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Derivatives

Canada: the right place to invest, by Jim Flaherty, Minister of Finance

In January, 1995, The Wall Street Journal proclaimed Canada to be “an honorary member of the Third World” and called the Canadian dollar the “northern peso”.

How times have changed. Today, Canada is among only a handful of countries in the very top tier of sovereign credit. Both the IMF and the OECD expect Canada to have one of the strongest growing economies in the G7 over this year and next. For the sixth year in a row, the World Economic Forum has named Canada’s banking system the world’s soundest. And as of June 2013, the Canadian dollar is now one of the ‘reserve’ currencies tracked by the IMF, alongside the US dollar, the euro and the Swiss franc.  

The latest chapter of this story is how Canada weathered the Great Recession. Real GDP is significantly above pre-recession levels and there are over 1 million more Canadians working than in July 2009, when the recovery began — the best performance in the G7.

In the eight years I have served as Canada’s Finance Minister, our country has consistently adhered to solid policy fundamentals to achieve this success, as well as an unwavering commitment to act against economic threats from outside our borders.

Prudent macroeconomic policies

At the start of 2008, Canada already had an enviable economic record, which served us well in the challenging years that followed. Our government’s responsible fiscal management, successive budget surpluses and a declining debt-to-GDP ratio in the years leading up to the recession left Canada in a position of strength. 

As we move on from the Great Recession and the deep stimulus that helped Canada weather the storm, ongoing restraint measures and efficiencies are expected to yield a declining deficit every year until 2015, when we expect to return to balanced budgets. The IMF projects a total government net debt for Canada of about 35% of GDP in 2018 — the lowest ratio, by far, amongst the G7. And Canada has recently set a 25% debt-to-GDP target by 2021.

In an uncertain global economic environment, the most important contribution the Government can make to bolster confidence and growth is to maintain a sound fiscal position. Responsible fiscal management ensures the sustainability of public services and low tax rates for future generations, while providing room to manoeuvre in the event of adverse developments outside our borders.

Canada has also enjoyed low, stable and predictable inflation, thanks to a well-established monetary policy framework, the goal of which is to keep inflation near 2% — the mid-point of a 1%-3% target range. The credibility of this framework allows Canadians to make spending and investment decisions with more confidence and encourages longer-term investment in Canada’s economy, while providing the flexibility to respond to economic shocks.

Sound financial sector policies

Canada’s well-regulated and prudently supervised banking sector was able to withstand the financial market crisis in part due to higher capital, leverage and liquidity standards in place prior to the global recession. 

Going forward, Canada actively supports the global financial reform agenda. On Basel III implementation, our domestic, systemically important banks already meet the Common Equity Tier One capital requirements, a full six years ahead of schedule.

Canadian financial institutions have traditionally taken a prudent approach to mortgage lending. Canada’s mortgage market had a much lower share of sub-prime and other alternative mortgage arrangements than in other countries.

Our government’s ongoing monitoring and strong regulatory framework have allowed Canada to maintain a strong and stable mortgage market, limiting the housing market imbalances seen in other countries. For example, the government has adjusted the rules for government-backed insured mortgages four times since 2008, including stronger standards for down payments, shorter amortisation periods and higher debt servicing standards.

An open, dynamic economy

Building on our strengths, Canada also boasts a well-diversified resource-rich economy that includes energy, manufacturing, financial services, commodities and technology, sustained by one of the most highly-skilled labour forces in the world. 

Our government has also made continued investments to foster a world-class research and innovation system that integrates Canadian businesses and manufacturing, bringing scientific discovery from the laboratory to the marketplace.

Add to this a concerted effort to strengthen business tax competitiveness through broad-based business tax reductions and improvements to our international tax regime.

Canada now has an overall tax rate on new business investment which is the lowest in the G7, and below the average for member countries of the OECD.

And our government is vigorously pursuing better and more open trade. Since 2007, we have concluded six free trade agreements with nine countries, including the European Free Trade Association. We are now focused on achieving major new free trade deals with the European Union, India and Japan, as well as free and open trade with Asian countries through the Trans Pacific Partnership (TPP) negotiations, linking North American and Asian markets and value chains. 

Strong demand for Government of Canada securities 

Canada’s debt is highly sought globally. Bond auctions continue to be well-covered across all sectors, with bond coverage ratios above five-year averages. 

Our approach to debt management seeks to achieve stability in spite of market uncertainty. We have temporarily reallocated short-term bond issuance towards long-term, and implemented a robust Prudential Liquidity Plan to cover at least one month of net projected cashflows. Consistent with international commitments, we are implementing measures to reduce exposure to counterparty credit risk, and reliance on external credit ratings. 

Resiliency shall never cede ground to complacency. Though Canada’s track record speaks for itself, it is the future prosperity of our economy that preoccupies us. We are continuing to pursue with vigour jobs for our citizens, opportunities with our trading partners, continued stability for our banking sector and a prosperous future for all Canadians.  

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