TEXT - S&P affirms Canada's ratings; outlook is stable

Mon Dec 10, 2012 4:44pm EST

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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