## 1canea2019001

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### Context and evolving risks
- Over the past five years, Canada used fiscal space and accommodative monetary policy at the onset of the 2014 oil price shock to overcome the 2015 recession; economy posted the strongest growth rate among G7 economies in 2017 and the unemployment rate fell to its lowest level in forty years.
- Important 2018 reforms: NAFTA overhaul deal signed, Canada Infrastructure Bank opened, tax allowances for business investment expanded following the 2018 U.S. Tax Cuts and Jobs Act.
- With low policy rates amid a booming housing market, macroprudential policy was tightened to slow household debt growth and enhance resilience.
- As federal elections approach, risks evolving:
  - Growth slowed to a more sustainable level.
  - Slowing global economy and low oil prices, aggravated by pipeline constraints, dampened exports and business investment.
  - Private consumption and residential investment decelerated due to a cooling housing market, rising interest rates, and slower real income growth.
  - New USMCA awaits legislative approval and trade tensions add uncertainty.

### Recent developments: growth, inflation, fiscal stance, and housing
- Growth and demand:
  - GDP growth, 2018: 1.8 percent.
    - Growth robust in first three quarters averaging 2 percent annualized; 0.4 percent in the last quarter.
  - Private consumption growth, 2018: 2.1 percent (slowest pace in five years).
  - Business investment: rose slightly; increase in non-residential investment offset by decline in residential investment.
- Inflation and monetary policy:
  - All three core inflation measures hovered around 2 percent.
  - Annual headline inflation rose to 2.8 percent in mid-2018 then fell back toward target by year-end.
  - Bank of Canada increased policy interest rate by 125 basis points to 1.75 percent since July 2017.
  - 5-year mortgage rate increased by around 80 basis points to 4.5 percent.
  - Yield curve recently inverted.
- Fiscal stance, 2018:
  - Federal cyclically-adjusted balance: surplus of 0.4 percent of potential GDP (up from 0.1 percent in 2017).
  - Overall cyclically-adjusted general government deficit widened slightly to 0.2 percent of potential GDP.
  - Ontario budget deficit in 2018: about Can$11.7 billion.
  - Alberta’s projected deficit narrowed due to higher oil revenues.
- Housing market summary:
  - Residential mortgage credit growth: 3.1 percent (historical low).
  - Credit gap: 5 percent of GDP.
  - Stock of household debt: 176 percent of disposable income.
  - New mortgages to highly indebted borrowers (LTI above 450 percent) fell by 39 percent in the year to mid-2018.
  - Nationwide, house prices are 2.5 percent lower than the peak in mid-2018.
  - Staff estimates house prices in Toronto, Hamilton, and Vancouver remain overvalued by around 50 percent.
  - For a Can$1.5 trillion mortgage market, roughly Can$300 billion (13.6 percent of GDP) refinanced every year (about 20 percent of mortgages refinanced annually).

### Housing finance ecosystem and vulnerabilities
- Concentrations and exposures (figures from text):
  - Mortgage Credit: Can$1.8 Trillion, 79% of GDP.
  - Real Estate Assets: Can$500 Billion, 23% of GDP.
  - Government Guarantee references: Can$485 Billion, 21% of GDP and Can$750 Billion, 34% of GDP.
  - Construction Firms: 16% Debt Growth v.s. 7% Income Growth.
  - Real Estate Firms: 35% Debt Growth v.s. 5% Income Growth.
- Mortgage financing and household balance-sheet pressures:
  - Mortgage renewals typically every five years; many contractual rates below current mortgage rates implying rising debt service.
  - Households’ debt service expected to rise by 0.4 percentage points to 15.3 percent of disposable income.
  - For uninsured mortgages, federally regulated institutions must test borrowers at an interest rate 200 basis points higher than the contracted rate, or the benchmark rate, whichever is higher.
- Macrofinancial vulnerabilities:
  - Significant housing imbalances in major metropolitan areas; attainable house prices implied by borrowing constraints are expected to decline under moderate income growth and rising interest rates, widening the gap with current prices and increasing likelihood of a large correction.
  - Multiple parts of the financial system exposed via CMHC insurance, private insurers (backstopped by government), MBS guarantees, and common exposures.
  - Smaller regulated banks and private lenders in non-prime markets face concentrated exposures and reliance on less stable, higher-cost funding (brokered deposits, redeemable equity).

### Growth-at-risk and downside probability
- Growth-at-risk findings:
  - Range of outcomes for a severely adverse scenario (5th percentile) shifted 100 basis points higher since last year.
  - 2018 growth at risk: -1.7 (one year ahead annualized GDP growth, percent).
  - 2017 growth at risk: -2.7.
- Likelihoods:
  - Growth-at-risk analysis: likelihood of the severe adverse scenario is 3.8 percent.

### Adverse scenario (FSAP adverse scenario assumptions and outcomes)
- Scenario assumptions:
  - Severe recession concurrent with significant financial market stress, large exchange rate depreciation, sharp housing correction, snapback of interest rates; BOC initially tightens then eases monetary policy later due to recession-induced deflationary effects.
- Adverse scenario key macro outcomes (by year as presented):
  - Real GDP growth: -3.1; -4.2; 1.3
  - Inflation rate: 3.6; 3.2; 1.7
  - Unemployment rate: 7.2; 10.1; 12.1
  - Exchange rate (CAD/USD): 1.52; 1.55; 1.47
  - House price (2017=100): 82; 66; 62
  - Bank of Canada policy rate: 3.3; 2.9; 1.2
  - U.S. GDP growth rate: -2.4; -2.9; 3.3

### Financial sector resilience and stress-test results
- Banking sector:
  - Total assets (2018): Can$5,643 billion.
  - Total assets as percent of GDP (2018): 254.5.
  - Aggregate Tier 1 capital ratio: 13.2 percent.
  - Total capital ratio: 15.2 percent.
  - NPL ratio: 0.4 percent of total loans (2018Q4).
  - Customer deposits to loans (2018): 99.4.
  - FX loans to total loans (2018): 37.4.
  - D-SIB market share: 90 percent (six D-SIBs).
  - Banks’ total claims on nonresidents rose to 42 percent of banking sector assets (from 31 percent end-2013).
  - Foreign currency funding share of total funding: 54 percent.
- FSAP stress-test results:
  - Aggregate CET1 capital ratio would decline by 4.8 percentage points to 7.4 percent in 2021.
  - All banks meet hurdle rates at end of stress testing horizon; most entities would run down conservation buffers and face dividend restrictions until rebuilt.
  - Liquidity: loans to deposits about 100 percent; D-SIFIs hold enough liquidity buffers to withstand sizeable funding outflows; large liquid securities holdings largely eligible for BOC facilities.
- Corporate and household stress outcomes:
  - Corporate: assuming profitability declines by 25 percent and funding costs increase by 5 percentage points for all debt due within one year, share of firms with debt-at-risk rises from 5 percent to 8 percent.
  - Households: share with debt-at-risk increases from 17 percent to 29 percent under the adverse scenario (assumed average house price decline of 40 percent, disposable income decline 15 percent, interest rates up to 230 basis points depending on renewal profile). Households with debt-at-risk defined as debt service > 40 percent of disposable income.
  - Mortgage insurers: CMHC and private mortgage insurers would need additional capital of Can$15 billion (around 0.7 percent of GDP) to meet supervisory target ratio; over the 3-year stress horizon cumulative claims would amount to Can$25 billion.

### Emerging vulnerabilities and safety nets
- Emerging vulnerabilities:
  - Rising risk appetite among life insurers, pension funds and other non-banks.
  - Growth in non-prime mortgage lending.
  - Banks’ increased reliance on external, foreign-currency funding.
  - Increased use of repos and derivatives raising cross-sectoral linkages and counterparty risk.
  - Growing cross-border financial interconnectedness increasing spillover risk.
- Safety nets and buffers:
  - Federal government central role in housing finance creates implicit safety net and contingent liabilities.
  - Bank of Canada framework for market operations and liquidity provision well-articulated; standing swap arrangements with major central banks.
  - Canada is a net creditor with NIIP of 23.8 percent of GDP; market value of NIIP rose to Can$530 billion by end-2018 (20 percent increase over the year).
  - Comprehensive social safety nets including unemployment insurance and targeted fiscal transfers.

