Canada’s rating protected from low oil prices: Moody’s

Diverse economy, sources of federal revenue will help limit impact from recent price shock

By: James Langton
March 17, 2015 March 17, 2015
10:50

The recent weakness in oil prices do not threaten Canada’s Aaa sovereign credit rating, says Moody’s Investors Service.

In a new report, the rating agency says that lower oil prices “do not pose a significant risk to Canada’s fundamental credit quality”, or its Aaa sovereign rating. “Canada’s diverse economy as well as the small role hydrocarbons play in federal revenues contribute to this resiliency,” the rating agency says.

“The Canadian economy’s diversity will help mitigate the impact from the recent exogenous price shock,” says Moody’s senior vice president, Steven Hess. “At the same time, volatile oil prices, and by extension, slower oil production growth, will reduce but not cancel out Canada’s growth momentum.”

Unless there’s a notable economic shock, such as a major correction in the housing market, Moody’s says that it expects lower interest rates, a weaker Canadian dollar and strong U.S. growth, among other factors, to help the Canadian economy maintain its growth momentum despite lower oil prices.

Moreover, it notes that the federal government’s fiscal position is largely insulated from movements in commodity prices. Moody’s says that the federal government’s direct exposure to the oil and gas sector via corporate income tax, for example, amounts to only slightly more than 1% of federal revenues.

However, it also says that some local and provincial governments are much more exposed, particularly Alberta, Saskatchewan and Newfoundland. That said, it also stresses that Alberta is also the province best equipped to maintain its credit strength during a temporary downturn in oil prices given its strong reserves and modest debt. It says that Saskatchewan is also fairly well insulated from lower oil prices.

Newfoundland faces the greatest fiscal pressures, Moody’s says, as oil royalty and revenues accounted for about 28% of the province’s consolidated revenues in 2013-2014 and its cash reserves are relatively low. Moody’s says that it expects the province’s debt to rise in 2015-2016, but that it still has some leeway within its rating category.