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Canada, along with other countries, could face credit rating downgrades: Fitch
Post Date: Jan. 21, 2013

By James Langton | January 21, 2013 11:20

Without further reforms to address the impact of an aging population, Canada, along with numerous other countries, could face credit ratings downgrades in the years ahead, suggests a new report from Fitch Ratings.

The rating agency published a new report today that examines the effects of aging populations on the finances of the advanced economy countries, which warns that many sovereigns, including Canada, are facing the prospect of future downgrades. Fitch says that successful resolution of the current fiscal crisis remains the most important driver for many ratings, but, "without further reform to address the impact of long-term ageing these economies face a second, longer-term fiscal shock."

The report estimates that, without the implementation of mitigating reforms, the median country would see its budget worsen by 0.6% of gross domestic product (GDP) by 2020, and 4.9% of GDP by 2050, which would, in turn, cause government debt-to-GDP ratios to rise. "Without reforms to boost labour productivity and/or participation rates in many other advanced economies, population aging will cause potential GDP growth to decline over the long-term, exacerbating the fiscal challenge," it says. For now, most countries don't face an imminent problem,

Fitch says. However, without major pension reforms, it expects to take negative rating actions over the next decade on the countries facing the most serious aging pressures. Its models predict a 1.5-notch downgrade by 2030 for countries with the worst aging problem, and a five-notch downgrade for them by 2050. Canada is seen as slightly better off, and potentially facing a one-notch downgrade by 2030; although it projects a four-notch downgrade by 2050.

The U.S. would likely see a 1.5 notch downgrade by 2030, it notes; similarly dropping by four notches by 2050. According to the model, Japan, Ireland and Cyprus face the largest jump in aging costs over the next decade; and, Luxembourg, Belgium, Malta and Slovenia face the most severe impact over the very long term. It suggests that Austria, Cyprus, Japan, Luxembourg, Malta, Netherlands, and Slovenia would also see their ratings fall by a notch by 2030. However,

Fitch also points out that recent experience in tackling critical fiscal issues in certain European countries shows the power of reforms in transforming long-term projections. "Recent reforms in Portugal, Italy and Greece have effectively neutralized the long-term impact of aging on public finances in those countries," it says.

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