Fitch Ratings: North America Sovereign Ratings Outlook Stable In 2019 November 28, 2018 at 02:03PM

Fitch Ratings: North America Sovereign Ratings Outlook Stable In 2019


Fitch Ratings: North America Sovereign Ratings Outlook Stable In 2019

Fitch Ratings-New York-28 November 2018: Fitch Ratings expects North American sovereign ratings to be stable in 2019. Both the U.S. and Canada are rated ‘AAA’ with a Stable Outlook. The U.S.’s high general government debt burden will be outweighed by extraordinary
financing flexibility, underpinned by the status of the U.S. dollar as the pre-eminent reserve currency. Canada’s rating is supported by its large and diverse economy and track record of fiscal adjustment. A general government debt burden of almost 90% of
GDP is second only to that of the U.S. in the ‘AAA’ category, but it is on a downward path.

Outlooks on the U.S. long-term ratings are Stable. The main short-term risk to the U.S. rating is the tail risk of a failure to lift the debt limit in time to prevent a U.S. federal debt default, which Fitch considers
remote. Over the medium term, larger or more rapid rise in government deficits and debt/GDP ratio than we forecast or a deterioration in the credibility of policymaking, undermining the status of the U.S. dollar, could lead to negative rating action.

The Outlook for Canada is similarly Stable, with the key rating triggers for a downgrade including a deterioration in public finances and potential spillovers from a reversal in recent strong house price appreciation for banks, household balance sheets, growth
and public finances.

We expect growth in North America to slow but to remain above long-term potential growth rates. Macroeconomic performance in 2019 will remain supportive of public finances and sovereign creditworthiness. We expect the U.S. to grow by 2.6% in 2019, with demand
still benefiting from tax cuts and rising wages, while the Canadian economy will grow by around 2% as investment and net trade strengthen while private consumption moderates. Following agreement on changes to NAFTA, reduced uncertainty over North America trade
will benefit Canada in particular, although the revised U.S.-Mexico-Canada Agreement (USMCA) may face delays in ratification in the new U.S. Congress. Greater global trade tensions remain a risk to growth in both countries.

We expect the Federal Reserve to raise interest rates by 75bps in 2019, taking the policy rate to 3.25% by the end of 2019, close to estimate of the neutral policy rate. The Bank of Canada will follow suit, but it will tread carefully, mindful of borrowers’
sensitivity to higher rates amid a slowdown in household credit growth and cooling housing market that followed earlier macroprudential tightening.

The U.S. enters 2019 with divided government and a divided Congress, and political noise will increase. The Democrat House victory means that the likelihood of further tax cuts (which had been proposed by some Republicans) is much reduced. Equally, action to
mitigate the impact on the deficit of growing mandatory spending is also unlikely. Fitch expects the general government deficit to exceed 5% of GDP in FY19. General government debt will climb further above 100% of GDP, albeit not rapidly, given the pace of
economic growth.

Canada’s federal budget deficit is less than 1% of GDP and is expected to narrow marginally. Despite increases in spending and tax breaks on certain types of business investment offered in November’s Fall Economic Statement, federal government fiscal policy
is consistent with a falling government debt burden under our growth and interest rate assumptions. General government deficits and debt are also on a downward path although subject to risks from provincial finances.


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