Source: The Canadian Press

Canada’s corporate sector is in a strong position to withstand the higher interest rates that are on the horizon but remains at risk from a stronger dollar, according to a new report by one of the country’s major banking groups.

The CIBC World Markets report says Corporate Canada is benefitting from their low debt levels, which put the country’s companies in better shape to withstand higher interest rates than Canadian households.

The report estimates corporate debt service payments are equal to only 30% of total operating earnings today, down from 100% during Canada’s last full-blown recession in the early 1990s.

The Canadian dollar’s value has varied widely over the past two decades, rising from about 62 cents per share at the low point in early 2002 to near parity with the American dollar at the current time.

The report’s author, senior economist Peter Buchanan, says that the Canadian dollar’s “rags-to-riches story” has mirrored the turnaround in the resource sector but has run further than warranted by some measures.

Buchanan says non-resource Canadian manufacturers are more vulnerable to competition at home and abroad because of the stronger currency — particularly in the transportation equipment, clothing and machinery sectors.

Part of the reason for the Canadian dollar’s relative strength is widespread expectations that the Bank of Canada will begin raising key interest rates sooner than its U.S. counterpart, giving investors from around the world added incentive to put their money into this country to receive higher interest payments.

The Bank of Canada has sent mixed signals recently about exactly when it will begin raising its policy rate, currently at an all-time low of 0.25%. Observers have debated whether the increase will come in June or July and whether it will be an increase of a quarter-point or more.

“Everything depends critically of course on how aggressively the Bank moves to reverse itself,” adds Mr. Buchanan. “The Bank has cited both a lofty Canadian dollar and heavy consumer debt loads as presenting potential obstacles to a normal, healthy paced recovery in its recent pronouncements. That suggests, if anything, the Bank will err on the side of caution, which is good news given the recovery’s continuing vulnerabilities on a number of fronts.”