Canada’s Budget Target Supports Top Rating, Moody’s Says

Canada is projected to eliminate a budget deficit this fiscal year and post “moderate” surpluses in the following years, Moody’s Investors Service said.

Prudent financial policies and debt levels validate the country’s top credit rating, Moody’s said in an annual credit analysis on Canada today affirming its Aaa rating with a stable outlook, which it has had since May 2002.

“After a recession at the time of the global financial crisis, the economy recovered and continues to show positive momentum, supporting improvement in government finance,” according to the report.

The world’s 11th-largest economy is challenged by high household debt and rising house prices that pose “a potential risk to the banks and to the federal government directly, as it guarantees a considerable portion of mortgages,” Moody’s said.

Another risk is the large debt load carried by the nation’s provinces, a “contingent liability” for the federal government, according to Moody’s. While Ontario, with C$290 billion ($257 billion) of bonds outstanding, is carrying more debt than California, it has a higher Aa2 credit rating from Moody’s, thanks to the broad powers it enjoys over its own revenue.

Canada’s ratio of household debt to disposable income rose to 163.6 percent between April and June, close to the record 164.1 percent in the third quarter of last year, Statistics Canada said Sept. 12. The drop in the average five-year fixed mortgage rate to the lowest in decades at 4.8 percent this year has fueled unexpected gains in home prices and resales, which reached the highest in more than four years in August.

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