### Economic outlook and projections (baseline and medium-term)
- Real GDP growth:
  - 2019: 1.5 percent.
  - 2020: 1.9 percent.
  - 2021: 1.8 percent.
  - 2022: 1.6 percent.
  - 2023: 1.6 percent.
  - 2024: 1.7 percent.
- Medium-term potential growth limited to 1.7 percent due to weak external competitiveness, low productivity growth, and population aging.
- Current account deficit projected to narrow to 1.9 percent by 2024.
- Output gap becomes more negative in 2019; monetary policy expected to remain on hold in near term; fiscal stance broadly neutral near term.
- Key quantitative indicators (from supplied content):
  - Current account deficit: 2.6 percent of GDP (2018).
  - CPI inflation (2019 proj): 1.7 percent.
  - Unemployment rate (2019 proj): 5.9.
  - Bank of Canada policy rate increase since July 2017: 125 basis points to 1.75 percent.
  - 5-year mortgage rate: 4.5 percent.
  - Stock of household debt: 176 percent of disposable income.
  - Residential mortgage credit growth: 3.1 percent.
  - Credit gap: 5 percent of GDP.
  - Decline in new high-LTI ( > 450 percent) mortgages: 39 percent year-to-mid-2018.
  - Nationwide house prices: 2.5 percent lower than mid-2018 peak.
  - Estimated overvaluation in Toronto, Hamilton, Vancouver: around 50 percent.
  - Banking sector Tier 1 capital ratio: 13.2 percent.
  - NPL ratio: 0.4 percent.

### Fiscal policy assessment, measures, and recommendations
- Fiscal stance and measures:
  - Federal cyclically-adjusted surplus rose to 0.4 percent of potential GDP in 2018.
  - Federal government decided to spend windfall gains, leaving cumulative federal deficit over FY2018/19 to FY2023/24 broadly the same (around 3.5 percent of GDP).
  - Total New Measures: $C 51.5 billion; 2.2 percent of GDP.
    - New Measures 2018 FES: $C 23.8 billion; 1.0 percent of GDP; 46.2 percent of total new measures.
      - Accelerated Investment: $C 13.0 billion; 0.6 percent of GDP; 25.2 percent.
      - Other Measures: $C 10.8 billion; 0.5 percent of GDP; 21.0 percent.
    - New Measures 2019 Budget: $C 27.7 billion; 1.2 percent of GDP; 53.8 percent of total new measures.
      - Housing affordability and supply: $C 0.9 billion; 0.0 percent of GDP; 1.7 percent.
      - Training and education: $C 4.6 billion; 0.2 percent of GDP; 9.0 percent.
      - Prescription Drugs: $C 1.0 billion; 0.0 percent of GDP; 2.0 percent.
      - Retirement: $C 1.9 billion; 0.1 percent of GDP; 3.6 percent.
      - Advancing reconciliation: $C 4.7 billion; 0.2 percent of GDP; 9.2 percent.
      - Infrastructure and innovation: $C 6.0 billion; 0.3 percent of GDP; 11.7 percent.
      - Diversity, health, and justice: $C 5.4 billion; 0.2 percent of GDP; 10.5 percent.
      - Other Measures: $C 3.1 billion; 0.1 percent of GDP; 6.1 percent.
- Fiscal guidance and recommendations:
  - Focus on rebuilding buffers and supporting productivity-enhancing growth; pace of consolidation should be gradual given risks.
  - Provinces with large deficits or high debt should lead necessary fiscal adjustment; provincial aggregate deficit cuts from 1.3 percent of GDP in 2019 to 1.0 percent in 2024 (adjustment could be doubled to 0.6 percent of GDP).
  - Federal government expected to gradually cut overall deficit from 0.9 percent of GDP in FY2019/20 to 0.4 percent by FY2023/24 via gradual slowdown in direct program spending growth and broadly stable revenue growth.
  - If unexpected fiscal savings materialize, prioritize deficit and debt reduction; if downside risks materialize, allow automatic stabilizers and consider discretionary measures depending on downturn severity.
  - Fiscal rule recommendation: federal government could explicitly aim to lower net debt to pre-crisis low of 28 percent of GDP (authorities’ definition) as a debt anchor. Canada reports net debt around 26.8 percent of GDP; authorities project federal net debt to fall to 28.6 percent of GDP by 2024.

### Housing supply, macroprudential policy, and structural measures
- Macroprudential stance:
  - Macroprudential policy has been effective in containing financial stability risks and the current stance is appropriate.
  - BIS early warning indicator shows Canada’s credit to GDP gap has declined below 10 percent.
  - Caution: the CMHC First-Time Home Buyer Incentive could encourage households to borrow more and would not fully address affordability in Toronto and Vancouver where median house price exceeds the maximum home value allowed (Can$500,000); could inflate prices elsewhere.
  - In event of sharper contraction in credit growth, authorities should consider easing macroprudential settings.
  - Provincial and municipal real estate taxes on non-residents could be eliminated or harmonized into broad-based tax measures targeted at speculative activity.
- Measures to increase housing supply (Box reproduced):
  - Accelerate delivery of land ready for development by municipalities and provide better and timely data about land availability.
  - Shorten the approval process for building permits and re-zoning by modernizing building approval systems and increasing personnel.
  - Improve transparency and certainty about timelines in the development approval process.
  - Provide greater certainty to developers: if an application meets the conditions of the designated zone where planning permission is being applied, permission must be granted.
  - Time-limit development plans to avoid construction delays.
  - Re-evaluate rent control policies to ensure they do not constrain rental property supply.
  - Assess current funding and incentives for purpose-built rental to encourage a more balanced mix of rental supply.
  - Further improve regional coordination among municipalities on transportation and housing supply strategies.
- Delivery gaps:
  - Provincial programs for affordable housing and the Rental Construction Financing Initiative are welcome but delivery has been limited and demand continues to outpace supply.
  - Expert Panel on the Future of Housing Supply and Affordability recently established.

### Modernizing financial stability architecture and microprudential supervision
- Shortfalls identified:
  - Significant data gaps (cross-sectoral exposures, activities, unregulated nonbank intermediation).
  - Insufficient capacity for systemic risk analysis (intra-system, cross-border interconnectedness, shadow banking).
  - Limited ability for broader, inclusive macroprudential dialogue; need stronger federal-provincial coordination.
  - Lack of a single mechanism to monitor and follow up on policy implementation and outcomes.
  - Need to strengthen AML/CFT framework and supervision of the real estate sector.
- Institutional options:
  - Redefine Heads of Agencies (HOA) Committee to include relevant provincial prudential regulators; Bank of Canada to continue chairing and leading systemic risk surveillance.
  - HOA could make recommendations on a “comply or explain” basis.
  - BOC’s Financial System Review should remain key instrument for communicating risk assessments.
  - Senior Advisory Committee (SAC) could act as federal coordinator for Canada-wide crisis preparedness.
- Microprudential and safety-net recommendations:
  - Bank resolution: develop framework to compensate holders of bail-in debt; adopt depositor preference to facilitate resolution.
  - Liquidity provision: establish indemnity agreements between BOC and provincial governments for provincially regulated institutions to access BOC’s ELA; BOC to develop contingency plans for market-wide support including securities market intervention and foreign-currency liquidity provision.
  - Pension funds: increase detail, standardization, reporting frequency of disclosures and introduce standardized liquidity stress testing.
  - OSFI: should have authority to issue legally enforceable regulations; MoUs between OSFI and provincial authorities needed.
  - Capital markets oversight: further harmonization via CMRS warranted.
  - Mortgage risk weights: increase risk weights for mortgage exposures and improve risk-based differentiation in mortgage pricing.

### Trade, productivity, and internal trade barriers
- Productivity challenge:
  - Based on OECD data, 7 percent labor productivity gap with the United States in 2017.
  - Current productivity growth insufficient given population aging; medium-term potential growth limited to 1.7 percent.
- Trade agreements:
  - USMCA signed; awaits legislative approval. Provisions likely to adversely affect automotive, textiles and apparel trade but aggregate trade effects modeled as small.
  - Elimination of U.S. tariffs on steel and aluminum (tariffs of 25 percent on steel and 10 percent on aluminum were lifted on May 17, 2019).
  - CPTPP entered into force on December 30, 2018 covering 11 countries representing 13.5 percent of global GDP.
- Internal trade barriers and gains from liberalization:
  - Interprovincial trade share declined from 54 percent in 1981 to 38 percent in 2017.
  - Staff analysis: lowering NTBs could increase real GDP per capita by almost 4 percent.
  - Average tariff equivalent NTBs for all provinces around 20 percent.
  - Geography accounts for 57 percent of total trading barriers.
  - Prince Edward Island and Yukon have largest NTBs (around 60 percent).
  - Removing non-geographic NTBs increases trade volumes as a share of GDP by roughly 15 percentage points; real GDP per worker would increase by over 4 percent nationally and by around 16 percent in Prince Edward Island.
- Policy recommendations:
  - Make reducing internal trade barriers a common priority across federal, provincial and territorial governments.
  - Use CFTA platform, identify NTBs, set explicit targets, improve regulatory reconciliation (adopt “comply or explain”), resource the Secretariat, publish annual progress report, and raise penalties for non-compliance.
  - Reduce barriers particularly in finance, business and insurance sectors; unify securities regulations and enhance labor mobility.

