DBRS Ltd. Tuesday confirmed its ‘AAA’ rating on the Government of Canada, noting that while significant risks and challenges remain, Canada is in a relatively strong fiscal position.

“Canada’s fiscal position remains the envy of many developed nations and its strong credit profile is supported by a manageable debt burden, track record of prudent fiscal management and sound financial system,” notes the rating agency.

DBRS says that the government’s efforts to provide fiscal stimulus “appear to have contributed to Canada’s robust economic performance” so far this year, “although considerable risks remain in the form of a further disruption in global demand, the strong Canadian dollar, and the tenuous state of the U.S. economic recovery, which could weigh on Canada’s economic and fiscal performance.”

DBRS notes that Canada is forecasting a sizeable deficit of $53.8 billion in 2009-2010, equivalent to 3.5% of GDP, although it expects that the final results “may have been somewhat better than expected”. With fiscal stimulus measures in effect for another year, it says another sizeable deficit is expected for 2010-2011 of $49.2 billion, or 3.1% of GDP. However, DBRS notes that a robust economic recovery through the early part of the year may contribute to better-than-expected fiscal results in 2010-2011.

That said, it cautions that the government “will still be challenged” to meet its target of returning to near balance by 2014-2015, “given the global economic headwinds it faces”.

“As a result of government commitment to not raise taxes or cut transfers, considerable emphasis is being placed on spending discipline, which will require Canada to make difficult choices to ensure that its fiscal plan remains on track,” it adds.

The debt-to-GDP ratio is projected to have finished the 2009-2010 year at approximately 37%, up from 32% the prior year. “However, this ratio is still low for the rating and by international standards,” the rating agency says, adding that debt growth is expected to slow, “as stimulus measures are unwound and the fiscal deficit reduced”; which, along with a rebound in nominal GDP, this is likely to keep Canada’s debt-to-GDP ratio unchanged at 37% in 2010-2011.

“DBRS expects that while Canada may exceed fiscal targets in the current year, slower growth over the medium term, as a result of lingering disruptions in global demand, is likely to require meaningful discipline to ensure fiscal balance is restored in a time frame consistent with the budget plan,” it concludes.

IE