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Canada a haven of calm amid global tumult

With unemployment falling to pre-crisis levels, immigration increasing and a glut of commodity reserves to rely on, Canada has escaped much of the turmoil in the international markets. Although the country hit a blip in the second quarter of 2011 when GDP fell, Nina Flitman examines the sources of strength for the world’s 10th largest economy.

  • 28 Sep 2011
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Crisis? What crisis? Canada has managed to stay clear of almost all the troubles that have beset the global economy this year. Indeed, despite the eurozone teetering on the edge, the world’s largest economy being downgraded and natural disasters hitting supply and damaging trade globally, Canada has remained almost serene in its position of strength.

"Canada and its governments are in the spotlight for all the right reasons," says Warren Lovely, government strategist at CIBC in Toronto. "The country boasts a very resilient economy, although admittedly one tied to global economic developments and more specifically the developments in the US. But we have seen an almost complete recovery since the crisis, whether you look at jobs or other broader measures of activity, such as GDP."

But though Canada’s GDP had grown consistently since the third quarter of 2009 and increased 0.9% in the first quarter of this year, the economy slipped in the second quarter, with GDP falling by 0.1%. Much of this can be ascribed to a drop in exports, which fell 2.1% after two quarters of growth, and especially to a decline in energy exports — down 6.7% over the quarter. Wildfires in Alberta, which had led to shutdowns in the oil industry and caused provincial oil production to fall 12% in May, natural disasters in Japan and flooding in Manitoba all contributed to the disappointing figures, while the effects of the global economic environment also stunted Canada’s growth over the quarter.

"The weakness in the second quarter was a result of some temporary factors, most specifically global supply chain disruption globally," says Lovely. "The second quarter across Asia, Europe and the US were also a disappointment, so to have such broad-based weakness does support the argument that there were some short term factors at work internationally. We see scope for the Canadian economy to bounce back in the third quarter and to generate moderate economic growth."

Although some analysts have revised down their expectations for a return to 3% growth by next year, many market participants are hopeful about the long term stability of the Canadian economy, even if it is affected by the turmoil hitting other regions of the world.

"Canada is the 10th largest economy in the world, and it’s a very open economy so there’s no way that we can be an island," says Scott Lampard, managing director, head of global markets, Canada, at Deutsche Bank in Toronto. "But our financial system is very stable, and with debt to GDP at about 30% right now our government is sitting in a strong fiscal position. That is in stark contrast to many of our global peers. So our starting point is a very good one, but there’s no doubt that if you see the soft patch deteriorate into a recession in the rest of the G7, Canada’s going to be impacted."

A solid banking system is one of the factors that could help Canada ride out any volatility that is set to hit the rest of the world. Canadian banks have traditionally held a higher percentage of their capital base in common equity rather than preferred shares or subordinated debt. And because the financial institutions were focused far more on their corporate and retail businesses than on investment banking, and because they relied far less on wholesale funding and complex products, they were able to emerge relatively unscathed from the crisis in 2008 and 2009.

The housing market in Canada is also far more stable than in the US, although there are pockets of worry. In particular, there are some concerns that there has been an oversupply of condominiums in the largest cities: in Toronto, residents joke that there is little point buying a condo property overlooking Lake Ontario as another tower will almost certainly soon be built to block the view. However, with the population growing by around 1% due to immigration increasing household formation, and with interest rates set to remain low for the foreseeable future, there are no fears of a national housing market crash.

"There are real concerns about Vancouver real estate, and the condo markets in Vancouver and in Toronto," says Lampard. "If there was a sharp economic downturn here of similar severity to what we saw in 2008 then certain people could get into trouble. But there are some structural differences between the US and Canadian mortgage and housing finance markets that means that we are going to be less likely to experience the same chain reaction that we’ve seen over the border."

While many states in the US offer non-recourse defaults on mortgages, in Canada a lender has recourse to all of a defaulter’s assets. The industry north of the border is also highly regulated, with the government taking steps to shorten the amortisation periods on mortgages and to lower maximum loan-to-value ratios.

Huston Loke, president at DBRS in Toronto, agrees that the housing finance market in Canada has remained more structurally stable than in the US.

"Canada has been very conservative on underwriting, and the mortgage practices carried out by major lenders have demonstrated that, even through crises, losses remained at very controlled levels," he says.

Perils of a strong dollar

The Canadian government has also made headway in shoring up the country’s economy against the risks of a strong domestic currency. The Canadian dollar hit a high point in November 2007, reaching US$1.1, and since then the currencies have had almost four years of parity. But the country is vulnerable: Canada relies on international trade for around 35% of its GDP, with the vast majority of its exports going into the US.

