Moody's "very comfortable" with top Canada rating

By Claire Sibonney and Andrea Hopkins | Reuters – Thu, Jun 14, 2012

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TORONTO (Reuters) - Moody's Investors Service is "very comfortable" with its top Aaa credit rating for Canada because the country's fiscal and banking strength give it room to react to risks arising from the European debt crisis and Canada's hot housing market, Moody's chief analyst for Canada said on Thursday.

Steven Hess said he did not believe the risk from Canada's booming real estate sector was very great, but that he would not be surprised if there was some price correction. External risks from Europe would mainly flow to Canada from the United States, Canada's largest trading partner, he said.

"We still have a stable outlook on Canada and don't see any reason why that would change anytime soon," Hess said in an interview with Reuters.

"The fiscal situation being pretty good relative to other countries and ... our bank financial strength ratings for the Canadian banking system as a whole are the highest really of any banking system in the world."

Hess said if one is looking for risks to Canada they would come from high household debt and the heated housing market, but that Canada's strong banks and economic strengths would likely limit the fallout of a housing correction.

The Bank of Canada, in its semi-annual Financial System Review on Thursday, said the country's financial system remains highly vulnerable to a further escalation in the European debt crisis and the possibility of a correction in the housing market.

But even if a severe housing correction resulted in problem loans, Hess said Canada's big banks would be able to manage without having to resort to government help.

"It wouldn't be surprising if there was some correction in the housing market," Hess said. "Now will that cause a financial problem, system-wide? In the end we don't think that that risk is very great because of the lending standards that are in the banks, because the economy is still doing relatively well and employment is all right.

"You don't have the same thing that you had in the United States of people losing jobs before losing their houses. And also the legal framework surrounding foreclosures and whatever is different in Canada, and is more conducive to people continuing to service their loans."

Canada's federal housing agency said in a report on Thursday that the country's hot housing market will likely cool toward the end of 2012.

SAFE-HAVEN STATUS

Canada and Germany are alone among G7 countries in having Moody's highest credit rating with a stable outlook. Canada's prudent fiscal management and sound banking sector have been credited with helping it survive the global recession better than many countries.

Hess said Canada's strength - including the relatively positive budget positions of the federal and provincial governments and the prospect of eventual official interest rate increases - is turning Canada into a safe haven for foreign investment.

"In some sense, the Canadian government bond and Canadian dollar assets in general are taking on some characteristics of a haven currency internationally (with) investors who are wanting to diversify away from Europe because of the situation there," Hess said.

"And with the debt-limit question coming back to the fore in the United States, maybe some diversification away from the U.S. dollar is also desirable and Canada looks like a place you could put your money."

The emergence of Canada as an alternative safe haven for foreign investment is benefiting the government in terms of low bond yields. Hess said the proportion of Canadian government debt held by nonresidents has risen in the last couple of years to about 20 percent.

That is low compared with the United States, where nonresidents hold about 50 percent of U.S. Treasury bonds, and compared with France and Germany, where it is more than 60 percent.

"In Canada it is still relatively low so there is a lot of room, if you want to put it that way, for foreign investment coming into not just the federal government but the provinces as well," Hess said. "And this means that their borrowing costs are lower than they would be otherwise. Even if the Bank of Canada raises the short-term rates, the longer-term bond market is going to benefit from foreign demand."

Last month, the federal government announced a smaller-than-expected budget deficit for 2011-12, giving Finance Minister Jim Flaherty some leeway to react if needed to what he called an "unstable" situation in Europe, and keeping Ottawa on track in its plan to balance the budget by 2015-16.

Hess said Canada can't escape feeling the effect of any return to fiscal crisis in the United States or a knock-on effect of the euro zone debt crisis or breakup.

"It's not something we are predicting, but the risk to the financial system coming from Europe, for example, is there. And that would obviously have some spillover effects on Canada because of the close association of Canada and the U.S.," Hess said.

(Reporting By Andrea Hopkins and Claire Sibonney; Editing by Peter Galloway)

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Immigrant Underemployment is Costly for Canada, CIBC Says

English: Tour CIBC in Montreal. (Photo credit: Wikipedia)

By Nirmala Menon


Bloomberg
A worker at an auto-parts plant in Ontario. A CIBC economist argues that changes to Canada’s immigration model could help productivity.
Immigrants in Canada are underemployed and paid less than Canadian-born workers, a phenomenon that’s costing the economy over 20 billion Canadian dollars in forgone earnings, and is probably  a significant factor in Canada’s productivity gap with the U.S., according to a report from CIBC World Markets.

Newcomers to Canada may be more educated now, but they only earn about 60 cents on the dollar relative to their Canadian-born counterparts. That compares with 80 cents on the dollar earned by those who arrived in the 1970s, the report says. The earnings gap is also narrowing at a much slower pace.

The crux of the issue is a mismatch between the skills that an immigrant brings and those the country needs, according to the report’s author, Benjamin Tal. Furthermore, immigrants are arriving with less proficiency in English or French, Canada’s official languages.

“This is not an efficient market,” Mr. Tal, who is deputy chief economist of CIBC World Markets, said in an interview.

He says Australia is doing a better job of narrowing the discrepancy between its native-born and immigrant populations, noting that the earnings gap is 50% smaller than in Canada. He says mandatory pre-immigration English language testing introduced in the 1990s is probably the key factor for the advantage that Australian immigrants enjoy. There’s also more coordination between government and the professional bodies responsible for licensing, so immigrants have a greater chance of success in their fields, he says.

Although many recent changes in Canadian immigration rules are modeled on Australia, Mr. Tal worries that Canada may be focusing too much on short-term needs.

“We should be taking a long term view,” he says.

The earnings disparity between immigrants and those born in Canada doesn’t bode well for the country’s lackluster productivity. Mr. Tal points to estimates that suggest some 20% of the increase in the productivity gap with the U.S. over the last decade can be attributed to immigration.

“Without a significant increase in immigration-based productivity, the aging profile of the Canadian population will work to reduce the standard of living all Canadians,” Mr. Tal writes.

http://blogs.wsj.com/canadarealtime/2012/08/13/immigrant-underemployment-is-costly-for-canada-cibc-says/