DBRS Text: Confirms Government of Canada at AAA Stable

     OTTAWA (MNI) - Following is the text of a press release issued Friday by

DBRS, confirming Canada's AAA rating with a stable outlook:

     DBRS Inc. has confirmed the Government of Canada's Long-Term Foreign and

Local Currency - Issuer Ratings at AAA and Short-Term Foreign and Local Currency

- Issuer Ratings at R-1 (high). The trend on all ratings is Stable. The AAA

ratings are underpinned by Canada's large and diverse economy, prudent

macroeconomic policymaking, and strong public institutions.

     The economic recovery in Canada has recently accelerated and become more

broad-based. The near-term growth outlook is positive, supported by robust

foreign demand and strengthening business confidence. Fiscal and monetary

policies are expected to gradually tighten as the output gap closes and

inflationary pressures pick up. However, uncertainty over U.S. trade and tax

policies pose risks to the outlook, and domestic imbalances remain a source of

concern. High levels of household debt leave the economy vulnerable to

employment and interest rate shocks. In addition, house prices in the Toronto

and Vancouver areas appear well above levels consistent with economic

fundamentals and, therefore, could be subject to a correction.

     The AAA ratings are supported by Canada's strong public finances and sound

fiscal management. While gross general government debt is high at 92% of GDP,

the government balance sheet benefits from substantial financial assets. On a

net basis, Canada's public debt burden amounted to 27% of GDP in 2016, which

compares favorably to most highly-rated peers. Moreover, public debt ratios are

expected to decline over the next five years as fiscal accounts gradually

improve and the economy grows at a moderate pace. With a strong public balance

sheet and substantial financing flexibility, Canada has fiscal space to provide

temporary support to the economy if downside risks materialize without putting

stress on the ratings.

     The cyclical recovery in Canada is well-advanced. In the first seven months

of 2017, the economy expanded 3.4% year-over-year, with contributions coming

from resource industries, non-resource goods industries, and services

industries. Employment growth has stabilized in resource-based provinces and

accelerated in non-resource-based provinces. In terms of capital,

non-residential business investment remains weak following large cutbacks in

2015 and 2016, but there are early signs of a recovery. Taken together, recent

data suggests that the drag from the oil-price shock in 2014 has largely passed

and that slack in the economy is quickly diminishing. The IMF projects GDP

growth of 3.0% in 2017 and 2.1% in 2018.

     Fiscal and monetary policies are expected to gradually tighten as spare

capacity in the economy diminishes. Since the oil-price shock three years ago,

the government has provided a modest countercyclical fiscal stimulus, which DBRS

viewed as prudent and well-timed. However, with the cyclical recovery now

entrenched, fiscal policy is expected to move to a more neutral stance next year

and then begin to tighten.

     The Bank of Canada has already started to withdraw extraordinary monetary

stimulus. The target for the overnight rate was increased 25 basis points in

July and again in September, taking the rate to 1.0%. The pace of monetary

tightening will likely depend on the evolution of economic activity and ongoing

assessments of the output gap, which is subject to some uncertainty. Although

growth has recently accelerated, the Bank of Canada's three preferred core

inflation measures remain below the 2.0% target.

     Risks to the economic outlook in the near term largely stem from the

external environment. Protectionist measures by the United States, potentially

including an outright withdrawal from NAFTA, could have an impact on the

competitiveness of North American firms and lead to gradual changes in

cross-border production chains. Greater impediments to trade - tariff or

non-tariff - would likely reduce Canada's potential growth. In addition,

unanticipated shocks to the global economy, such as a sharp deceleration in

China, could affect Canada through deteriorating terms of trade, weaker global

demand, and financial market volatility. Finally, interest rates in Canada could

rise faster than expected if U.S. growth accelerates, potentially on the back of

the proposed tax cuts.

     The key domestic vulnerability in Canada is high household debt. In the

second quarter of 2017, household debt as a share of disposable income reached a

record high 170%. If a negative growth shock were to materialize, high debt

could amplify the shock by forcing borrowers, particularly those with limited

savings, to pull back on consumption. Adverse wealth effects stemming from a

correction in house prices could intensify the shock. At the same time,

financing conditions could tighten as Canadian banks face increased credit costs

and weaker collateral values.

     A correction in house prices in Toronto and Vancouver in isolation,

however, is not likely to cause significant macroeconomic disruption. In both

cities, robust employment growth and steady population gains underpin housing

demand. Moreover, the run-up in house prices has not been accompanied by clear

evidence of a misallocation of labor and capital. Though a price correction

could generate adverse wealth effects in these two cities and the surrounding

areas, the effects on the broader economy and financial system would likely be

manageable.

     RATING DRIVERS

The Stable trend reflects DBRS's view that Canada has a high capacity to absorb

shocks and cope with pending challenges. The ratings could experience downward

pressure in the medium term, however, if a large shock were to significantly

weaken growth prospects and fiscal outcomes, resulting in a sustained

deterioration in public debt dynamics and policy credibility.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$,MR$$$$]