Standard & Poor’s Ratings Service (S&P) has affirmed its AAA sovereign credit rating for Canada, citing its stable political situation, and continued fiscal and monetary flexibility.
The rating agency says that the rationale for its view on Canada’s rating includes its record for predictable policymaking and political institutions, a highly resilient economy, and strong monetary and fiscal flexibility. It also has a stable outlook on the rating, which, it says, reflects its expectation that “recovering gross domestic product (GDP) growth and declining fiscal deficits at all levels of government will contribute to the net general government debt burden stabilizing at about 50% of GDP against a backdrop of modest current account deficits and considerable monetary flexibility.”
In terms of risks to that outlook, S&P says that Canada’s potential vulnerabilities include a high dependence on the U.S. economy, and “possible asset-quality problems that could arise in the financial system as a result of rising household credit.”
Notwithstanding the risks posed by the close ties to the U.S. economy, S&P says that it expects the economic recovery in the United States will help sustain growth in Canada. However, it also notes that domestic demand will likely exceed GDP growth in 2013 and in the next year. And, over the next three years, it says that business investment and external demand are likely to play a bigger role in sustaining GDP growth. Still, unemployment will likely remain about 7% in 2013 and into 2014, it says.
As for worries about household debt levels, the rating agency says that the growing debt burden, combined with rising housing prices, “raises the risk of an abrupt correction in the real estate market in the event of an unexpected rise in unemployment.”
“A sharp decline in housing prices could depress consumer demand, constrain GDP growth, and weaken bank asset quality,” it adds. However, this scenario would likely not destabilize Canada’s financial system, it says, noting the sector’s strong capital levels and effective regulation.
S&P says it expects inflation will likely remain below 2% this year and in 2014, with little chance of outright deflation. It also expects fiscal deficits and net general government debt to slowly decline in the coming years.
“Canada’s success in the past decade in achieving credible monetary and fiscal policy, along with its openness to trade and its flexible, market-determined exchange rate, will continue to support its economic performance,” S&P concludes. “Continued growth of energy production, along with high investor confidence and a flexible labor market, should sustain long-term growth and provide the government with ample room to undertake countercyclical policies if needed during future economic downturns.”