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

DBRS has today confirmed the ratings of the Government of Canada (the Government or Canada) at AAA and R-1 (high) with Stable trends. While still challenging, 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. The Government’s efforts to provide fiscal stimulus appear to have contributed to Canada’s robust economic performance early in 2010, 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.

Based on the 2010 budget, Canada is forecast to have recorded a sizeable deficit of $53.8 billion in 2009-10, equivalent to 3.5% of GDP, although DBRS anticipates that final results may have been somewhat better than expected. As fiscal stimulus measures remain in place for another year, another sizeable deficit is expected for 2010-11 of $49.2 billion, or 3.1% of GDP. DBRS notes that a robust economic recovery through the early part of the year may contribute to better-than-expected fiscal results in 2010-11, although the Government will still be challenged to meet its target of returning to near balance by 2014-15, 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.

Following a significant contraction in 2009, the budget assumes real GDP growth of 2.6% in 2010, which now appears conservative in relation to the private-sector consensus and recent International Monetary Fund (IMF) forecast. However, the significant difficulties facing economies in the United States and Europe have resulted in reduced growth expectations going forward as the IMF points to real growth in Canada of 2.8% in 2011, compared with the 3.2% assumed in the budget.

The debt-to-GDP ratio (defined by DBRS as unmatured debt) is projected to have finished the 2009-10 year at approximately 37%, up from 32% the prior year. However, this ratio is still low for the rating and by international standards. Debt growth is expected to slow going forward as stimulus measures are unwound and the fiscal deficit reduced; along with a rebound in nominal GDP, this is likely to keep Canada’s debt-to-GDP ratio unchanged at 37% in 2010-11. 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.

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

The applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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