Fitch affirms Canada's AAA issuer default rating
Aug 21 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has affirmed Canada's ratings as follows: --Long-term foreign currency (FC) Issuer Default Rating (IDR) at 'AAA'; --Long-term local currency (LC) IDR at 'AAA'; --Foreign currency short-term IDR at 'F1+'; --Country Ceiling at 'AAA'. The Outlook is Stable. KEY RATING DRIVERS Canada's sovereign ratings reflect the following factors: Canada is an advanced, well diversified and high income country. Its political stability, strong governance and institutional strengths support the rating. Its overall policy framework remains strong and has delivered steady growth and low inflation. Canada has a good track record of prudent fiscal management. Its fiscal credibility was boosted by the timely withdrawal of the fiscal stimulus implemented during the global financial crisis and the roadmap provided by the authorities to achieve a balanced federal government fiscal position by 2015/16. Prudent budgetary practices provide sufficient confidence that the consolidation path is realistic. Fitch believes that Canada's general government debt (GGD) has peaked and should start to decline in 2013-15 in line with fiscal consolidation. Nonetheless, at 88.2% of GDP for 2012 GGD is the second highest among the 'AAA' rated sovereigns, highlighting Canada's more limited fiscal flexibility compared with peers. Mitigating this rating weakness are Canada's strong commitment to fiscal consolidation and ample domestic financing flexibility. Elevated household indebtedness (especially mortgages) and strong appreciation of house prices in recent years renders the Canadian economy vulnerable to adverse shocks. The authorities have taken measures to mitigate risks and the initial signals suggest some moderation in the housing market and stabilization of household indebtedness. However, external and/or domestic economic shocks can lead to a faster adjustment which would be negative for the banking system and the broader economy. Fitch believes that the banking system is relatively well-capitalized and can absorb a potential moderate level of stress from the housing market. This is supported by a strong regulatory framework and an early implementation of Basel III which is already in effect for all banks in Canada. While Canada's growth has outperformed peers since 2009, consumption and construction, the main drivers of growth after the crisis are losing steam on the back of tightening credit conditions and high household indebtedness. The economy faces the challenge of rebalancing growth drivers away from consumption and construction to exports and business investment in a context of high uncertainty for the country's energy sector as well as competitiveness issues confronting the manufacturing sector. RATING SENSITIVITIES A Stable Outlook reflects Fitch's assessment that downside risks to the rating are currently not significant. Nonetheless, the following risk factors individually, or collectively, could trigger negative rating action: --Disorderly unwinding of household indebtedness with adverse repercussions for financial sector stability and fiscal consolidation --A renewed and persistent rise in the general government debt/GDP ratio --Material weakening in macroeconomic projections caused, for example, by a deterioration in the housing market KEY ASSUMPTIONS Fitch assumes that economic growth in the US (Canada's largest trading partner) will pick up in 2014. Fitch assumes that the Eurozone remains intact and that there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by policy makers. Fitch assumes that China will avoid a hard landing and that oil prices will remain at relatively high levels. Crude oil is forecast to average USD105 and USD100 per barrel in 2013 and 2014 respectively, compared with USD112 per barrel in 2012. Fitch assumes that the housing market will achieve a soft landing and that the Canadian government will remain proactive and pragmatic in its approach to address macroeconomic and banking sector vulnerabilities. The agency assumes that the government broadly adheres to its fiscal consolidation strategy.
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