Canada, AAA, Quebec, Ontario, Alberta, British Columbia, CMHC, Provinces

1. June 2012
Ontario Manitoba British Columbia
Canada Housing Trust Alberta Quebec
Canada Investor Relations Series
Interviews with Selected Public Sector Borrowers
Sponsor
000 Cover Canada IR 2012.indd 1 11/06/2012 19:17

2. Euroweek Euroweek
Canada: Reaping the Canada: Reaping the
benefits of past reforms benefits of past reforms
by Krishen Rangasamy, Senior Economist by Krishen Rangasamy, Senior Economist
Canada’s economic fortunes have rarely been There are some concerns from the central bank instrumental. Population growth for people The outlook for investment in real assets is
in such sharp contrast with other OECD nations. about household debt accumulation which it aged 20-44, the age cohort generally associated positive, but so is the potential for a ramp up in
While the latter have generally struggled views as “the biggest domestic risk” – thanks to with marginal demand for a residential asset, investment in Canadian financial assets. Canada’s
to achieve economic growth and meet deficit rising rates of home ownership, the oft-mentioned has picked up significantly since 2007 and is government bonds have never looked as good in
targets, particularly in Europe, Canada’s growth debt to disposable income ratio is now at a record projected to remain positive through the next a shrinking AAA universe. With the public sector
is proceeding at a decent pace. As a result, 150%. Currently, debt servicing is quite decade, in sharp contrast with the rest of the OECD. well on track to balance the budget and reducing
the federal and most provincial governments manageable for most households with mortgage overall debt over the coming years, Canada’s fiscal
Canada: Why are home prices outperforming the OECD?
are well on their way towards balancing their payments as a percentage of disposable income Real house price growth since 2007Q1 Annual growth for population
rectitude shines when compared to countries
respective budgets. remaining close to the average of the last decade IRL -42.2 1.4 %
aged 20-to-44
experiencing missed deficit targets and a growing
USA -37.9
despite home prices soaring over 40% in the last DNK -25.8 1.2 debt load.
It has not always been that way. Less than two ESP -23.0 1.0
…remains supported by
positive demographics
ten years. Thank record low mortgage rates GRC
GBR
-22.4
-13.3
decades ago, Canada was grappling with similar ITA -12.3 The surge in
0.8
Canadian general government net debt relatively low
for that. NZL
NLD
-10.1
-7.9
home prices in
Canada …
0.6 At year end, as % of GDP (IMF projections for 2012 to 2017)
challenges to those currently facing several JPN
KOR
-7.7
-1.4
0.4 Canada
FRA 0.5
European economies, with massive debt and The risk, of course, is a sudden sharp increase in DEU
FIN
1.2
3.1
0.2
0.0
90
% of GDP
2011
BEL 80
deficits culminating in an S&P ratings downgrade. interest rates. That scenario is highly unlikely in AUS
7.9
9.2 -0.2 Canada: 33.3
SWE 10.1 OECD 70 U.S.: 80.3
Canada’s leadership at the time saw opportunity our view. While rates are set to rise, they should NOR
CHE
10.6
13.4
-0.4
60 Eurozone: 68.4
CAN 18.2 -0.6 OECD: 72.4
in adversity, and implemented major structural do so very gradually. The BoC would be aware ISR 40.5
%
-0.8
50
-50 -30 -10 10 30 1990 1995 2000 2005 2010 2015 2020 40
reforms that were designed to be sustainable and of the threat posed by an overshooting currency NBF Economy & Strategy (data via OECD, Statcan, Teranet - National Bank, United Nations)
30
Canada
therefore credible. Those crucial policy actions should the overnight rate stray too far from the 20 U.S.
10 Eurozone
continue to bear fruit today. A well-managed Fed Funds rate which itself is destined to remain So notwithstanding temporary dips, residential OECD
0
economy, vast natural resources and favourable near zero for the next few years. Moreover, the investment should generally remain in decent 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
demographics all boost Canada’s credentials as a BoC would prefer an orderly ramp down in debt shape. Non-residential investment should also Source: IMF, Fiscal Monitor April 2012
country that is open for business and with solid rather than provoke, via aggressive rate hikes, a be well supported. According to a recent Statistics
prospects for continued prosperity. disorderly de-leveraging (the latter tends to be Canada survey, non-residential investment is Foreigners will also be enticed by the stable
hazardous to the economy if recent US experience expected to grow 7.2% or $19.8 billion this year. investor base for our government bonds, given
The Bank of Canada now stands alone among
is any guide). There are already promising signs that over 40% of gross government debt is held by
major world central banks in considering tighter
on that front, with consumer credit growth Canada: Investment intentions remain positive in 2012 domestic institutional investors in Canada.
monetary policy. The BoC’s stance rests on an
falling on its own to the lowest levels in almost Non-residential investments
(2012: intended)
2012 intended non-residential
investment growth, $B and % Canada: A stable investor base for government bonds
improving economy which has allowed both $ billion $ billion
two decades. 300 9 Oil & gas Holdings of government debt by AAA club could become even more select
Canadian output and employment to recover 280
260
Total
8
14.8%
…oil & gas
domestic institutional investors*
Private sector accounting for CAN
from the Great Recession and to rise to more than That said, residential credit growth remains strong 240
220
7 except oil & gas more than 40%
4.7% SWE Australia
rating
AAA
outlook
Stable
of the increase
Canada AAA Stable
5% above 2007 levels, in sharp contrast to the and is one of the reasons why the Canadian 200
6
Public entreprises
FRA
Denmark AAA Stable
180 5
Finland AAA Negative
performance stateside. housing market continues to outperform. With 160
4
17.3% GBR
Germany AAA Stable
Private sector USA Hong Kong AAA Stable
140
Canadian housing prices surging in recent years, 120 3 ITA Liechtenstein AAA Stable
Canada: Recovery has been smooth relative to the US Luxembourg AAA Negative
Real GDP Employment
there are concerns about a sharp correction in 100
80
2 Public DEU Netherlands AAA Negative
Non-residential investments expected admin. Norway AAA Stable
ESP
106 Index = 100 (Jan 2007) 106 Index = 100 (Jan 2007) the pipeline. While we do not rule out temporary 60 to reach a new high in 2012… 1 1.1%
NLD
Singapore AAA Stable
105 40 Sweden AAA Stable
105
104
price declines in some cities and some segments 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 0
0 10 20 30 40
Switzerland AAA Stable
104 NBF Economy and Strategy, (data from Statistics Canada) % of gross general government debt United Kingdom AAA Stable
103
103 of the housing market (condo prices in Toronto
102 * Pension, insurance and mutual funds
102 101 and Vancouver come to mind as potential risk That is a new record, for both total non-residential NBF Economy & Strategy (data via IMF April 2012 Fiscal Monitor, Standard & Poors)
101 100
areas), the outlook remains positive for Canadian investments and those of the private sector. More That, combined with well anchored inflation
100 99
99
98 housing as a whole. than 40% of the growth is expected to come from expectations and fiscal discipline, bode well for
98
97
oil & gas extraction (+14.8% or $8.3 billion). The Canada’s bond market. Clearly, in Canada’s case,
96
Negative real interest rates and a healthy
97 95 strong showing in business investment will help reforms of the past are gifts that keep on giving.
96 94 labour market have played an important role in
2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 offset the impacts related to the end of several
supporting housing demand and prices so far,
NBF Economy & Strategy (data via Global Insight)
federal infrastructure programs.
but favourable demographics have also been
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