Fitch: Canada AAA Faces More Risk From Housing Than NAFTA

By Yali N'Diaye

     OTTAWA (MNI) - While the latest words from U.S. President Donald Trump

regarding the NAFTA treaty were that a deal could not be reached, Fitch North

America sovereigns analyst Charles Seville expects free trade between the U.S.

and Canada to be preserved, estimating that Canada's coveted AAA-rating faces

more risk from a shock to the economy that would spill over to housing.

     The most likely scenario, however, is that "NAFTA will hold together,"

Seville told MNI Thursday.

     In a commentary Thursday, RBC economist Mathias Hartpence estimated that a

withdrawal would cost Canada one percentage point of GDP over the next five to

ten year, assuming a 4% increase in tariffs in both countries compared to a

status quo.

     "The broader cost is hard to quantify," the RBC analyst commented, as a

U.S. withdrawal would weigh on business and consumer confidence, "further

weighing on growth and investment and potentially fuelling a cycle of falling

interest rates and a declining Canada dollar."

     However, he too sees a U.S. withdrawal as unlikely.

     Besides, said Seville, "we would expect whatever framework replaces it

largely to preserve free trade between Canada and the U.S., as the economies are

very intertwined."

     In remarks at a rally in Phoenix, Arizona, Tuesday, Trump particularly

targeted Mexico when addressing the three-country treaty, which suggests the

U.S. could still default to the bilateral Free Trade Agreement with Canada that

predated NAFTA in case the latter was terminated.

     Canada and Mexico "have made such great deals, both of the countries, but

in particular, Mexico, that I don't think we can make a deal," Trump told his

supporters as the Three Amigos are about to enter a second round of negotiations

at the beginning of September. "So I think we'll end up probably terminating

NAFTA at some point," he said.

     "If the U.S. did terminate the agreement, it would certainly be

disruptive," Fitch's Seville told MNI.

     However, "we see bigger risks to Canada's sovereign rating coming from a

shock to the economy that spills over to the housing market," he said. 

     "Another source of pressure is the general government debt burden, if this

does not stabilize and fall as we expect," he added.

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

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