TEXT - S&P affirms Canada's ratings; outlook is stable
Overview -- In our view, Canada's chief credit strengths include the effectiveness, stability, and predictability of its policymaking and political institutions, the resilience of its economy, and the strength of its monetary and fiscal flexibility. -- We view Canada's chief credit weakness as its high dependence on the U.S. economy and U.S. financial conditions. -- We are affirming our 'AAA/A-1+' sovereign credit ratings on Canada. -- The stable outlook reflects our base case expectation that Canada's credit strengths will continue to outweigh its credit weaknesses. Rating Action On Dec. 10, 2012, Standard & Poor's Ratings Services affirmed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on Canada. The outlook on the long-term rating is stable. The transfer and convertibility (T&C) assessment of Canada is 'AAA'. Our T&C assessment reflects our view of the extremely low likelihood of the sovereign or central bank restricting non-sovereign access to foreign exchange needed for debt service. Rationale The ratings on Canada reflect Standard & Poor's opinion of the country's relatively diversified and resilient economy and its effective and predictable policymaking and political institutions. Canadian authorities have a strong track record in managing economic and financial crises and delivering economic growth. During the recent global financial crisis and recession, no Canadian financial institution required a government injection of capital and Canadian real GDP per capita growth exceeded U.S. growth in almost every year of the 2007-2011 period. Canadian governments have demonstrated an ability and willingness to implement reforms to ensure sustainable public finances over the long term. We expect Canadian institutions and the broad direction of Canadian policies to remain stable over time, ensuring the predictability of responses to future crises. Underpinning Canada's monetary flexibility are the sovereign's free-floating exchange rate regime, its well-established monetary policy credibility, and monetary transmission mechanisms that are strong and stable. Our view of Canadian fiscal flexibility reflects the government's ability to run countercyclical policies, and reduce increases in general government debt, which have been 6%-7% of GDP annually since 2008, to below 2% of GDP over the next few years. As a result, we expect net general government debt to peak at about 54% of GDP this year and to fall below 50% in 2015. Canada's external flexibility reflects the Canadian dollar's status as an actively traded currency, low current account deficits, and a net external liability position of about 50% of current account receipts. More than half of the gross external liabilities are related to foreign direct investment and portfolio equity, which are less burdensome in most circumstances. External debt, net of reserves and other liquid external assets, has risen to slightly more than 80% of current account receipts this year, but we expect it to ease, as receipts gradually recover with the U.S. economy. The greatest potential risk to Canada's external position would be deterioration of the Canadian financial sector's domestic or foreign loan book that could raise external funding costs. We view this risk as small, given Standard & Poor's credit ratings on the large, internationally active Canadian financial institutions, all of which are in the 'A' or 'AA' categories. Canada's economy is highly dependent on the economy of the U.S. (unsolicited ratings AA+/Negative/A-1+). About three-quarters of goods exported and about half of goods imported are traded with the U.S., and Canadian financial markets are also deeply interconnected with U.S. ones. Many of the trade linkages are intra-firm, contributing to stability of flows and somewhat mitigating this concentration risk. In addition, despite several elevated measures of Canadian household indebtedness and house prices, including household credit market debt to disposable income of 162% in 2011, we continue to view Canada's contingent liabilities as limited. We view micro- and macro-prudential factors as stronger than in many peer countries at the time of their housing market corrections. Outlook Our outlook is stable. Standard & Poor's base case is that the U.S. economy will continue to grow weakly but avoid an extended double-dip recession, sustaining Canada's principal source of external demand and contributing to its growth prospects; that inflation expectations will remain well-anchored; that fiscal deficits will slowly decline toward balance; and that any fiscal impact from a potential housing market correction will prove limited. Given Canada's strong political and economic positions, a combination of increased political uncertainty and noticeably weaker fiscal or external outcomes would likely be necessary for downward pressure to build on the rating. Related Criteria And Research -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011 -- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Ratings List Ratings Affirmed Canada Bank of Canada Sovereign Credit Rating AAA/Stable/A-1+ Canada Transfer & Convertibility Assessment Local Currency AAA Canada Senior Unsecured AAA Short-Term Debt A-1+ Commercial Paper A-1+
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