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Rating Action:

Moody's affirms Canada's Aaa rating; maintains stable outlook

02 Nov 2018

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

No Related Data.
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