### External balance and public debt (Annex highlights)
- External balance (Annex I):
  - NIIP: 23.8 percent of GDP in 2018 (staff note: earlier report shows NIIP 17.2 in table—content preserves both presented figures in context).
  - Gross external debt: 121 percent of GDP (2018), of which about one-third is short-term.
  - EBA CA Norm: 2.2 percent of GDP; Actual CA -2.6 percent of GDP (2018).
  - Staff assess the CA to be lower than warranted by fundamentals and desired policies; staff CA gap -2.1.
  - REER assessments: EBA REER index model overvaluation 2.0 percent; REER level model undervaluation around 7.0 percent; staff assesses REER overvalued in range 2 to 13 percent.
- Public Debt Sustainability (Annex II):
  - Gross debt-to-GDP: peaked 91.8 percent in 2016; fell to 89.7 percent in 2018; projected to decline to 75.3 percent by 2024.
  - Net debt-to-GDP: 26.8 percent in 2018; projected to fall to 22.7 percent by 2024.
  - General government gross debt: 89.7 percent of GDP (2018); excluding accounts payable gross debt falls to 73.7 percent of GDP.
  - General government holds sizable financial assets (about 61 percent of GDP).
  - Gross financing needs: around 14 percent of GDP in 2018; expected 13–17 percent through projection horizon (below 20 percent high-risk threshold).
  - Stress scenarios:
    - FSAP stress scenario: gross debt would peak at 94.7 percent of GDP and gross financing needs peak at 22.4 percent of GDP (mortgage insurers assumed to receive Can$15 billion capital injection).
    - Primary balance shock: deterioration of about 1 percent of GDP raises gross debt-to-GDP by about 3 percentage points.
    - Growth shock: one standard deviation shock in 2020–21 reduces growth to about 0–0.1 percent and gross debt-to-GDP would peak at 88.2 percent in 2021.

*Italic: IMF staff analysis and chapter text from "Canada" report PDF content unit 1canea2019001.*

### 1. Measures to Increase Housing Supply and Improve Affordability _____________________________ 20

### 1. Measures to Increase Housing Supply and Improve Affordability _____________________________ 20

### Context: Risks evolving in election year
- Over the past five years, Canada used fiscal space and accommodative monetary policy at the onset of the 2014 oil price shock to overcome the 2015 recession.
- The economy posted the strongest growth rate among G7 economies in 2017 and the unemployment rate fell to its lowest level in forty years.
- Important reforms undertaken in 2018: NAFTA overhaul deal signed, Canada Infrastructure Bank opened, and tax allowances for business investment expanded following the 2018 U.S. Tax Cuts and Jobs Act.
- With the policy rate kept low amid a booming housing market, macroprudential policy was tightened to slow household debt growth and enhance financial resilience.
- As federal elections approach, risks are evolving: growth has slowed to a more sustainable level; a slowing global economy and low oil prices, aggravated by domestic pipeline constraints, have dampened exports and business investment; private consumption and residential investment have decelerated in line with a cooling housing market, rising interest rates, and slower real income growth.
- The new USMCA awaits legislative approval and ongoing trade tensions add uncertainty to the outlook.

### Recent policy assessment and guidance
- Several rounds of macroprudential measures, provincial and municipal tax measures, and tighter monetary policy contributed to reducing housing-related financial stability risks.
- Authorities have been under pressure to ease macroprudential policy or introduce new initiatives to buttress housing activity; IMF staff view such easing as ill-advised given high household debt and the desirability of a gradual housing slowdown to reduce vulnerabilities.
- Policy priorities recommended:
  - Ensure the financial system remains sound and resilient.
  - Enhance cooperation between federal and provincial governments.
  - Target structural reforms to raise productivity and support long-term growth.
- Traction of past IMF advice has been strong in areas including:
  - Using available fiscal space to support the economy and keeping monetary policy accommodative until inflation pressures emerge.
  - Adjusting macroprudential policy to tackle housing sector vulnerabilities and mitigate financial stability risks.
  - Collecting more comprehensive and timely data on real estate transactions.
  - Investing in infrastructure and structural reform to revitalize productivity and raise potential growth.
- One staff recommendation not adopted: introduce a debt anchor and an operational fiscal rule.

### Recent developments: growth, inflation, fiscal stance, and housing
- GDP growth in 2018: 1.8 percent.
  - Growth robust in first three quarters averaging 2 percent annualized; 0.4 percent in the last quarter.
- Private consumption: grew by 2.1 percent, the slowest pace in five years.
  - Consumer credit growth declined as households adjusted to higher interest rates.
  - Annual wage growth remained between 2-3 percent, with moderation in oil-producing regions.
- Business investment: rose slightly; increase in non-residential investment offset by decline in residential investment.
  - Decline in housing market activity and challenges in the Canadian oil sector (including pipeline delays and regulatory uncertainty) weighed on investment.
- Bank of Canada estimate: the decline in oil prices in the second half of 2018 will reduce GDP by 0.5 percent by the end of 2020.
  - The estimated impact is one quarter of the effect seen during the 2014-16 oil price decline.
- External sector:
  - A 15 percent terms of trade decline later in 2018 kept the trade balance in deficit.
  - Current account deficit narrowed slightly to 2.6 percent of GDP.
  - Overall external position was weaker than justified by fundamentals and desirable policies (Annex 1).
- Inflation and monetary policy:
  - All three core inflation measures (CPI-trim, CPI-median, CPI-common) hovered around 2 percent.
  - Annual headline inflation rose to 2.8 percent in mid-2018 then fell back toward target by year-end.
  - The Bank of Canada increased the policy interest rate by 125 basis points to 1.75 percent since July 2017.
  - Over this period, the 5-year mortgage rate increased by around 80 basis points to 4.5 percent.
  - Yield curve recently inverted.
- Fiscal stance, 2018:
  - Federal cyclically-adjusted balance rose from a surplus of 0.1 percent of potential GDP in 2017 to a surplus of 0.4 percent of potential GDP in 2018.
  - Overall cyclically-adjusted provincial deficit expanded from 0.6 percent of potential GDP in 2017 to 1.1 percent of potential GDP in 2018.
  - Ontario budget deficit in 2018: about Can$11.7 billion (almost doubled due to accounting changes and pension plans); Alberta’s projected deficit narrowed due to higher oil revenues.
  - Overall cyclically-adjusted general government deficit widened slightly to 0.2 percent of potential GDP.

### Housing market and household balance sheets
- Mortgage financing more expensive due to macroprudential measures and tighter monetary policy.
  - Most mortgages are renewed every five years; many mortgages falling due have contractual rates below current mortgage rates, implying rising debt service.
  - Households’ debt service expected to rise by 0.4 percentage points to 15.3 percent of disposable income.
  - For uninsured mortgages, federally regulated institutions must test borrowers at an interest rate 200 basis points higher than the contracted rate, or the benchmark rate, whichever is higher.
- Provincial and municipal tax measures dampened price expectations in Vancouver and Toronto:
  - A 15 percent non-resident property transfer tax introduced for Toronto and Vancouver areas between 2016–17.
  - In January 2018, British Columbia increased the tax to 20 percent and expanded coverage; introduced a speculation and vacancy tax ranging from 0.5 percent to 2 percent depending on ownership and vacancy status.
- Housing market developments:
  - Residential mortgage credit growth slowed to 3.1 percent (historical low).
  - Credit gap declined to 5 percent of GDP.
  - Stock of household debt: 176 percent of disposable income.
  - New mortgages to highly indebted borrowers (LTI above 450 percent) fell by 39 percent in the year to mid-2018.
  - Nationwide, house prices are 2.5 percent lower than the peak in mid-2018.
  - In Toronto, Hamilton, and Vancouver, declines narrowed gaps between actual and “attainable” prices.
  - Staff estimates house prices in these cities remain overvalued by around 50 percent.
- Mortgage market renewal dynamics and interest rates (Fall 2018):
  - Roughly 20 percent of mortgages are refinanced every year; for a Can$1.5 trillion market this implies Can$300 billion (13.6 percent of GDP) refinanced every year.
  - Renewals and prevailing average interest rates by expected renewal period affect household refinancing burdens.

