Analysts explain Canada’s worsening risk trend

Canada's risk rating faces troubled waters, compared with the calmer shores of its southern neighbour.

Among the many interesting results of Euromoney’s latest country risk survey is the contrast between the US and Canada.

Whereas the US risk score increased for a second successive quarter, highlighting improved government stability and other political indicators coupled with a brighter economic climate, Canada’s declined further.

Canada’s score has fallen more sharply than that of the US on both a five and 10-year trend basis, widening the score differential and their relative positions in the global rankings.

The US is currently 17th on Euromoney’s global risk table, with Canada down to 25th, sandwiched between Portugal and Chile. Both are within the second of five risk categories, but while the US has slipped two places over the past five years, Canada is down by 16.

Macroeconomic differentials tell part of the story. Both economies contracted in 2020 owing to the pandemic, but Canada’s GDP crashed 5.4% in real terms – more than the US, which fell by 3.5%. This follows two years of growth below that of the US.

The survey’s economic risk scores reflect this. Canada’s have been downgraded, but US analysts, sensing a faster and stronger recovery, have upgraded across the board. There is also the perception that the US can absorb a larger fiscal deficit and debt load than Canada.

Political risk differentials are equally striking.

Whereas they have improved in the US following the presidential handover from Donald Trump to Joe Biden – with faith returning in institutions, transparency and stability – in Canada it is the reverse.

This is explained by a variety of reasons that go beyond the prospect of snap federal elections –  which Trudeau’s Liberals are expected to win but which could be subjected to foreign interference, including cyberattacks, calling into question the legitimacy of the outcome.

Analysts explain

One of Euromoney’s survey contributors, Johan Krijgsman ofKrijgsman & Associates, notes in reference to the myriad political risks and their impact on the investor environment that Canada’s self-image of “competence and offering interesting business opportunities has been shaken on a number of fronts”.

He says that, until recently, the Covid-19 vaccine programme had been viewed as poorly managed. The vaccination rates are now proportionally better than in the US, but the delays involved, the discovery that the country did not have the capability to produce the mRNA vaccines itself, or have sufficient stockpiles of protective equipment, came as a shock.

On the economy, he says the pandemic has “provided a cover for marking time”.

Government spending and low interest rates have kept things going, he says, but there is a sense of “a piper needing to be paid”.

The growing public and private sector debt is not being discussed, there are no solutions forthcoming for the overpriced housing market and inflation is well above the central bank’s 2% target.

“In the background is the conflict over how to manage environmental good intentions and concerns (e.g. the tragic forest fires in the west), with the country's economic base of energy-intensive extraction of raw material, transporting goods over vast distances and living in air-conditioned or well-heated homes and offices, depending on the season.”

Erik Henningsmoen, a research analyst at Higher Education Strategy Associates, who also mentions the housing market, says his main concern is that as Canada comes out of the pandemic it will need to confront economic and societal challenges that have been put on ice in the past year and a half.

While the US also has numerous challenges to surmount, Canada, due to its smaller size and less fiscal capacity, does not have the runway to deal with its challenges in the same way 

 - Erik Henningsmoen

“While the US also has numerous challenges to surmount, Canada, due to its smaller size and less fiscal capacity, does not have the runway to deal with its challenges in the same way that the US does.”

Indeed, both analysts mention a particular risk for Canada is its treatment of black, indigenous and people of colour (BIPOC), which has received much attention in the media, emerging from the Black Lives Matter movement.

Canada's historic leaders, such as founding father John A. Macdonald, have had their statues knocked down following the discovery of unmarked graves at indigenous residential schools, notes Krijgsman, who says: “Whether Canada violated indigenous peoples’ treaty rights and, if so, what is to be done are also current questions.”

Henningsmoen also notes Canada's ongoing reckoning with residential schools.

“Since May of this year, surveys using ground-penetrating radar have discovered over 1,000 unmarked graves of indigenous children on the former grounds of residential schools. These discoveries have created shock, sadness and anger throughout Canadian society.”

He says this underscores the limited progress that Canada’s reconciliation efforts have made in repairing relations between indigenous peoples, the Canadian government and Canadian society as a whole, and that they increase political risk as they could lead to a degree of political instability in the country.

He gives the examples of numerous instances of vandalism and arson to churches that may be linked to anger over the discovery of the unmarked graves.

He also notes that back in early 2020, prior to the pandemic, there was a widespread blockade of railway traffic in Canada over pipeline development and indigenous land claims, highlighting the investor risks.

“This incident was highly disruptive to Canada's domestic and international supply chains, and was thus an effective tactic for the indigenous people and activists who carried out the blockade.”

US relations

Both analysts also mention the weakness of the bilateral relationship with the US as source of risk.

Krijgsman notes the fact, “the bromance between prime minister Trudeau and former president Barack Obama does not seem to have been extended by Joe Biden.”

The bromance between prime minister Trudeau and former president Barack Obama does not seem to have been extended by Joe Biden 

 - Johan Krijgsman

Henningsmoen says that while the values of the Trudeau government and the Biden-Harris administration would seemingly be congruent with one another, there have been major policy challenges between Canada and the US since Biden was elected.

“This has included the cancellation of the Keystone XL pipeline, major disputes with the State of Michigan over the operation of Enbridge Line 5 pipeline, and most recently a lack of reciprocity by the Biden-Harris administration in reopening the Canada-US border for regular travel.

“The US is not only Canada's main trading partner, but also its key strategic ally. Canada needs the US as a partner in navigating strategic challenges at the international level. Canadian stability and prosperity is contingent on a productive relationship with the US.”