In its annual report on Canada, Moody’s Investors Service says the country’s Aaa foreign currency country ceiling and stable outlook reflect the strongly improving trends in the country’s external financial position as well as its government debt ratios.

The rating agency says that Canada’s Aaa country ceiling for bonds is based on its foreign currency government bond rating of Aaa and Moody’s assessment of a minimal risk of government bond default.

“The country’s current account balance, which returned to surplus in 1999, is expected to stay that way according to most medium-term projections,” said Moody’s vice president Steven Hess, author of the report. “This trend will greatly decrease Canada’s vulnerability to shocks coming from external, mainly US, developments, or from events within the country.”

Part of the improvement in the external position stems from the appreciation of the Canadian dollar in the past two years, added Hess, “and, in part was due to the growth of productivity in Canada which, while lagging behind the U.S., has improved over the past few years.”

Productivity growth is the result of economic reforms in trade, taxation, the financial sector, and unemployment compensation over the past few years. “Canada’s accession to NAFTA in the mid 1990s was a part of the economic reform, as was a program of tax reductions that has reduced corporate taxes to near-US rates,” said Hess.