Foreign investment by pension funds protects Canada’s triple-A credit rating

Since 2011, the value of Canadian assets abroad has more than doubled, according to global rating agency Fitch

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According to Fitch Ratings, Canada’s hoard of assets abroad, including pension fund-owned airports and roads, helps protect the country’s best credit rating.

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Foreign assets held by Canadians reached US$3.71 trillion at the end of 2018, surpassing foreign liabilities by US$528.6 billion and making the country a net creditor to the rest of the world.

This helps support the credit rating, despite a mountain of public sector debt and persistent current account deficits that would typically undermine a country’s creditworthiness, Fitch said. The current account includes trade in goods and services, as as well as net income on cross-border investments and transfer payments.

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“Countries that run current account deficits are countries that tend to lower their ratings,” said James McCormack, global head of Fitch’s sovereign and supranational group. Nevertheless, “Canada accumulates more foreign assets than foreign liabilities”.

Canada has always been a debtor nation, with net liabilities peaking at US$333 billion in 2011, according to Statistics Canada. But since then, the country has seen the value of its foreign assets more than double, helped in part by a weaker Canadian dollar. This exceeded a 72% increase in passives. The nation went from debtor to creditor in 2014.

The $2.2 trillion US economy carries public sector debt — provincial and federal — equivalent to nearly 90% of its output, compared to an average of about 40% for Fitch’s 11 AAA-rated countries. Top-rated countries have on average reported current account surpluses, while Canada has posted deficits of around two percentage points to nearly four percentage points of gross domestic product over the past decade.

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pension funds

These weaknesses would place the country’s rating in the AA range were it not for a two-tiered upgrade that Fitch is applying to account for issues such as the net international investment position and unfunded pension liabilities that are lower than those of his peers, wrote McCormack, who was formerly a Bank of Canada official as well as a Goldman Sachs Group Inc. alumnus.

Only Canada and Denmark benefit from this adjustment, said McCormack.

Pension funds such as the Canada Pension Plan Investment Board and the Caisse de depot et placement du Quebec play a key role in strengthening Canada’s presence abroad. Pension fund assets rose 53% to US$1.92 trillion at the end of 2018, from US$1.25 trillion in the second quarter of 2011, according to Statistics Canada.

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Clear Passives

CPPIB, which manages the retirement savings of all Canadians except those in Quebec, had US$302.3 billion in foreign investments in the fiscal year ending March 2018, or nearly 85 % of its assets under management, according to its annual report. Last month, it pledged around US$900 million in a joint bid for British satellite company Inmarsat Plc.

Nearly two-thirds of the Caisse’s US$309.5 billion assets at the end of last year were invested outside of Canada. On April 5, the Caisse announced an agreement with the French company Engie SA to buy 90% of the TAG pipeline unit from Petroleo Brasileiro SA for 8.6 billion US dollars.

Other major foreign investors include Brookfield Asset Management Inc., which manages about US$350 billion.

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“Despite massive financing from abroad, Canadians have not dug themselves into the foreign debt hole,” Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, said in a separate note on Friday. . “If we sold all that we added to our balance sheets in overseas assets, as a country we could erase our liabilities.”

To be sure, the country’s net international international position might not be enough to protect the country’s top rating if public debt ratios were to rise and exceed 90% of GDP, McCormick said.

Additionally, the country’s net international investment position shrank by US$109.1 billion in the latest quarter after hitting a record high of US$637.7 billion at the end of September, according to government data.

Shenfeld also warns that during the next downturn, the value of Canadian assets abroad could fall as the country still has to pay interest on debt held overseas.

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