Moody’s Investors Service has given Canada’s debt-management performance a glowing review in its annual report on the country released today.

The New York-based credit ratings service says the country’s Aaa ratings and stable outlook reflect the strongly improving trends in Canada’s external financial position as well as in its government debt ratios.

“Canada has achieved a good balance of payments performance with current account surpluses likely to continue over the medium term,” says Moody’s Steven Hess, author of the report.

Moody’s noted that current account deficits had caused Canada’s net external liability position to rise to a moderately high level. But the return to surpluses since 1999 has corrected this situation significantly. “Any occasional, small deficits over the medium term are likely to be due to cyclical factors,” Moody’s said.

“Even though government debt ratios remain high, we expect the declining trend to continue, greatly lessening Canada’s vulnerability to either internal or external shocks, especially in the United States,” Hess said.

Part of the improvement in the external position is because of the depreciation of the Canadian dollar in recent years, and improved productivity growth in Canada. This, in turn, has resulted from economic reforms over the years in trade, taxation, the financial sector, and unemployment compensation. “Canada’s accession to NAFTA in the mid 1990s was part of this, as was a program of corporate tax reductions, moving them closer to US rates,” says Hess.

Further tax reductions in the U.S. could pressure Canada to follow suit, a development that would probably help to continue to improve Canada’s external position despite the recent rise in the value of the Canadian currency.

Moody’s says that on the public finance front, Canada’s ratios of general government debt to GDP and to revenue have moved significantly downward, “although they are still higher than the median for Aaa-rated countries. The same can be said for the ratios of net debt to GDP and to revenue, although these are closer to the median for such countries.”

“Supported by developments at both the federal and provincial levels, Moody’s believes that these ratios are clearly on a downward trend that will continue into the medium term.

“While there is political debate over government spending programs, especially for health care, and how these could affect the rate of improvement in the key ratios, there seems little chance that the positive trend will reverse given the political consensus in favor of balanced budgets and a continuation of paying off government debt,” Hess says.