New York, November 19, 2020 -- 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 and (P)P-1 other short-term
ratings. The outlook remains stable.
The rating affirmation reflects the following key drivers:
(1) Canada's high economic strength and a governance framework fostering
very strong policy effectiveness, affording its credit profile a
very high degree of resilience to shocks, including the current
coronavirus pandemic. Policy effectiveness is considered a governance
factor under the rating agency's Environmental, Social,
Governance (ESG) framework. This very high degree of resilience
to shocks has been demonstrated consistently in the past, including
during the global financial crisis and global oil shock of 2014-15.
(2) High debt affordability, supported by historically low interest
rates, mitigates the impact of this year's sharp rise in public
sector indebtedness on the country's fiscal strength.
The stable outlook reflects Moody's expectation that the risk of
a material, long-lasting impact of the pandemic shock on
Canada's economic and fiscal strength is very low. Despite
the recent deterioration in the government's fiscal position,
driven by a strong countercyclical fiscal policy response to the coronavirus
shock, Moody's believes that fiscal consolidation measures
will be progressively implemented after the pandemic subsides as Canada's
long-standing political consensus on prudent management of public
finances is expected to prevail. Diminishing confidence that Canadian
policymakers will take effective action to achieve gradual fiscal consolidation
after the economy begins a sustained recovery, would weigh on the
sovereign's 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 rating of the Strait Crossing Finance, Inc.,
which the rating agency considers to have the financial backing of the
Canadian government.
A full list of affected ratings is provided towards the end of this press
release.
RATING RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
HIGH ECONOMIC STRENGTH, ROBUST INSTITUTIONS AND POLICY EFFECTIVENESS,
SUPPORT HIGH DEGREE OF RESILIENCE TO SHOCKS
Canada's economic strength is supported by its large and diverse
economy, very high per capita income levels, reasonably high
growth potential and comparatively strong demographics. With projected
nominal GDP of about $1.7 trillion in 2020, the Canadian
economy is the third largest in the Aaa-rated category, after
the US and Germany. With large scale comes economic diversification
that offers a high degree of shock-absorption capacity.
Credit supportive 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 implementation of macroeconomic
policy and financial regulation, contribute to the economy's capacity
to absorb shocks, helping to reduce growth volatility. Canada
has clearly demonstrated its resilience to economic shocks in the past,
as it recovered faster than most other large advanced economies from the
global financial crisis and managed the global oil price shock of 2014-2015
through effective countercyclical policy measures. Moody's
expects that the government's proactive and aggressive fiscal and
monetary policy responses to the coronavirus shock, supported by
very strong institutions and governance, will provide for a sustainable
economic recovery in Canada.
In 2020, Moody's expects real GDP to contract by around 6.0%,
followed by growth of 5.0% and 3.5% in 2021
and 2022, respectively. Over the medium term, Moody's
expects real GDP growth to converge with its long-term potential
of around 1.7%, which is slightly higher than growth
trends observed in some other Aaa-rated sovereigns. However,
as with many countries throughout the world, Canada's recovery
path next year will remain highly dependent on: (1) the development
and distribution of a vaccine, (2) effective pandemic management,
and (3) government policy support.
Moody's highly favourable assessment of Canada's institutional
strength is supported by the country's robust and independent institutions,
high regard for the rule of law, clear separation of powers,
and high levels of transparency. Canada's mature and highly effective
public institutions have a demonstrated track record of timely and well-targeted
fiscal, monetary and macroeconomic policy responses to evolving
economic conditions and shocks. In addition, Canada's
macroprudential framework and well-capitalized and regulated financial
system support the government's ability to contain systemic implications
of shocks, including those emanating from the coronavirus pandemic
and housing market. Overall, Moody's considers Canada's
credit profile to have very limited susceptibility to event risks,
given the health of the banking system, very stable political institutions,
and reserve currency status which underscores the government's deep
and unfettered market access, particularly in times of shocks.
IMPACT OF SHARP RISE IN PUBLIC INDEBTEDNESS ON THE COUNTRY'S FISCAL
STRENGTH MITIGATED BY HIGH DEBT AFFORDABILITY
Like many of its Aaa-rated peers, the Canadian government
has significantly increased fiscal support measures (equivalent to about
14% of GDP) to buttress the economy and households from the pandemic
shock, resulting in a sharp deterioration of the fiscal position.
Moody's expects the general government fiscal deficit to widen to
about 18% of GDP in 2020, from near balance in 2019,
and to decline thereafter as the government winds down emergency support
programs and revenues increase in line with a recovery in economic activity.
According to the rating agency's forecast, the general government
debt burden will rise to about 104% of GDP in 2020, up from
79% in 2019, and remain around that level until gradually
declining over the medium term as the government advances fiscal consolidation
measures. As a reserve currency country (about 2% of global
foreign currency reserves are held in Canadian dollars), Moody's
considers Canada to have materially higher capacity to carry a larger
debt burden.
Canada's debt affordability has improved significantly over past two decades
and continues to benefit from further declines in global interest rates.
It has also benefited from increased demand for Canadian dollar-denominated
assets from foreign official investors, resulting in lower funding
costs at all levels of government. Non-resident ownership
of federal government debt has steadily increased to about 23%
of outstanding debt in 2020 from 13% in 2008. Debt affordability,
as measured by the ratio of general government interest payments to revenues,
strengthened to about 7% in 2019 from 16% in 2000.
Overall, declining funding costs have largely offset the effect
of a rising government debt stock on the country's fiscal strength.
Moody's expects Canada's debt affordability to continue to
improve over the near term as interest rates remain lower for longer and
government revenues strengthen in line with economic growth.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on Canada's rating reflects Moody's view that
the risk of a material, long-lasting deterioration to Canada's
economic or fiscal strength is low, including from the coronavirus
shock. In addition, despite a sharp deterioration in the
government's fiscal position this year, Canada's long-standing
political consensus on fiscal health will lead to gradual fiscal consolidation
after the pandemic subsides. Diminishing confidence that Canadian
policymakers will take effective action to achieve fiscal consolidation
after the economy begins a sustained recovery, would weigh on the
sovereign's credit profile.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations exert limited direct influence on Canada's
credit profile, notwithstanding the country's proactive measures
to address climate change. Nonetheless, protests from some
civil society groups over the potential negative environmental implications
of Canadian oil and gas pipeline projects have at times temporarily disrupted
economic activity.
Social risks are not a material consideration affecting Canada's
credit profile. Relative to many other advanced economies,
Canada's demographics are generally favorable and will support future
growth. The country's high level of wealth, low unemployment
rates, and broad access to healthcare and basic services mitigate
social risks related to labor markets and living conditions that are present
in other sovereigns. Moody's regard the coronavirus outbreak
as a social risk under Moody's ESG framework, given the substantial
implications for public health and safety.
Canada's very sound framework of governance and its high institutional
strength are key credit considerations supporting the rating.
GDP per capita (PPP basis, US$): 51,190 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.7% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.2%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -0.3%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2% (2019 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 16 November 2020, 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 institutions and governance strength, 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Although unlikely, should the political consensus on maintaining
sound public finances erode and government debt ratios continue to rise
materially above current expectations, the government's credit profile
could come under pressure. In addition, material deterioration
in 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 would be credit negative.
Affirmations:
..Issuer: Canada, Government of
.... Issuer Rating, Affirmed Aaa
....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: Strait Crossing Finance, Inc.
....Senior Unsecured Notes, Affirmed
Aaa
Outlook Actions:
..Issuer: Canada, Government of
....Outlook, Remains Stable
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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/Sub Sovereign
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