### Financial sector and corporate sector vulnerabilities
- Corporate sector:
  - Corporate debt is high, but non-financial corporate balance sheets remain solid.
  - Corporate profitability recovered and leverage declined since the slowdown three years ago.
  - Firms in oil and gas and mining sectors continue to show weak earnings.
- Banking sector:
  - Strong profits and sizable capital buffers; increased reliance on short-term foreign currency funding.
  - Total assets of banking sector up 50 percent since end-2013.
  - Total claims on nonresidents rose to 42 percent of banking sector assets (from 31 percent).
  - Aggregate Tier 1 capital ratio rose to 13.2 percent.
  - NPL ratio low at 0.4 percent of total loans in 2018Q4.
  - Foreign currency funding is 54 percent of total funding, largely for overseas operations.
  - Six D-SIBs hold a 90 percent market share.
- Housing finance ecosystem concentrations (figures from text):
  - Mortgage Credit: Can$1.8 Trillion, 79% of GDP.
  - Real Estate Assets: Can$500 Billion, 23% of GDP.
  - Government Guarantee: Can$485 Billion, 21% of GDP and Can$750 Billion, 34% of GDP referenced for guarantees (as shown in ecosystem diagram).
  - Construction and real estate firms showing debt growth exceeding income growth (e.g., Construction Firms: 16% Debt Growth v.s. 7% Income Growth; Real Estate Firms: 35% Debt Growth v.s. 5% Income Growth).

### Macrofinancial vulnerabilities and growth-at-risk
- Growth-at-risk analysis indicates lower downside risks compared with last year:
  - Range of outcomes for a severely adverse scenario (5th percentile) has shifted 100 basis points higher since last year.
  - 2018 growth at risk: -1.7 (one year ahead annualized GDP growth, percent).
  - 2017 growth at risk: -2.7.
- Persistent housing market imbalances remain a key macrofinancial vulnerability:
  - Significant housing imbalances in major metropolitan areas; “attainable” house prices implied by borrowing constraints are expected to decline under moderate income growth and rising interest rates, widening the gap with current prices and increasing the likelihood of a large correction.
  - Historical precedent: Edmonton and Calgary overvaluations in 2006 took around six years to normalize via moderate house price declines, strong household income growth, and falling interest rates.
  - Multiple parts of the financial system are exposed to housing via CMHC insurance, private insurers (backstopped by government), MBS guarantees, and common exposures that could amplify shocks.
  - Smaller regulated banks and private lenders serving non-prime markets face concentrated exposures and reliance on less stable, higher-cost funding (brokered deposits, redeemable equity), increasing vulnerability to funding pullbacks in downturns.

### Key quantitative indicators (from supplied content)
- GDP growth, 2018: 1.8 percent.
- Private consumption growth, 2018: 2.1 percent.
- Bank of Canada policy rate increase since July 2017: 125 basis points to 1.75 percent.
- 5-year mortgage rate increase: around 80 basis points to 4.5 percent.
- Current account deficit: 2.6 percent of GDP.
- Stock of household debt: 176 percent of disposable income.
- Residential mortgage credit growth: 3.1 percent.
- Credit gap: 5 percent of GDP.
- Decline in new highly indebted (LTI > 450 percent) mortgages: 39 percent year-to-mid-2018.
- House prices nationwide: 2.5 percent lower than mid-2018 peak.
- Estimated overvaluation in Toronto, Hamilton, Vancouver: around 50 percent.
- Banking sector aggregate Tier 1 capital ratio: 13.2 percent.
- NPL ratio: 0.4 percent of total loans (2018Q4).
- Banking sector claims on nonresidents: 42 percent of assets (from 31 percent end-2013).
- Foreign currency funding share of total funding: 54 percent.
- D-SIB market share: 90 percent.

*Source: IMF staff analysis and chapter text from "Canada" report PDF content unit 1canea2019001.*

### 1.5 percent in 2019, partly due to a disappointing first quarter and more subdued global growth.

### 1canea2019001 - 1.5 percent in 2019, partly due to a disappointing first quarter and more subdued global growth.

### Economic outlook and projections
- Real GDP growth: 1.5 percent in 2019.
- Growth expected to pick up in 2020 as oil-related slowdown effects wane and construction begins on a US$40 billion LNG project in B.C.
- Medium-term potential growth limited to 1.7 percent due to weak external competitiveness, low productivity growth, and population aging.
- Current account deficit projected to narrow to 1.9 percent by 2024.
- Output gap becomes more negative in 2019; monetary policy expected to remain on hold in the near term.
- Fiscal stance expected to be broadly neutral in the near term.
- Tight macroprudential policy expected to keep household credit and private consumption at modest growth rates.

### Risks and adverse scenario
- Risks are tilted to the downside.
  - Domestic: sharp housing market correction triggered by a sudden shift in price expectations or faster-than-expected increase in mortgage interest rates; if accompanied by a rise in unemployment and sharp contraction in private consumption, additional risks to financial stability and growth could emerge.
  - External: larger-than-expected global growth slowdown, sharp decline in oil prices, disruption in global trade and supply chains, rising uncertainty from retreat from multilateralism and escalation of trade tensions.
  - Financial: sudden tightening of global financial conditions (risk-off), higher volatility, deleveraging, institutional investor sell-off, and vulnerability of institutions serving the smaller “non-prime” mortgage market.
- Growth-at-risk analysis: likelihood of the severe adverse scenario is 3.8 percent.
- FSAP adverse scenario assumptions: severe recession concurrent with significant financial market stress, large exchange rate depreciation, sharp housing correction, snapback of interest rates; BOC initially tightens then eases monetary policy later due to recession-induced deflationary effects.

- Adverse scenario key macro outcomes (by year as presented):
  - Real GDP growth: -3.1; -4.2; 1.3
  - Inflation rate: 3.6; 3.2; 1.7
  - Unemployment rate: 7.2; 10.1; 12.1
  - Exchange rate (CAD/USD): 1.52; 1.55; 1.47
  - House price (2017=100): 82; 66; 62
  - Bank of Canada policy rate: 3.3; 2.9; 1.2
  - U.S. GDP growth rate: -2.4; -2.9; 3.3

### Financial sector resilience and stress-test results
- FSAP stress tests show the financial system is resilient to materialization of downside risks, but households and mortgage insurers would be vulnerable.
- D-SIFIs remain resilient: all banks meet hurdle rates at end of stress testing horizon.
  - Aggregate CET1 capital ratio would decline by 4.8 percentage points to 7.4 percent in 2021 because of credit impairments, market losses, and higher risk-weighted assets.
  - Most entities would run down conservation capital buffers and be subject to dividend restrictions until capital is rebuilt.
- Liquidity: D-SIFIs hold enough liquidity buffers to withstand sizeable funding outflows. Loans to deposits are about 100 percent; reliance on foreign-currency wholesale funding increases vulnerability to risk-off events, but resilience is supported by large liquid securities holdings, significant portion eligible for BOC’s liquidity facilities, and absence of material mismatch in repo books.
- Corporate sector shock resilience:
  - Assuming profitability declines by 25 percent and funding costs increase by 5 percentage points for all debt coming due within one year, share of firms with debt-at-risk rises from 5 percent to 8 percent.
  - An oil price shock would raise solvency risk of oil companies, particularly upstream firms.
- Households:
  - Share of households with debt at risk increases from 17 percent to 29 percent under the adverse scenario.
  - Larger effects in Vancouver and Toronto where household debt is high.
  - Scenario assumed average house price decline of 40 percent across cities, decline in disposable income by 15 percent, and increase in interest rates up to 230 basis points depending on borrower renewal profile. Households with debt-at-risk defined as debt service greater than 40 percent of disposable income. Share of households with negative equity is small.
- Mortgage insurers:
  - CMHC and private mortgage insurers would need additional capital of Can$15 billion (around 0.7 percent of GDP) to meet supervisory target ratio.
  - Over the 3-year stress horizon, cumulative claims would amount to Can$25 billion, consistent with credit losses of banks’ insured mortgage portfolios.
- Emerging vulnerabilities:
  - Rising risk appetite among life insurers, pension funds and other non-banks.
  - Growth in non-prime mortgage lending.
  - Banks’ increased reliance on external, foreign-currency funding.
  - Increased use of repos and derivatives raising cross-sectoral linkages and counterparty risk (not covered by FSAP stress tests).
  - Growing cross-border financial interconnectedness increasing spillover risk.

