Moody's: Diverse economy, sources of federal revenue, protect Canada's Aaa from low oil prices

Lower oil prices do not pose a significant risk to Canada's fundamental credit quality and its Aaa sovereign rating with stable outlook, says Moody's Investors Service. Canada's diverse economy as well as the small role hydrocarbons play in federal revenues contribute to this resiliency, the rating agency says in the report "Canada, Government of, Resilience to Oil Price Volatility Supported by Diversified Economy and Federal Revenue Sources."

"The Canadian economy's diversity will help mitigate the impact from the recent exogenous price shock," says Moody's Senior Vice President Steven Hess. "At the same time, volatile oil prices, and by extension, slower oil production growth, will reduce but not cancel out Canada's growth momentum."

Absent a major correction in the housing market, Moody's expects lower interest rates, a weaker Canadian dollar and the established growth in the United States, among other factors, to help the Canadian economy maintain momentum in its growth despite the lower oil prices.

Meanwhile, the federal government's fiscal position is largely insulated from movements in commodity prices, says Moody's. The federal government's direct exposure to the oil and gas sector via corporate income tax, for example, amounts to only slightly more than 1% of federal revenues.

The minimal exposure to volatility in oil prices differs from the larger ones of some local and provincial governments in Canada, particularly Alberta, Saskatchewan and Newfoundland.

With CAD7.7 billion in oil royalty revenues in 2013-14, Alberta (Aaa stable) faces the biggest revenue drop in absolute terms. However, Alberta is also the province best equipped to maintain its credit strength during a temporary downturn in oil prices given that it has cash or equivalent financial reserves that are three times its modest debt and equal to three quarters of annual its spending.

Saskatchewan (Aaa stable) is fairly well insulated from lower oil prices. Oil royalties and revenues made up just 11% of revenues in 2013-14.

Newfoundland and Labrador (Aa2 stable) faces the greatest fiscal pressures, given that oil royalty and revenues accounted for around 28% of the province's consolidated revenues in 2013-14 and its cash reserves are relatively low. Moody's expects the province's debt to rise in 2015-16. Newfoundland and Labrador, however, has some leeway within its rating category.