A carpet tile manufacturer in Belleville, Ont.Moe Doiron/The Globe and Mail
Moody's Investors Service Inc. has renewed Canada's triple-A credit rating, citing the factors that helped the country emerge from the global financial crisis relatively unscathed, such as its "economic resiliency, very high government financial strength, and a low susceptibility to event risk.''
Even though governments across the country ran deficits to fight the recession, Ottawa and the provinces are "on a track of fiscal consolidation," the agency said in its annual report on Canada, and their debt loads will improve "over the next few years."
Since the provinces also enjoy high credit ratings, the risk they pose to Ottawa's books is deemed low even though their debt loads are "relatively large," the agency said.
The main risks to Canada's outlook are linked to the housing market and to Quebec's ongoing sovereignty issues, Moody's said, adding that the chances of either risk affecting the federal government's credit rating is low.
Given the share of residential mortgages backed by Ottawa through the Canada Mortgage and Housing Corp., a "major downturn" in home prices could hurt the federal government's balance sheet, Moody's noted.
Nonetheless, the agency reckons that "even in an extreme scenario," any added debt wouldn't be enough to change its rating for Canada.
"As a large and diversified economy with a stable political system and strong regulatory framework, Canada has a low susceptibility to event risk," the agency's report says.
"Natural resource industries, a competitive manufacturing sector, and a well-developed and well-regulated financial market also support the country's resiliency," as does Canadians' high per-capita income, Moody's said.
Moody's attributes much of Canada's comparatively strong economic performance since the downturn to the Harper government's stimulus spending and the fact the Bank of Canada kept interest rates low, which encouraged borrowing and spending and shielded the housing market.
Even though Canada is in many ways joined at the hip with the United States - which the agency this month placed under review for a credit downgrade amid the debt-ceiling impasse in Washington - Moody's noted a number of "important differences" between the two economies.
These include the fact Canada's economy puts a greater emphasis on trade, the fact Ottawa has more fiscal flexibility thanks to a smaller debt load, and also that the banking system and housing market in Canada are stronger and less vulnerable to shocks.
"Compared to other AAA-rated sovereigns, Canada's general debt levels are near the median level, but the federal government's position by itself is relatively strong," the agency said, noting that total debt of all levels of government in Canada amounts to about 70 per cent of gross domestic product.
At the same time, Moody's noted that Ottawa's annual budget gap is little more than 2 per cent of GDP after peaking at 3.6 per cent of GDP in fiscal 2009-10, and is forecast to be closed in 2014-15.
But Moody's also flagged what is likely to be a central political issue for years to come in Canada, noting that the government's budget projections depend on a path for spending restraint that may difficult to achieve as the population ages and health care costs escalate.
"Whether expenditure restraint to this extent is sustainable is a question in the face of rising pressure on government resulting from the aging of the population," the report says. "In part, this will be a political question as to how health care costs are managed and shared between the federal government and the provinces.''