### Safety nets and buffers
- Federal government plays central role in housing finance; implicit safety net reduces perceived system risk but exposes government to contingent liabilities.
- Bank of Canada framework for market operations and liquidity provision is well-articulated with many channels to provide liquidity against a broad range of collateral.
- Canada is a net creditor with NIIP of 23.8 percent of GDP.
  - Market value of NIIP rose to Can$530 billion by end-2018, a 20 percent increase over the year.
- Canada has comprehensive social safety nets including unemployment insurance and targeted fiscal transfers to support low-income households.

### Fiscal policy assessment and recommendations
- Federal fiscal outlook broadly unchanged despite sizeable windfall gains from favorable conditions; government decided to spend all gains, leaving cumulative federal deficit over FY2018/19 to FY2023/24 broadly the same (around 3.5 percent of GDP).
- New spending initiatives targeted at business investment and middle class; 2018 Fall Economic Update accelerated capital expensing; 2019 Budget added measures for training, gender equality, infrastructure, first-home buyers, reconciliation, and prescription drug cost reduction.
- Measures taken over past year contribute just over 2 percent of GDP to the cumulative deficit over next five years, essentially offsetting fiscal gains.
- New measures summary:
  - Total New Measures: $C 51.5 billion; 2.2 percent of GDP; 100 percent (of the total new measures)
  - New Measures 2018 FES: $C 23.8 billion; 1.0 percent of GDP; 46.2 percent
    - Accelerated Investment: $C 13.0 billion; 0.6 percent of GDP; 25.2 percent
    - Other Measures: $C 10.8 billion; 0.5 percent of GDP; 21.0 percent
  - New Measures 2019 Budget: $C 27.7 billion; 1.2 percent of GDP; 53.8 percent
    - Housing affordability and supply: $C 0.9 billion; 0.0 percent of GDP; 1.7 percent
    - Training and education: $C 4.6 billion; 0.2 percent of GDP; 9.0 percent
    - Prescription Drugs: $C 1.0 billion; 0.0 percent of GDP; 2.0 percent
    - Retirement: $C 1.9 billion; 0.1 percent of GDP; 3.6 percent
    - Advancing reconciliation: $C 4.7 billion; 0.2 percent of GDP; 9.2 percent
    - Infrastructure and innovation: $C 6.0 billion; 0.3 percent of GDP; 11.7 percent
    - Diversity, health, and justice: $C 5.4 billion; 0.2 percent of GDP; 10.5 percent
    - Other Measures: $C 3.1 billion; 0.1 percent of GDP; 6.1 percent
- Provincial fiscal positions mixed:
  - Quebec and B.C. generating operating surpluses and reducing net debt.
  - Ontario government intends to balance the budget by 2024.
  - Alberta running sizable operating deficit; energy sector 20 percent of Alberta’s GDP.
  - Annual health care spending growth expected to rise from 3 percent to 4 ½ percent over a 10-20-year timeframe, contributing to rising net debt-to-GDP ratios by around 2025.
- Fiscal policy guidance:
  - Focus on rebuilding buffers and supporting productivity-enhancing growth.
  - Pace of fiscal consolidation should be gradual given balance of risks.
  - Provinces with large deficits or high debt should lead necessary fiscal adjustment. Under baseline provincial aggregate deficit cuts from 1.3 percent of GDP in 2019 to 1.0 percent in 2024; the size of the adjustment could be doubled to 0.6 percent of GDP.
  - Federal government: overall size of fiscal adjustment broadly appropriate; expected to take slightly expansionary stance in 2019 and gradually cut overall deficit from 0.9 percent of GDP in FY2019/20 to 0.4 percent by FY2023/24. Fiscal adjustment entails gradual slowdown in direct program spending growth and broadly stable revenue growth.
  - If unexpected fiscal savings materialize, prioritize deficit and debt reduction; if downside risks materialize, allow automatic stabilizers and consider discretionary measures depending on downturn severity.
- Fiscal rule recommendation:
  - Federal government could explicitly aim to lower net debt to pre-crisis low of 28 percent of GDP (authorities’ definition) as a debt anchor.
  - Canada reports net debt as total liabilities less total assets and equity; net debt reported around 26.8 percent of GDP. Authorities project federal net debt to fall to 28.6 percent of GDP by 2024.
  - Well-designed fiscal rules can mitigate fiscal slippage and “deficit bias”; success depends on initial spending level consistency with debt anchor and potential transitional arrangements.

*Source: 1canea2019001 - 1.5 percent in 2019, partly due to a disappointing first quarter and more subdued global growth.*

### 2018. Canadian pundits also support some form of fiscal anchor to promote greater fiscal transparency and

### 1canea2019001 - 2018. Canadian pundits also support some form of fiscal anchor to promote greater fiscal transparency and

### Fiscal framework and fiscal anchors
- Operational rule design:
  - Any rule should strike a balance between enforcement, flexibility, and simplicity.
  - A cyclically-adjusted balance rule could be too complex to communicate and measure in real time.
  - The advantage of an expenditure rule (e.g., placing a cap on expenditure growth) is ease of measurement and communication, and built-in flexibility.
  - In good times the rule prevents higher-than-expected revenues from being used for new spending, allowing fiscal buffers to build.
  - In downturns, automatic stabilizers would operate freely and the rule would incorporate well-defined contingencies and escape clauses for exceptional circumstances.
- Enforcement and monitoring:
  - Regularly scheduled reviews should assess whether the fiscal framework achieves its objectives and whether rules should be kept, revised, or abandoned.
  - The Parliamentary Budget Officer (PBO) is well placed to monitor compliance and ensure rules are not circumvented (e.g., by overly optimistic macroeconomic and fiscal projections).
- Provincial-level rules:
  - Fiscal rules should strengthen the link with debt while protecting public investment and can differ across provinces to address specific sources of fiscal imbalance (e.g., excessive current spending or under-taxation).
  - Balanced operating budget rules in B.C. and Quebec appear to be working well.
  - Alberta urgently needs legislation to strengthen commitment to fiscal sustainability and management of resource revenues for future generations.
  - Given relatively high levels of debt, Ontario should enhance credibility of debt reduction as a medium-term objective by exploring alternative operational rules and enforcement strategies to replace or support its existing balanced budget rule.

### Tax system and business taxation
- Authorities should review the tax system to remove distortions and improve efficiency.
- Recent expansion of tax allowances for investment is a positive step.
- Further steps toward a cash-flow based corporate tax system could reduce distortions; possible measures include:
  - Permanently allowing immediate expensing of all capital investments.
  - Removing the deductibility of interest for debt-financed investments.

### Monetary policy
- Recent stance and rationale:
  - The accommodative stance of monetary policy has been appropriate.
  - There were three increases in the policy rate over the course of 2018.
  - The current policy rate implies a slightly negative real interest rate, still well-below estimates of the real neutral interest rate of around 1 percent.
  - The current accommodative stance reflects below-target core inflation, a negative and widening output gap, and slowing wage growth.
- Near-term guidance:
  - Monetary policy should remain on hold in the near term.
  - Staff’s baseline scenario projects a gradual increase of the policy rate towards its neutral nominal level (around 3 percent) after 2019 as the output gap closes.
  - Gradualism is warranted due to uncertainty about the level of the output gap and the long-run neutral policy interest rate.
  - If risks materialize and the outlook deteriorates, the Bank of Canada should be prepared to cut the policy rate.

### Macroprudential policy and housing supply
- Effectiveness and stance:
  - Macroprudential policy has been effective in containing financial stability risks and the current stance is appropriate.
  - BIS early warning indicator shows Canada’s credit to GDP gap has declined below 10 percent.
- Cautions on new initiatives:
  - The CMHC First-Time Home Buyer Incentive could encourage households to borrow more and would not fully address affordability in Toronto and Vancouver, where the median house price exceeds the maximum home value allowed (Can$500,000).
  - The incentive could inflate prices in cities where home values are not currently overvalued, undermining affordability there.
- Policy responses to downside risks:
  - In the event of a sharper than expected contraction in credit growth, authorities should consider easing macroprudential policy settings.
  - Provincial and municipal real estate taxes on non-residents could be eliminated, or harmonized into broad-based tax measures targeted at speculative activity more generally.
- Housing supply recommendations:
  - Authorities should expand housing supply in key metropolitan areas; provincial programs for affordable housing and the Rental Construction Financing Initiative are welcome but delivery has been limited and demand continues to outpace supply.
  - Multiple levels of government need to work together to identify bottlenecks and shorten the construction process.
  - The recently established Expert Panel on the Future of Housing Supply and Affordability is a positive step.

