Overseas Shopping Spree by Pension Funds Protects Canada’s AAA Rating

(Bloomberg) -- Canada’s trove of overseas assets, including airports and roads owned by pension funds, is helping to protect the country’s top credit rating, according to Fitch Ratings.

Foreign assets held by Canadians reached C$4.96 trillion ($3.71 trillion) at the end of 2018, exceeding foreign liabilities by C$528.6 billion and making the country a net creditor to the rest of the world.

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

“Countries that run current account deficits are countries that tend to pull the rating down,” said James McCormack Fitch’s global head of sovereign & supranational group. Nonetheless,“Canada is building more external assets than external liabilities.”

Canada historically had been a debtor nation, with net liabilities peaking at C$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. That outpaced a 72 percent increase in liabilities. The nation turned from debtor to creditor in 2014.

Overseas Shopping Spree by Pension Funds Protects Canada’s AAA Rating

The C$2.2 trillion economy is supporting public sector debt -- provincial and federal -- equivalent to almost 90 percent of its output, compared with an average of about 40 percent for the 11 countries rated AAA by Fitch. Top-rated countries have on average been reporting current account surpluses while Canada has posted deficits of about 2 percentage points to almost 4 percentage points of gross domestic product in the last decade.

Pension Funds

Those weaknesses would put the country’s rating in the AA-range, were it not for a two-level uplift that Fitch applies to take into account issues including the net international investment position and unfunded pension commitments that are lower than its peers, wrote McCormack, who previously was a Bank of Canada official as well as a Goldman Sachs Group Inc. alumni.

Only Canada and Denmark are given that adjustment, said McCormack.

Pension funds such as the Canada Pension Plan Investment Board and the Caisse de dépôt et placement du Québec are playing a key role in bolstering Canada’s presence abroad. Pension fund assets rose 53 percent to C$1.92 trillion at the end of 2018 from C$1.25 trillion in the second quarter of 2011, according to Statistics Canada.

Clear Liabilities

CPPIB, which manages the pension savings of all Canadians except those in Quebec, had C$302.3 billion of investments overseas in the fiscal year ended March 2018, or almost 85 percent of its assets under management, according to its annual report. Last month, it committed about $900 million in a joint bid for U.K. satellite company Inmarsat Plc.

Almost two-thirds of the Caisse’s C$309.5 billion of assets at the end of last year were invested outside of Canada. On April 5, the Caisse announced a deal with with France’s Engie SA to buy 90 percent of Petroleo Brasileiro SA’s pipeline unit TAG for $8.6 billion.

Other big overseas investors include Brookfield Asset Management Inc., which has about $350 billion under management. The Toronto-based investor won the bidding for the car-battery division of Johnson Controls International Plc in November for $13.2 billion and hospital operator Healthscope Ltd. in January for about $3.1 billion.

“Despite heavily financing ourselves abroad, Canadians have not dug themselves into a foreign debt hole,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said Friday in a separate note. “If we sold everything we’ve added to our balance sheets in assets abroad, as a country, we could clear our liabilities.”

To be sure, the country’s international net international investment position may be not enough to protect the country’s top rating should public debt ratios head upward and rise over 90 percent of GDP, said McCormick.

Also, the country’s net international investment position declined by C$109.1 billion in the last quarter after reaching record C$637.7 billion at the end September, according to government data.

Shenfeld also cautions that in the next downturn the value of Canada’s overseas assets may slip while the country will still have to make interest payments on debt held abroad.

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