for skills training and apprenticeships, a renewal of economic development funding and extension of tax relief for the manufacturing sector. In addition, federal infrastructure investment through the Building Canada plan has been renewed for an additional ten years. Revenue measures are also relatively scarce and include steps to close tax loopholes and modernize certain tariffs.

Canada’s economy began to lose steam in 2012, with real GDP growth reported at 1.7%, down from 2.5% in 2011. For 2013, the budget assumes real GDP growth of 1.6%, which is slightly below the private sector consensus and latest IMF forecast. Domestic activity is expected to remain subdued due to continued fiscal restraint across all levels of government and a much-anticipated slowdown in the housing market. However, improving economic conditions in the United States and a somewhat weaker Canadian dollar should be supportive of a stronger external position and reduced current account deficit. In 2014, the Government has budgeted for rebound in real growth to 2.5%, although the latest IMF forecast is somewhat more cautious at 2.2%.

Canada has weathered the financial crisis with relatively limited impact on its balance sheet. Central government debt (as measured by DBRS) is estimated to have grown by 6.4% in 2012-13, resulting in a debt-to-GDP ratio of 37%. As debt used to fund assets purchased under the Insured Mortgage Purchase Program (IMPP) begins to mature, the debt-to-GDP ratio is expected to fall to 34% in 2013-14 and continue a downward trend thereafter, provided fiscal recovery efforts are maintained. At this level, debt is considered to be very manageable and DBRS believes Canada is well-positioned to benefit when the global economy turns a corner.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at [email protected].

The applicable methodology is Rating Sovereign Governments and Rating Agents of the Crown, which can be found on our website under Methodologies.

The ratings for the Government of Canada and Canada Mortgage and Housing Corporation are endorsed by DBRS Ratings Limited for use in the European Union.