### Box: Measures to Increase Housing Supply and Improve Affordability (reproduced)
- Accelerate delivery of land ready for development by municipalities and provide better and timely data about land availability.
- Shorten the approval process for building permits and re-zoning by modernizing building approval systems and increasing personnel.
- Improve transparency and certainty about timelines in the development approval process.
- Provide greater certainty to developers: if an application meets the conditions of the designated zone where planning permission is being applied, permission must be granted.
- Time-limit development plans to avoid construction delays.
- Re-evaluate rent control policies to ensure they do not constrain rental property supply.
- Assess current funding and incentives for purpose-built rental to encourage a more balanced mix of rental supply.
- Further improve regional coordination among municipalities on transportation and housing supply strategies.

### Modernizing the financial stability architecture
- Rationale:
  - The current systemic risk oversight arrangement has worked but needs modernization due to responsibilities being spread across multiple levels of government and financial sectors, evolving financial sector exposures, and fintech-driven boundary blurring.
- Shortfalls to address (drawn from FSAP):
  - Significant data gaps, including cross-sectoral exposures, activities, and unregulated nonbank financial intermediation.
  - Insufficient capacity for systemic risk analysis, particularly intra-system and cross-border interconnectedness and shadow banking.
  - Limited ability to carry out broader and more inclusive dialogue on macroprudential policy; need stronger federal-provincial coordination to limit policy leakages.
  - Lack of a single mechanism to monitor and follow up on implementation and outcomes of policies relevant to mitigating systemic risk.
  - Lack of transparency around policy decisions relative to high-transparency standards at individual agencies.
  - Need to strengthen the AML/CFT framework for entity transparency, the legal profession, virtual assets service providers, and supervision of the real estate sector.
- Institutional options:
  - The Heads of Agencies (HOA) Committee could be redefined to include all relevant provincial prudential regulators, with the Bank of Canada continuing to chair and lead systemic risk surveillance in cooperation with relevant authorities.
  - The HOA could make recommendations on a “comply or explain” basis to balance accountability and autonomy.
  - The BOC’s Financial System Review should remain the key instrument for communicating financial sector risk assessments.
  - The Senior Advisory Committee (SAC) could act as the federal coordinator for Canada-wide crisis preparedness, adopting new terms of reference and conducting contingency planning and testing exercises.

### Microprudential supervision and safety nets
- Key areas highlighted by FSAP:
  - Bank resolution: develop framework to compensate holders of bail-in debt to increase certainty of outcomes; adopt depositor preference to facilitate resolution tool application.
  - Liquidity provision: establish indemnity agreements between the BOC and provincial governments to enable provincially regulated financial institutions to access the BOC’s emergency lending assistance (ELA); BOC should develop contingency plans for market-wide support including intervention in securities markets and foreign-currency liquidity provision.
  - Oversight of pension funds: large public pension funds are systemic asset managers; increase detail, standardization, and reporting frequency of pension fund disclosures and introduce standardized liquidity stress testing requirements.
  - OSFI oversight: OSFI should have authority to issue legally enforceable regulations (guidelines may be ineffective in stress); MoUs between OSFI and provincial authorities are still lacking and constrain information exchange and policy coordination.
  - Oversight of capital markets: further harmonization of provincial regulatory frameworks is warranted, potentially through the Cooperative Capital Markets Regulatory System (CMRS) to oversee securities markets in participating jurisdictions and perform Canada-wide systemic risk surveillance.
  - Mortgage risk weights: while overall capital is adequate, higher risk weights for mortgage exposures and measures to increase risk-based differentiation in mortgage pricing are desirable.

*Italic: International Monetary Fund — Canada staff report excerpts.*

### 43. Canada needs to boost productivity to lift long-

### Canada needs to boost productivity to lift long-term growth

### Productivity and long-term growth
- Investment growth over the last two decades has been insufficient to remove a sizable productivity gap relative to the U.S.; based on OECD data, there was a 7 percent gap in labor productivity in 2017 with respect to the United States.
- Current levels of productivity growth will be insufficient to sustain GDP growth as the population ages.
- Canada faces the challenge of attracting productivity-enhancing investment that diversifies the economy beyond traditional sectors and takes advantage of opportunities from new trade agreements.

### Recent trade agreements and their effects
- USMCA: signed and awaits legislative approval. Key new provisions include:
  - higher regional value and labor content requirements for vehicles and auto parts;
  - stricter rules for textiles and apparel;
  - increased agricultural trade liberalization;
  - new trade facilitation measures.
- Staff analysis suggests provisions modeled will adversely affect trade in automotive, textiles and apparel sectors, with resources shifting to other sectors and very moderate positive effects on aggregate welfare and GDP; aggregate trade effects modeled are small.
- Elimination of U.S. tariffs on steel and aluminum and the removal of Canadian and Mexican retaliatory tariffs create benefits; the United States had imposed import tariffs of 25 percent on steel and 10 percent on aluminum in March 2018 (these were lifted on May 17, 2019).
- Some USMCA aspects are complex and difficult to quantify; e.g., non-tariff efficiency gains could offset negative effects of regional content requirements, while the provision discouraging members from negotiating free trade agreements with non-market economies could limit trade diversification depending on implementation.
- CPTPP: newly-ratified and entered into force on December 30, 2018; expected to cover 11 countries representing 13.5 percent of global GDP. It should provide a boost to Canadian exports and opportunities for diversification.
- Canada’s share of international trade in GDP fell significantly since peaking at 85 percent in 2000.

### Internal (interprovincial) trade barriers and costs
- Non-tariff trade barriers (NTBs) arise from differing provincial rules and regulations and hinder labor mobility, narrow consumer choice, fragment markets, stifle competition, and limit effective scale of production.
- Interprovincial trade share declined from 54 percent in 1981 to 38 percent in 2017.
- Staff analysis suggests internal trade barriers are significant in most provinces; lowering NTBs could increase real GDP per capita by almost 4 percent—larger than expected gains from recent international trade agreements.
- Head-Ries index results and stylized findings:
  - The average tariff equivalent NTBs for all provinces is around 20 percent.
  - Geography accounts for 57 percent of total trading barriers across regions in Canada.
  - Alberta, British Columbia and Ontario have the lowest policy-relevant, non-geographic NTBs (around 20 percent).
  - Prince Edward Island and Yukon exhibit the largest NTBs (around 60 percent).
  - Across goods sectors: lowest NTBs (below 10 percent) apply to petroleum and chemicals, and textiles; largest NTBs (30 percent) on heavier metals, food products and other manufacturing goods.
  - NTBs are significantly higher for services.
- General equilibrium model results on liberalization:
  - Removing non-geographic NTBs increases trade volumes as a share of GDP by roughly 15 percentage points, bringing internal trade volume to a similar level as international trade volume.
  - Real GDP per worker would increase by over 4 percent nationally; gains around 16 percent in Prince Edward Island.
  - Employment in provinces with above-average NTBs (Atlantic provinces) would rise by 6 percent, as workers migrate from provinces with below-average NTBs (B.C., Alberta, Ontario).
  - Sectoral priority: a 10 percent barrier reduction in finance, business, wholesale and retail, and transportation services produces larger gains than the same reduction in other sectors.
- Regional effects table (selected outcomes of trade liberalization, from staff calculations):
  - Canada: Real GDP per capita +3.8 (internal), +6.2 (external), +9.1 (all trade)
  - Provincial examples (Real GDP per capita, percent): AB +3.2 (internal), BC +2.8, MB +7.1, PE +16.2, NL +12.8
  - Employment effects vary by province (examples not exhaustive).

