New York, November 02, 2018 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of Canada's Aaa long-term issuer and senior unsecured ratings.
The (P)Aaa senior unsecured MTN program and shelf ratings were also affirmed,
along with the P-1 Commercial Paper Program and (P)P-1 other
short term rating. The outlook remains stable.
The factors supporting the rating affirmation include:
1. A large, diversified and competitive economy with demonstrated
flexibility and resilience to economic shocks;
2. Stable general government debt ratios and funding, supported
by a low federal debt burden which Moody's expects to gradually
decline in subsequent years;
3. Exceptionally strong institutions and a well-regulated
financial system which preserve macroeconomic and financial stability
The Canadian economy has exhibited strong growth over the past two years,
supported by higher oil and gas prices and robust US economic growth.
While financial risks from housing prices and elevated household debt
levels pose downside risks to the economy, policymakers are effectively
implementing measures to mitigate these risks, denoting Canada's
very high institutional strength. The stable outlook on Canada's
rating reflects Moody's expectation that, even in the event of negative
economic shocks, the resilience of the Canadian economy and effectiveness
of its institutions would preserve Canada's Aaa sovereign credit profile.
Canada's long-term country ceilings for local- and foreign-currency
bond and bank deposits remain unchanged at Aaa. Its short-term
country ceilings of P-1 for foreign-currency bonds and bank
deposits remain unchanged.
In a related action, Moody's has affirmed the Aaa backed senior
unsecured ratings of the Strait Crossing Finance Inc. and Petro-Canada
Ltd. and the (P) Aaa backed senior unsecured shelf rating of Petro-Canada
Ltd, all of which Moody's considers to have the backing of
the Canadian government.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION
LARGE, DIVERSIFIED AND COMPETITIVE ECONOMY WITH DEMONSTRATED ECONOMIC
RESILIANCE
With a nominal GDP of about $1.7 trillion in 2017,
Canada's economy is the third largest in the Aaa-rated category,
after the US and Germany. With large scale comes economic diversification,
which Moody's considers an important credit metric, denoting
a high degree of shock-absorption capacity.
Key structural features of the Canadian economy include relatively flexible
labor and product markets, a well-capitalized and regulated
financial system, and a flexible exchange rate. These attributes,
combined with effective macroeconomic policy, contribute to the
economy's capacity to absorb shocks, helping to reduce growth volatility.
Canada's resilience to economic shocks was illustrated by its rapid recovery
from the global financial crisis and its ability to manage the oil price
shock of 2014-2015 through effective countercyclical policy measures.
Looking forward, Canada's robust growth potential is underpinned
by steady increases in the working age population, including from
a regular inflow of immigrants, and by productivity growth reflecting
high competitiveness. Moody's expects full year growth of
about 2.1% in 2018 and 2.0% in 2019,
followed by convergence with the economy's long-term potential
growth rate of 1.8-1.9% over the medium term,
which is slightly higher than growth trends observed in some other Aaa-rated
sovereigns.
The recently revised North American Free Trade Agreement (NAFTA) deal,
now called the US-Mexico-Canada Agreement (USMCA),
should, if ratified, reduce trade-related uncertainty
that would otherwise have weighed on the outlook for future investment
and growth.
Potential overheating of Canada's housing market presents a downside
risk to growth and government finances. Household debt, which
is mainly in mortgages, has risen to 100% of GDP and 160%
of disposable income, driven largely by significant housing price
appreciation in the metropolitan areas of Toronto and Vancouver.
A disorderly housing market correction would weigh on consumption and
could result in crystallization of contingent liabilities from loses on
government insured mortgages. However, rising interest rates,
combined with provincial tax and macroprudential measures, have
contributed to moderation of the pace of housing price growth since the
third quarter of 2017, mitigating some of this risk.
In addition, at over 200%, Canada's total private
sector debt to GDP is one of the highest among Aaa-rated peers,
representing additional downside risk to the economy from relatively high
corporate leverage.
STABLE GENERAL GOVERNMENT DEBT RATIOS AND FUNDING, SUPPORTED BY
LOW FEDERAL DEBT BURDEN
Canada's fiscal strength is consistent with its Aaa rating,
supported by: a stable general government debt burden; a low
federal debt burden, which Moody's expects to decline in subsequent
years; and stable investor demand for Canadian assets which supports
debt affordability.
While Canada's ratio of total general government debt, at
around 79% of GDP as of year-end 2017, is higher than
the 39% median for Aaa-rated sovereigns, the federal
government's ratio is only 35%. Moody's estimates
that general government debt will remain essentially unchanged relative
to GDP over the next year, before falling gradually in subsequent
years, driven by fiscal consolidation at the federal and provincial
levels and sustainable GDP growth close to potential.
