Pension funds' overseas shopping spree protects Canada's credit rating

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 billion ($3.71 billion) 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 and 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% increase in liabilities. The nation turned from debtor to creditor in 2014.

The C$2.2 trillion economy is supporting public sector debt — provincial and federal — equivalent to almost 90% of its output, compared with an average of about 40% 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.

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, said Mr. McCormack, who previously was a Bank of Canada official as well as a Goldman Sachs Group alumni.

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

Pension funds such as Canada Pension Plan Investment Board and Caisse de Depot et Placement du Quebec are playing a key role in bolstering Canada's presence abroad. Pension fund assets rose 53% 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.

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% 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.

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 France's Engie to buy 90% of Petroleo Brasileiro's pipeline unit TAG for $8.6 billion.

Other big overseas investors include Brookfield Asset Management, which has about $350 billion under management.

"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% of GDP, Mr. McCormick said.

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.

Mr. 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.