"The Bank of Canada appreciates as well as anyone the headwinds that a strong currency can pose, but it’s encouraging to see some tax policy changes that have been implemented at a federal and provincial level that are improving the competitive landscape," says Lovely at CIBC. "The country still has a manufacturing sector that is very vibrant, and I think that is testament to the strength of the Canadian economy as a whole."

By 2011, although much of the country’s industry has adapted to the strong Canadian dollar, Canadian exporters are still having to deal with the effects of its neighbour’s economic woes.

The downturn in the US has hit Canadian exporting businesses hard, as consumer demand south of the border remains focused on cheaper products, such as those coming out of China, than on goods manufactured in Canada. Canadian industry has had to change its approach by developing more trading links with counterparties away from the US.

"Canada is sometimes thought to be too reliant on the economy of the US, but since the global financial crisis, Canada has effectively diversified its trade counterparties," says Greg Greer, managing director, head of debt capital markets, Canada, at Scotia Capital in Toronto. "In particular, in the natural resources and manufacturing sectors, Canada has established relationships in growth markets such as the Asia Pacific region."

In looking to develop its international trade links outside the US, Canada has been able to rely on the attraction of its bulging commodity reserves to build links with the emerging markets. Canada is rich in potash, aluminium and coal and has the second largest proven reserves of oil in the world — although some analysts say the reserves available in the oil sands could be understated by a factor of four and that Canada’s reserves could prove to be far more plentiful than those in Saudi Arabia. All of these commodities are in high demand in developing regions.

"The emergence of economies like China, India and Brazil from developing to developed is creating what some people have called a commodity super-cycle," says Lampard. "This is a generational transformation, a long-term cycle that places like Canada and Australia are going to benefit from."

External risks

But just as the global markets could prove to be Canada’s source of strength for economic growth, it is also from the wider world that Canada faces the greatest risks to its economic stability. If there is weakness in the country’s future, most market participants believe that it will be due to external factors.

"People think that the more diversified you are, the less exposed you are to what happens in the US," says Eurci Beauchemin, managing director of public finance at DBRS in Toronto. "That may be true, but the last downturn was really synchronised among major countries, which means that no matter what their exposure was every province got affected."

Although analysts agree that the economy is diversified and the underpinnings — the banking sector, the employment figures and the housing market — are robust enough to steer clear of a recession, there is a risk that the quarter of the economy that’s linked to trade with the US could drag down the whole country. However, there are hopes that the remaining three quarters of the economy will be strong enough to pull Canada through.

"The outlook is cautiously optimistic. Canada can hold its own given the diversity in its economy and given that consumer borrowing, although high, is at a level that can be sustained," says DBRS’s Loke. "The banking system is solid, and though the housing market may be expensive, the underpinning means that if there are problems it would call for a modest correction rather than a crash. While all of these things are turbulent in other regions, in Canada the situation seems very under control."

Although Canada’s story continues to be tied to global economic developments, and specifically to the problems in the US, market participants are hopeful that Canada and its governments can continue to shine on the global stage. Having almost completely recovered since the financial crisis in 2008, with jobs and GDP all in much healthier positions, Canada looks in far better shape than many of its peers in the international arena.

"Canada has benefited over the last two or three years from the fact that it has looked so good relative to the deterioration in other regions," says Lovely at CIBC. "If we continue to see sustained pressure and structural issues coming to the fore in the US, in Europe and in advanced Asia, Canada’s fiscal advantage and it relative standing is only going to look brighter and brighter."

  • 28 Sep 2011

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 20 Oct 2014
1 JPMorgan 274,362.92 1088 8.09%
2 Barclays 246,500.00 850 7.26%
3 Citi 241,124.13 935 7.11%
4 Deutsche Bank 240,786.09 977 7.10%
5 Bank of America Merrill Lynch 235,519.40 841 6.94%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 21 Oct 2014
1 BNP Paribas 45,034.29 183 7.39%
2 Citi 34,532.35 96 5.67%
3 Deutsche Bank 34,196.96 122 5.61%
4 Credit Agricole CIB 30,654.20 126 5.03%
5 Barclays 28,791.02 107 4.72%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 21 Oct 2014
1 JPMorgan 23,663.67 112 9.36%
2 Goldman Sachs 22,917.78 77 9.07%
3 Deutsche Bank 20,595.54 76 8.15%
4 UBS 19,458.10 79 7.70%
5 Bank of America Merrill Lynch 18,899.80 68 7.48%