Although the percentage of provincial and municipal debt in Canada's
total general government debt (at about 56%) is the highest among
Aaa-rated peers, Moody's estimates that contingent
liability risk from the provinces is very low, due to the high intrinsic
creditworthiness of Canadian provinces, which indicates a low probability
that financial support from the federal government would be needed.
Meanwhile, unlike most of its peers, Canada runs largely funded
pension systems at the federal and sub-sovereign levels,
which helps to mitigate fiscal risks associated with population aging.
Canada's fiscal profile also benefits from stable funding of government
debt, supported by steady demand for Canadian dollar-denominated
assets from both domestic and foreign investors, resulting in lower
overall funding costs at all levels of government. IMF data on
the currency composition of official foreign exchange reserves indicate
that foreign central banks hold the equivalent of US$203 billion,
or 2% of allocated global official foreign exchange reserves,
equal to about one third of Canada's federal debt outstanding.
EXCEPTIONALLY STRONG INSTITUTIONS PRESERVE MACROECONOMIC AND FINANCIAL
STABILITY
Canada's institutional framework is exceptionally strong, which
is reflected in the capacity of its fiscal and monetary policy to effectively
manage and absorb shocks, further aided by a flexible exchange rate.
In addition, Canada's macroprudential framework and well-capitalized
and regulated financial system support the government's ability to contain
the systemic implications of potential shocks, including those emanating
from the housing market.
A track record of sound and consistent fiscal and monetary policies underpins
Canada's institutional strength. Although there have been
alternating parties in power, with differences in tax and spending
priorities, overall economic and fiscal policies have not varied
greatly under different ruling parties at the national level. In
particular, Canadian authorities continue to demonstrate a commitment
to fiscal prudence, which has been a priority for the past 20 years.
Meanwhile, the Bank of Canada continues to maintain a monetary policy
conducive to stable inflation at moderate levels.
Canada's financial regulatory regime further augments the strength
of its institutional framework. Prudent financial oversight prevented
the formation of a large subprime mortgage market and proliferation of
high-risk lending practices in the run-up to the global
financial crisis. More recently, the government has adopted
new macroprudential policies to safeguard itself, the banking system,
and households from risks related to rising house prices and household
debt. Measures have included enhanced stress testing and stricter
mortgage insurance standards.
Meanwhile, the Canadian banking system continues to maintain high
intrinsic strength, supported by persistently high profitability,
capitalization levels and asset quality. The system's asset-weighted
average baseline credit assessment (BCA) rating of a3 is currently one
of the highest amongst the banking systems rated by Moody's. While
transitions to more volatile revenue models by some Canadian banks may
pose risks over the medium term, the industry's favorable structure
and conservative regulatory oversight will limit the extent of any resulting
deterioration in asset quality.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on Canada's rating reflects Moody's expectation that
the risk of a material shock to Canada's economic or fiscal strength
is low. Even in the event of such a shock, for example emanating
from the housing sector or externally, the resilience of the economy,
supported by very strong institutions that foster timely and effective
policy responses to such shocks, would keep Canada's credit metrics
consistent with a Aaa rating.
Canada's demonstrated capacity to adjust fiscal, monetary
and economic policy to buffer the economic impact of negative shocks points
to the overall resilience of its economy and credit profile.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Canada's rating is unlikely to move down in the near future, as
the stable rating outlook suggests. Over the long term, should
the political consensus on maintaining sound public finances erode and
government debt ratios rise materially, the government's rating
could come under pressure.
In addition, material deterioration of Canada's long term
economic potential and resilience to economic shocks that impairs affordable
financing of government debt and the health of the financial system,
for example emanating from material further increases in private sector
indebtedness, would be credit negative.
Outlook Actions:
..Issuer: Canada, Government of
....Outlook, Remains Stable
Affirmations:
..Issuer: Canada, Government of
.... Issuer Rating, Affirmed Aaa
....Senior Unsecured Commercial Paper,
Affirmed P-1
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)Aaa
....Senior Unsecured Other Short Term Program,
Affirmed (P)P-1
....Senior Unsecured Notes, Affirmed
Aaa
....Senior Unsecured Shelf, Affirmed
(P)Aaa
..Issuer: Petro-Canada Ltd.
....Backed Senior Unsecured Notes, Affirmed
Aaa
....Backed Senior Unsecured Shelf, Affirmed
(P)Aaa
..Issuer: Strait Crossing Finance, Inc.
....Backed Senior Unsecured Notes, Affirmed
Aaa
SUMMARY OF MINUTES FROM RATING COMMITTEE
GDP per capita (PPP basis, US$): 48,390 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3% (2017 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.9%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -1.0%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.9% (2017 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 30 October 2018, a rating committee was called to discuss the
rating of the Canada, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's governance and/or management, have
not materially changed. The issuer's fiscal or financial strength,
including its debt profile, has not materially changed. The
issuer's susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
William Foster
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
