Canada: Risk Assessment
Country Risk Rating
|A2||The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
- Abundant and diversified energy resources
- Fifth largest producer of oil and gas in the world
- Dynamic population growth (migration inflows)
- Solid banking sector, well capitalized and strictly supervised
- High degree of openness and heavy dependence on U.S. economy
- Insufficient research and development spending
- Manufacturing industry's loss of competitiveness linked to rising power of emerging competitors
- High level of household debt
- Weakening of energy exports (natural gas resources in the United States)
- Inadequate gas pipeline infrastructures
Domestic demand would support activity despite downside risks
In 2015, growth slowed significantly because of the decline in investment in the oil and gas sector following the reduction in revenues and profits in the sector, a consequence of the fall in oil prices. Activity should slightly pick up in 2016. Household consumption will be more vigorous, driven by higher wages and property prices and this, despite very high debt levels (165% of gross disposable income) and low savings rates (4.2% of gross disposable income). The expansionary monetary policy of the Bank of Canada is expected to provide an additional boost to household consumption, as well as property investments. This latter and public investment are therefore likely to increase, whilst non-residential investments will not help boost economic activity given the low price of oil (the oil price needed to match Canadian production costs is around $65/barrel, higher than the current price).
Alberta, and to a lesser extent Saskatchewan, have been strongly affected by Fort McMurray wildfires in May 2016 while 60% of Canadian annual oil production is derived from this Province. The impact should nonetheless be limited on the whole year due to rebuilding efforts and new fiscal measures came into force in July 2016 (increase of the child tax benefit).
The principal downwards risks are from a continuation in low oil prices and a property market price correction, which would hit residential investment and household consumption.
Fiscal measures adopted by Prime minister would widen public deficit
The government plans to spend $60 billion over ten years in infrastructure projects to stimulate economic activity. The first phase of this plan should be completed in 2019 and plans $10 billion investments in public transport network and both green and social infrastructure projects have been launched, in particular in Alberta, British-Colombia and Quebec. Details of the second phase will be announced in 2017. Measures aimed at precarious populations, in particular the unemployed and families have also been implemented. In terms of revenues, the government intends to reduce taxation for those earning least. The deficit is therefore set to increase in 2016 under the dual impact of spending (increased) and receipts (down, amplified by the oil effect). The public debt should therefore increase. At the level of the provinces, Quebec and Ontario, the two most heavily indebted provinces, representing 60% of GDP, two-thirds of the population and over half of its exports, are likely to continue with their budgetary control.
The deterioration of the terms of trade in 2015 increased the current account deficit. This latter should anew slightly increase in 2016 due to less dynamic exports caused by the exchange rate appreciation against the dollar and the turnaround point reached by the US economy (77% of Canadian exports go to US market), insomuch as domestic demand’s increase should support imports. Besides, income balance should remain in deficit.
The Liberal Party wins October 2015 parliamentary elections
Justin Trudeau was elected Prime Minister of Canada in the last parliamentary elections in October 2015, taking over from the conservative Stephen Harper, who held the post for almost ten years. Trudeau’s Liberal Party (center-left) won 184 of the 338 seats in parliament, giving it an absolute majority. Nearly a year after his appointment, Trudeau’s government enjoys high popularity both nationally and internationally. Both diplomatic and trade relations have therefore strengthened with many countries (Mexico, Ukraine) since Trudeau took office.
Finally, the business climate is eased by the simplicity of starting a business and of obtaining credit and the low level of taxes.