New York, November 03, 2022 -- 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 very strong institutions and governance framework, which provide a high degree of resilience to shocks, including the current challenges to the global economy from elevated and persistent inflation, tightening financial conditions and the ramifications of the Russian invasion of Ukraine. Moody's expects Canada's monetary and macroeconomic policies to effectively manage these challenges and the economy to continue to demonstrate its resilience.
(2) High debt affordability and fiscal policy effectiveness, which have contributed to general government fiscal consolidation following the COVID-19 pandemic shock and support Moody's overall assessment of Canada's fiscal and institutions and governance strength.
The stable outlook on Canada's rating reflects Moody's view that the risk of a material, long-lasting shock to Canada's economic or fiscal strength is low. The resilience of the economy, supported by very strong institutions that have demonstrated timely and effective policy responses to previous shocks, would likely keep Canada's credit profile consistent with a Aaa rating. In addition, despite an initial sharp deterioration in the government's fiscal position from the pandemic, Moody's expects Canada's long-standing political consensus on fiscal sustainability to remain in place.
Canada's' local-currency (LC) and foreign-currency (FC) ceilings remain unchanged at Aaa. The Aaa LC ceiling reflects a small government footprint in the economy, predictable and effective institutions, very low political risks and very low external imbalances, all of which reduce the risks posed to non-government issuers by government actions or shocks that would commonly affect the government and the private sector. The FC ceiling at Aaa reflects the country's very strong policy effectiveness and open capital account which reduce transfer and convertibility risks to minimal levels.
In a related action, Moody's has affirmed the Aaa (no outlook) backed senior unsecured rating of Strait Crossing Finance, Inc., which benefits from the financial backing of the Canadian government in the form of a guarantee.
A full list of affected ratings is provided towards the end of this press release.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
HIGH ECONOMIC STRENGTH, VERY HIGH INSTITUTIONS AND GOVERNANCE STRENGTH, SUPPORT RESILIENCE TO SHOCKS
Canada's economic strength is supported by its large and diverse economy, very high per capita income levels and high competitiveness. With nominal GDP of about $2.0 trillion in 2021, the Canadian economy is the third largest in the Aaa-rated category, after the US and Germany. With large scale typically 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 recent decades, including the impacts of the Russian invasion of Ukraine, COVID-19 pandemic, global oil price shock of 2014-2015, and global financial crisis. The country's implementation of countercyclical policy measures during these shocks demonstrated fiscal and monetary policy effectiveness. Looking ahead, Moody's expects that Canada's monetary and macroeconomic policies, supported by very strong institutions and governance, will effectively manage current challenges from elevated and persistent inflation, tightening financial conditions and the economic, financial and political ramifications of the Russian invasion of Ukraine.
Following real GDP growth of 4.5% in 2021, Moody's expects the Canadian economy to grow by about 3.3% in 2022, followed by 0.6% in 2023 and 1.5% in 2024. Moody's expects that Canada will continue on a path of monetary and fiscal policy tightening in 2023 in order to rein in inflation and slow the economy. As a result of these policies, Moody's expects Canada's inflation rate to reach around 6.7% in December 2022 and decline to 2.8% and 2.0% by the end of 2023 and 2024, respectively. Over the medium term, Moody's expects real GDP growth to converge with its long-term potential of around 1.8%, which is slightly higher than growth trends observed in some other Aaa-rated sovereigns, and inflation to remain near the Bank of Canada's midpoint target of 2.0%.
Moody's assessment of Canada's institutions and governance strength reflects the very high quality of legislative and executive institutions, very strong civil society and judiciary, and a demonstrated track record of sound and consistent fiscal and monetary policy effectiveness. This assessment is further 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 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 potential shocks, including those emanating from the 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.
HIGH DEBT AFFORDABILITY AND FISCAL POLICY EFFECTIVENESS SUPPORT FISCAL AND INSTITUTIONS AND GOVERNANCE STRENGTH
Like many of its Aaa-rated peers, the Canadian government significantly increased fiscal spending during the pandemic to provide counter-cyclical support to households and businesses at a time when revenues were weak and GDP contracted, resulting in a sharp deterioration of the fiscal position. In 2020, the general government fiscal deficit widened to about 11.3% of GDP from near balance in 2019. However, in 2021 the deficit narrowed to around 5.0% of GDP and Moody's expects it to decline further to about 1.2% in 2022, supported by strong government revenue collection and the phasing out of emergency pandemic fiscal spending. Weaker growth in 2023 will likely slow the pace of fiscal consolidation, but Moody's expects the government fiscal deficit to continue to decline toward balance over the medium term. Meanwhile, after rising to a peak of about 106% of GDP in 2020 and declining to around 101% in 2021, Moody's expects the general government debt burden to decline further to about 94% in 2022 and 91% in 2023 as the government advances its intended fiscal consolidation measures and relatively high nominal GDP help reduce the debt burden.
As Canada is a reserve currency country, Moody's sovereign ratings methodology places more weight on debt affordability in its assessment of fiscal strength. Canada's debt affordability has improved significantly over the past two decades and has benefited from historical declines in global interest rates. The country has also benefited from increased demand for Canadian dollar-denominated assets from stable 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 27% of outstanding debt as of June 2022 from 13% in 2008. Debt affordability, as measured by the ratio of general government interest payments to revenue, strengthened to 6.6% in 2021 from about 16% in 2000. Overall, declining funding costs have largely offset the effect of a rising government debt stock on the country's fiscal strength. Looking ahead, even though Canada's debt affordability will gradually weaken as global interest rates reset at higher levels, Moody's expects it to remain strong in absolute and relative terms.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on Canada's rating reflects Moody's view that the risk of a material, long-lasting shock to Canada's economic or fiscal strength is low. The resilience of the economy, supported by very strong institutions that have demonstrated timely and effective policy responses to previous shocks, would likely keep Canada's credit profile consistent with a Aaa rating. In addition, despite an initial sharp deterioration in the government's fiscal position from the pandemic, Moody's expects Canada's long-standing political consensus on fiscal sustainability to remain in place.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Canada's neutral-to-low (CIS-2) ESG Credit Impact Score reflects neutral-to-low exposure to environmental and social risk, along with very strong governance and policy effectiveness that mitigates the sovereign's susceptibility to these risks.
Canada's E issuer profile score is neutral-to-low (E-2), reflecting relatively low exposure to environmental risks across most categories and moderately negative exposure to carbon transition and natural capital risks. With hydrocarbons accounting for nearly one-fifth of exports, Canada's economy and public finances are exposed to a global shift away from fossil fuel sources of energy. Natural resources extraction and the construction and use of hydrocarbon pipelines in protected and forested areas present additional environmental risks.
Canada's S issuer profile score is neutral-to-low (S-2), reflecting broadly low exposure to social risks, apart from moderately negative demographic trends. In line with many advanced economies, access to high quality education, housing, healthcare and basic services prevails. However, demographic pressures from an aging population will rise over the longer term, which will weigh somewhat on public finances.
Canada's very strong institutions and governance profile support its rating, as captured by a positive G issuer profile score (G-1) with a strong institutional structure and policy credibility and effectiveness.
GDP per capita (PPP basis, US$): 52,973 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 4.5% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.8% (2021)
Gen. Gov. Financial Balance/GDP: -5% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 0% (2021) (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 31 October 2022, 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
Canada's rating is Aaa, which is already at the top of Moody's rating scale. An upgrade to a higher rating is therefore not possible.
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, a 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://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.
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 https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.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
Alejandro Olivo
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
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U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