### Policy recommendations to reduce internal barriers
- Make reducing internal trade barriers a common priority across federal, provincial and territorial governments; a sustained and concerted collective effort is necessary.
- Use the Canadian Free Trade Agreement (CFTA) platform but address problematic aspects:
  - Clearly identify NTBs and assess progress at regular intervals.
  - Set explicit targets to reduce the number of exemptions to the CFTA in future negotiations.
  - Improve the CFTA regulatory reconciliation process: administrative burden, protracted negotiations, and opt-outs hinder progress; adopt a “comply or explain” approach to ensure accountability and accelerate harmonization.
  - Resource the Secretariat adequately to assess and communicate progress, including publishing an annual report on goals and achievements.
  - Raise penalties for non-compliance, calibrated to reflect economic impact and to distinguish large barriers from small.
  - Recognize unilateral provincial action via a “national recognition” regime where a province deems extra-provincial certifications, standards, and registrations as compliant with its own.
- Reduce barriers particularly in finance, business and insurance sectors; unify securities regulations across provinces and enhance labor mobility.

### Structural reforms, infrastructure, and investment
- Structural reforms remain key to the growth agenda and can help reduce internal trade barriers.
- Implementation underway: Innovation and Skills Plan, but addressing restrictive regulations in product markets and foreign direct investment remains pending.
- Infrastructure efforts: progress in fully operationalizing the Canada Infrastructure Bank (CIB); CIB has a board and a designated CEO since mid-2018 and is conducting due diligence and building operational capabilities.
- Need for a more detailed strategic infrastructure plan to prioritize projects serving national interest, potentially including transportation projects facilitating interprovincial trade.
- Improve project selection, execution and coordination at provincial and municipal levels to avoid delays; continue improving financial reporting and cost-tracking to facilitate federal infrastructure funds.
- Federal investment incentives (from the Fall Economic Statement) including the Accelerated Investment Incentive aim to provide focused, fiscally-responsible support for growth-generating investments.

### Anti-money laundering, anti-corruption, and related governance
- Canada has an adequate framework to fight money-laundering and terrorist financing, with strengthening efforts underway to mitigate proceeds of foreign acts of corruption.
- AML/CFT regulatory amendments to be finalized in 2019 will strengthen preventive measures on: reporting suspicious transactions; verifying beneficial ownership; client due diligence for life insurance companies; checking source of wealth for politically exposed persons; assessing risks of new technologies, prepaid cards and virtual currency dealers.
- Risks needing further mitigation include foreign tax crimes, corruption, the real estate sector, and third-party money launderers; more intensive supervision and increased efforts to detect and prosecute money laundering cases are necessary.
- Beneficial ownership transparency: 2018 reforms to the Canada Business Corporations Act prohibit options and rights in bearer form and require federally-incorporated corporations to create and maintain a register of individuals with significant control; further amendments announced to make beneficial ownership information more readily available to tax authorities and law enforcement.
- Anti-foreign bribery framework: reforms include codifying corporate criminal liability in 2004, amending the Corruption of Foreign Public Officials Act in 2013, and introducing remediation agreements in 2018; Canada is exploring upgrading the Integrity Regime for procurement and real estate to render companies ineligible or suspended for wrongdoing.
- Canada has reported only six foreign bribery convictions to date.
- Canada volunteered to be assessed under the IMF’s Enhanced Governance Framework on the supply and facilitation of corruption.

### Authorities’ views
- Authorities broadly agree with staff’s macroeconomic outlook: trade tensions, weaker foreign demand, and last year’s decline in oil prices weighed on business investment and exports; housing policy changes and higher 2018 borrowing rates decelerated residential investment and interest-rate-sensitive consumption.
- Growth-dampening effects of low oil prices and tighter financial conditions expected to dissipate over 2019; continuing strong immigration should support growth; risks to the outlook are largely balanced.
- Bank of Canada views an accommodative monetary policy stance as warranted due to the recent slowdown; it will evaluate appropriate accommodation guided by incoming data.
- Federal government commitments and fiscal stance:
  - Federal deficit projected to decline by $10 billion over the next five years.
  - Federal debt-to-GDP ratio expected to decline to 28.6 per cent by 2023–24.
  - Canada’s low debt advantage, declining debt-to-GDP ratio and commitment to regular and transparent financial reporting obviate the need for a more explicit federal fiscal rule or debt target; provinces with high deficits or debt should pursue fiscal consolidation.
- Authorities will continue to review key elements of the tax system to ensure efficiency and competitiveness and will monitor international developments to keep the tax system competitive.

*IMF staff report excerpt.*

### 55. The authorities agree that the macroprudential policy stance is appropriate. Macro-

### 1canea2019001 - 55. The authorities agree that the macroprudential policy stance is appropriate. Macro-

### Macrofinancial vulnerabilities and housing
- Macro-financial vulnerabilities have begun to diminish but remain elevated.
- The First-Time Home Buyer Incentive will improve affordability, with a negligible effect on aggregate house prices, due to the size and targeted nature of the program.
- Supply-side policies are needed; the newly established Expert Panel on the Future of Housing Supply and Affordability, the expansion of CMHC’s Rental Construction Financing Initiative and other measures in the 2019 budget will help to address housing affordability concerns and housing market imbalances over the long term.
- Recommendation: Regional and federal authorities need to work together to develop and implement a comprehensive housing supply strategy.

### Financial system resilience and FSAP
- The authorities welcomed the assessment and recommendations of the recent FSAP.
- The stress tests, including an extreme adverse scenario, demonstrated the strength and resilience of the core financial system.
- Authorities welcomed the FSAP’s views on systemic risk oversight and crisis management, and on the desired outcomes for related governance structures.
- The recent Supreme Court decision giving the federal government authority over systemic risk oversight in Canadian capital markets will bolster economy-wide systemic risk oversight.

### Trade diversification, structural reforms, and innovation
- Authorities reaffirmed that trade diversification and structural reforms are critical components of their growth agenda.
- They welcome staff’s assessment of the effects of USMCA and removal of tariffs on steel and aluminum imports.
- Reducing internal trade barriers can have positive effects on productivity and GDP; it will take a sustained and concerted collective effort to break down barriers.
- The Government of Canada continues to work with provincial and territorial partners to implement the Canadian Free Trade Agreement and remove barriers to trade within Canada.
- The Innovation and Skills Plan supports high-quality and innovative business investment, including through a new Intellectual Property Strategy.
- Recent Budgets committed significant support for innovation and skills measures and for Canadian scientists and researchers.
- Authorities are working with provincial and local authorities to accelerate infrastructure investment under Phase 2 of the Investing in Canada plan, including deploying the advisory and investment role of the new Canada Infrastructure Bank in prioritizing projects and promoting long term infrastructure planning.

### Corruption, enforcement, and AML/CFT
- Authorities welcomed the consideration of supply and facilitation of corruption issues in the IMF Article IV consultations.
- Canada has a strong record of fighting corruption and significant steps taken to deter Canadian companies and persons from paying bribes to foreign public officials (FPO) in conducting business.
- Authorities noted that they are implementing OECD Phase 3 recommendations.
- Amendments to CFPOA in 2013:
  - granted jurisdiction over Canadian citizens, permanent residents, and Canadian companies who commit offences, regardless of where they take place;
  - created a books and records keeping offence;
  - clarified that the offence of bribing an FPO applies to international business transactions regardless of profit;
  - increased maximum prison sentences; and
  - repealed the facilitation payment exception.
- Recommendation: Continue enforcement actions against foreign bribery in line with OECD WGB recommendations, and further enhance the effectiveness of AML/CFT frameworks to tackle the proceeds of crime, including foreign corruption.

### Staff appraisal — fiscal policy and frameworks
- With growth moderating to a more sustainable level, fiscal consolidation should be gradual.
- Rebuilding fiscal space creates room to finance policies that promote growth and enhance resilience to adverse shocks.
- Authorities prefer investing in the middle class over more aggressive fiscal consolidation.
- On balance, the planned fiscal adjustment is appropriate at the federal level but provinces should aim to rebuild buffers faster to address long-term challenges.
- At both federal and provincial levels, any unexpected fiscal savings should target deficit and debt reduction.
- If growth underperforms, automatic stabilizers should be allowed to operate fully; discretionary measures could be used depending on the severity of the downturn.
- Recommendation: Fiscal frameworks could more explicitly incorporate fiscal rules; a federal fiscal rule could include both a debt anchor and operational rules to better guide annual budget decisions and improve transparency.
- Recommendation: Address sources of fiscal imbalance (both current and expected); strengthen transparency and accountability to ensure fiscal sustainability over the long term.

### Tax system and public investment
- Authorities should continue to monitor and evaluate the effectiveness and efficiency of the tax system.
- Recent tax changes allowing for immediate and accelerated expensing are a step in the right direction.
- Further steps toward a cash-flow based system could include permanently allowing immediate expensing of all capital investments and removing interest deductibility.
- Recommendation: A more detailed strategic plan is needed to prioritize infrastructure projects that best serve the national interest and improve federal–provincial collaboration to facilitate the flow of allocated federal infrastructure funds.

