Flaherty Says Canada May See Big Surplus With Weak Dollar

Canada may post a bigger budget surplus than forecast in the 2015-2016 fiscal year and its manufacturers will be aided by a currency that the central bank head says may weaken, Finance Minister Jim Flaherty said.

“Yes, we’ll balance and it won’t be close, we’re in good shape,” Flaherty said in an interview broadcast yesterday on CTV’s “Question Period.” “We could have a larger surplus than we anticipated but we will have a surplus,” he said. Flaherty didn’t elaborate on how large the surplus could be.

The finance department projected in November a budget gap of C$17.9 billion ($16.9 billion) for the fiscal year that started April 1, narrowing to C$5.5 billion next year and swinging to a C$3.7 billion surplus the following year.

Flaherty also said recent weakness in the Canadian dollar was good for the country’s factories, and that Bank of Canada Governor Stephen Poloz had told him and his provincial counterparts that they may see more currency depreciation.

“The governor was with us recently with the provincial ministers and he indicated there might be some softening in the dollar,” Flaherty said. “But the dollar in the nineties somewhere is good for manufacturing.”

Poloz briefed Flaherty and the provincial finance ministers at a meeting near Ottawa Dec. 16. “The Bank doesn’t comment on confidential discussions that the Bank holds with federal and provincial finance ministers or other government officials,” spokesman Alexandre Deslongchamps said in an e-mail.

Currency Weakens

The currency fell 0.3 percent to C$1.0670 per U.S. dollar at 10:17 a.m. in Toronto. One Canadian dollar buys 93.72 U.S. cents. The dollar has depreciated by 0.8 percent against its U.S. counterpart in the past six months, ranking 12th out of 16 major currencies tracked by Bloomberg.

While Flaherty also said Canadians could face higher interest rates this year as the Federal Reserve slows its monetary stimulus, he stopped short of saying the central bank should raise its policy interest rate.

“The OECD and the IMF have both said to Canada we ought to let our interest rates go up a bit,” Flaherty said. “So there’ll be some pressure there for that to happen.”

The yield on Canada’s benchmark 10-year government bond increased almost a full percentage point last year as the Fed signaled it would slow the bond-buying program it used to depress interest rates. The Fed reduced its $85 billion in asset purchases by $10 billion this month.

Swaps trading

Investors aren’t expecting any interest-rate increases from Poloz next year, according to trading in overnight index swaps.

Canada’s economic growth is expected to pick up to 2.3 percent this year from 1.7 percent last year while growth in the U.S., its largest trading partner, is forecast to reach 2.6 percent in 2014, according to separate Bloomberg economist surveys.

Flaherty also said Sunday that dangers to the Canadian economy from elevated housing prices and high consumer debt levels are receding.

Flaherty said the country’s housing market is cooling and he’s less worried about a bubble forming, in part thanks to the changes his government made to mortgage-lending rules.

“We’ve seen some softening in the housing market, including the condo market,” he said. “We’ve tightened the rules four times on mortgage insurance and if we have to tighten them again we will.”

Flaherty said his government is aiming for a “soft landing” in the housing market. If home values don’t collapse, the record levels of debt compared to disposable income being carried by Canadians shouldn’t be a problem, he said.

“We look at debt to net worth,” he said. “As long as the housing market remains relatively strong we don’t really have a debt issue.”

Canada’s Parliamentary Budget Office, which operates independently from the finance department, projected the 2015-2016 surplus could be C$4.6 billion in a Dec. 5 report.

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