Credit ratings agency Moody's says fiscal discipline has been strong for the last 20 years, and overall economic and fiscal policies have not varied greatly under different ruling parties
NEW YORK—The latest report from credit agency Moody’s has not only maintained the country’s AAA rating, but acknowledges Canada as one of the most attractive place in the world for businesses to invest and hire.
Canada’s Aaa rating coems with a stable outlook and reflects the country’s large and diversified economy, high wealth levels and benign trends in federal government finance. Moody’s Investors Service report says the economy is supported by a number of factors, such as a transparent monetary policy and well-developed and well-regulated financial markets.
With a nominal GDP of $1.6 trillion in 2015, Canada’s economy is the third largest in Moody’s AAA-rated category, after the U.S. and Germany. Canada is also highly competitive, ranking 15th out of 138 countries in the World Economic Forum’s 2016-17 Global Competitiveness Index.
Moody’s examined Canada in four categories: economic strength, which is assessed as “very high”; institutional strength: “very high (+)”; fiscal strength ” high (-)”; and susceptibility to event risk: “very low”.
“In line with other large, high-income economies, Canada’s economy is well diversified,” said William Foster, a vice-president and senior credit officer at Moody’s. “This enables it to absorb shocks, for example following the financial crisis and, more recently, the downturn in oil prices.”
However, the ratings agency warned an increase in household debt could pose a threat to growth.
The report says there is a low probability of a housing market collapse similar to the one experienced in the U.S. during the most recent recession, but a major downturn in the housing market could affect the government’s balance sheet.
Canada’s government effectiveness and rule of law are ranked highly by international surveys, supporting its rating. Fiscal discipline has also been strong for the last 20 years, as overall economic and fiscal policies have not varied greatly under different ruling parties.
While Canada’s general government debt burden is somewhat higher than that of its AAA-rated peers, federal government debt levels are moderate. The ratio of general government debt to GDP, was at 78.3% for year-end 2015, more than twice the 38.1 per cent median level for AAA-rated sovereigns. However, excluding provincial debt, the federal government’s own ratio was a more moderate 34.5 per cent.
The stable outlook on the rating indicates Moody’s view that Canada’s rating is unlikely to move down in the near future. Over the long term, should the political consensus on maintaining sound public finances erode and government debt ratios rise further, the government’s rating could come under pressure.