Fitch affirms Canada's AAA issuer default rating

Wed Aug 21, 2013 4:41pm EDT

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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