Economy & Markets

The country has many strengths, but it also has the second highest government debt of any “AAA”-rated sovereign

By James Langton |

 

Fitch Ratings Inc. has reaffirmed Canada's "AAA" sovereign rating on Monday, with a stable outlook, amid solid economic growth expectations.

Canada's sovereign rating is supported by an "advanced, well-diversified and high-income economy" along with other strengths such as political stability, strong governance and robust institutions, according to Fithc.

Yet, at the same time, the country has high debt levels. Fitch reports that Canada's gross general government debt is the second highest of any "AAA"-rated sovereign — and that it is close to a level that would be incompatible with "AAA" status.

"The economy has recovered strongly from the oil price shock, which caused a steep drop in energy sector investment and limited growth to below 1% in 2015 and 1.5% in 2016," Fitch says, adding that it expects gross domestic product (GDP) growth of around 2.5% in 2017, with risks to the upside. Looking further out, it sees growth slowing to 1.6% by 2019, which is close to the long-term potential growth rate.

With the Bank of Canada starting to raise interest rates, Fitch says that it expects consumers to weather a gradual rise in interest rates, but that consumption growth will decelerate.

The credit-rating agency also says that it expects gross general government debt/GDP to trend down after 2017, but that "any decline is likely to prove shallow, in view of current policy settings and a forecast decline in GDP growth, thereby leaving public finances vulnerable in the event of an economic shock."

Finally, Fitch notes that it rates the overall quality of the banking system in Canada highly: "Fitch believes that the system's capital cushion and government-backed mortgage insurance covering half the banks' portfolio would allow it to absorb even a severe property price shock."

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