Canada Achieves Best Debt Rating

Worth A Look, Role of Government, Frontier Centre

Fitch Ratings-New York-August 12, 2004: Fitch Ratings, the international rating agency, today upgraded Canada’s long-term foreign currency sovereign rating to ‘AAA’ from ‘AA+’, reflecting the continuation of budgetary surpluses and a record of robust GDP growth that have put government debt and external debt on a downward path.

‘The federal elections in June showed that Canada’s major political parties agree on maintaining budgets in balance, if not surplus,’ said Roger M. Scher, Managing Director and head of Americas Sovereign Ratings at Fitch. The campaign platforms proffered in June differed markedly in the mix of taxation and spending, in economic assumptions, and even in the size of the surpluses envisioned, but the major political parties, like the majority of Canadians, supported fiscal prudence. ‘Continued budget surpluses should underpin a strong national savings rate and declining general government debt and net external debt in GDP terms,’ said Scher.

‘With a minority Liberal government resulting from the June elections, it will prove more difficult to maintain fiscal discipline, but a return to the deficits of the early 1990s is not in the cards,’ said Scher.

In the 2004-05 federal budget, spending was tightened after some fiscal slippage in the prior year’s budget. Likewise, many provincial budgets will undergo a fiscal tightening this year. As a result, the general government budget surplus should rise to at least 0.5% of GDP this year, on a national accounts basis, from an estimated 0.2% of GDP in 2003. Given strong GDP growth, which has exceeded growth in most ‘AAA’ sovereigns (averaging 3.5% per year in Canada over the last ten years), gross general government debt should fall to 72% by year-end from nearly 100% ten years ago. Likewise net external debt should decline to under 30% from 47% of GDP ten years ago. Though these ratios compare unfavorably to the ‘AAA’ medians of 50.8% and 15% respectively, Canada’s ratios are moving in the right direction and have been for some time.

Furthermore, Canada’s government debt ratio net of assets, at 34.9% of GDP in 2003, is lower than the same ratio in several peer sovereigns. More can be done to ensure long-run fiscal discipline and to enhance Canada’s growth rate. However, the likelihood of bold initiatives on structural reforms has diminished with the new minority government. The Liberal Party may have to secure the votes ofthe left-leaning New Democratic Party (NDP), which could make it difficult to amend welfare policies in order to encourage work, to introduce pricing mechanisms in health-care provision, and to liberalize business practices to encourage competition. As a result, it will prove challenging for Canada to close the gap between its lower per capita GDP and labor productivity growth and these figures in the United States.

Contact: Roger M. Scher +1-212-908-0240 or Morgan C. Harting +1-212-908-0820,New York.