### Monetary policy
- Monetary policy should remain on hold in the near term.
- Monetary tightening will be warranted as the output gap closes.
- The balance of risks around the outlook and uncertainty about the level of the output gap and the neutral policy rate suggest that the tightening phase should be gradual.

### Macroprudential policy, microprudential supervision, and safety nets
- Macroprudential policy has been effective and the current stance is appropriate.
- With measures working well, their effectiveness should not be diluted by home buyer initiatives that inadvertently increase household debt.
- Provincial and municipal real estate taxes should be replaced by broad-based tax measures that target speculative activity more generally.
- A sharper than expected contraction in credit growth may warrant an adjustment to macroprudential policy settings.
- Recommendation: Macroprudential oversight should be complemented with stronger microprudential supervision and safety nets.
- Gaps to address include bank resolution, liquidity support, and monitoring of risk-taking by pension funds.
- Recommendation: OSFI should have the authority to issue its own legally enforceable regulations.
- There is scope for further harmonization of provincial regulatory frameworks through the CMRS and increasing capital buffers for mortgage exposures.

### Systemic risk surveillance and crisis management
- The framework for systemic risk surveillance and crisis management has worked well in the past, but there is a case for modernizing the arrangement.
- A revamped HOA that includes all relevant agencies could carry out economy-wide systemic risk analysis, increase transparency and cooperation around policy decisions, and provide a broader, more inclusive dialogue on macroprudential policy.
- The SAC should assume the role of overseeing Canada-wide crisis preparedness, in collaboration with key provincial authorities.

### Trade developments and productivity
- The reduction in trade uncertainty from the new USMCA is welcome.
- Benefits will follow from the elimination of U.S. tariffs on steel and aluminum imports and Canada’s retaliatory measures.
- Canada’s rapid ratification of CPTPP is commended for the greater opportunities for diversification it brings, and for Canada’s leadership in efforts to reaffirm the importance of a multilateral trading system.
- Productivity is key to sustaining growth; beyond international trade, there are significant opportunities from promoting internal trade.
- Breaking down barriers to interprovincial trade should be a priority deserving of unanimous political support.

*CANADA — INTERNATIONAL MONETARY FUND*

### 69. It is recommended that the next Article IV consultation be held on a standard 12-

### 1canea2019001 - 69. It is recommended that the next Article IV consultation be held on a standard 12-

### Growth and Demand
- Real GDP growth:
  - 2015: 0.7
  - 2016: 1.1
  - 2017: 3.0
  - 2018: 1.8
  - 2019 (proj): 1.5
  - 2020 (proj): 1.9
- Contributions to growth (2018): broad-based deceleration across major provinces driven mainly by slower private consumption and business investment.
- Total domestic demand:
  - 2015: -0.1
  - 2016: 0.7
  - 2017: 3.9
  - 2018: 1.7
  - 2019 (proj): 0.6
  - 2020 (proj): 1.8
- Private consumption growth:
  - 2015: 2.3
  - 2016: 2.2
  - 2017: 3.5
  - 2018: 2.1
  - 2019 (proj): 0.7
  - 2020 (proj): 1.3
- Business investment: flat in 2018; business investment series:
  - Business investment growth (index, 2014Q1=100) shows Canada lagging United States and average other G7 countries.

### Labor Market and Wages
- Unemployment rate (average):
  - 2015: 6.9
  - 2016: 7.0
  - 2017: 6.3
  - 2018: 5.8
  - 2019 (proj): 5.9
  - 2020 (proj): 6.0
- Employment growth driven mainly by services; strong gains in part-time jobs.
- Wage growth:
  - Growth of average weekly earnings by sector (Y/Y percent change) shows moderation in 2018, with lower wage growth in mining and oil.
  - Wage-common indicator and range of wage indicators depict moderate pace of wage growth in 2018.
- Labor force participation and employment rates increased gradually; employment rate higher through 2019Q1.

### Housing Market
- Real house prices (2010=100) and city house price indices show stabilization in 2018.
- Housing supply increased; growth of dwellings created by type (single vs multiple) rose through 2018.
- Share of new mortgages with LTI > 450 percent:
  - Data through 2018Q2 show a decline in high-LTI mortgages.
- Household indebtedness and debt servicing, 2018Q3:
  - Debt to GDP and debt servicing to income remain high by global standards (Canada high relative to peers).
- Sales-to-New Listings Ratio: Vancouver and Toronto moved to more balanced market conditions.

### Oil Market (2018 developments)
- WCS-WTI spreads widened, reaching almost $50 dollars in 2018Q3.
- Drivers: excess supply, longer-than-expected Midwest refinery shutdowns, pipeline capacity constraints.
- Canadian oil:
  - Record high inventories in 2018 and record high crude-by-rail shipments.
  - Pipeline capacity and crude available for export versus crude production depicted through 2016–Feb-19.

### External Sector
- Current account balance (percent of GDP):
  - 2014–2018 contributions show small narrowing; current account deficit narrowed slightly by 2018.
- Current account balance (Table 2):
  - 2017: -2.8
  - 2018: -2.6
  - 2019 (proj): -2.7
  - 2020 (proj): -2.2
  - 2024 (proj): -1.9
- Merchandise trade balance (percent of GDP):
  - 2017: -1.2
  - 2018: -1.0
  - 2019 (proj): -1.8
  - 2020 (proj): -1.6
- Exports, goods (percent of GDP):
  - 2017: 25.7
  - 2018: 26.4
  - 2019 (proj): 24.9
- Canada remains a net creditor (Net Foreign Assets, end-2018 shown positive).

### Monetary Conditions and Inflation
- Policy rates and expectations:
  - CAN policy rate and USA policy rate shown; estimated expected rate as of Feb 2019 using Bloomberg WIRP.
- CPI inflation (average):
  - 2015: 1.1
  - 2016: 1.4
  - 2017: 1.6
  - 2018: 2.2
  - 2019 (proj): 1.7
  - 2020 (proj): 1.9
- Core CPI inflation (y/y) projections:
  - 2018: 1.5
  - 2019 (proj): 1.6
  - 2020 (proj): 1.7
  - 2024 (proj): 2.1
- Output gap near zero in 2018 with most sectors at or above capacity.
- Effective cost of borrowing edged up; spreads remain relatively low.

### Capital Markets and Yields
- TSX index tracked global indices; energy sector weak while most sectors increased.
- Market volatility (VIX, VIX-CAN) fell recently.
- Selected bond yields:
  - Ten-year government bond yields:
    - 2015: 1.5
    - 2016: 1.3
    - 2017: 1.8
    - 2018: 2.3
    - 2019 (proj): 2.3
    - 2020 (proj): 2.5
  - Yield curve has flattened over the past year; long-term yields correlated with U.S. yields.

### House Prices Valuation by City
- Toronto, Vancouver, and Hamilton: house prices assessed as overvalued.
- Calgary and Edmonton: house prices took around six years to normalize after past overvaluations.
- Montreal: house prices consistent with fundamentals.
- Charts present observed price vs estimated attainable price series 2000–2018 for Toronto, Vancouver, Hamilton, Calgary, Edmonton, Montreal.

### Investment, Productivity and Competitiveness
- Labor productivity (GDP per hour worked, index 1996=100):
  - US and Canada series show Canada lagging the US since early 2000s.
- Sources of labor productivity growth:
  - Multifactor productivity, capital intensity, and labor skills contributions shown; capital intensity declined since 2010.
- Capital expenditure growth by sector (2017, percent change from 2010) shows mining and oil sector weakness.
- Business investment (index, 2014Q1=100) shows Canada lagging United States and average other G7 countries.
- International rankings:
  - Doing Business ranking slipped from 18th to 22nd.
  - Global Competitiveness Index rank slipped from 10th to 12th.

### Fiscal Position and Public Debt
- Table 1 headline fiscal indicators (percent of GDP unless noted):
  - Gross national saving:
    - 2015: 20.3
    - 2016: 19.7
    - 2017: 20.7
    - 2018: 20.4
  - Gross domestic investment:
    - 2015: 23.8
    - 2016: 22.9
    - 2017: 23.5
    - 2018: 23.0
  - General government overall balance:
    - 2015: -0.1
    - 2016: -0.4
    - 2017: -0.3
    - 2018: -0.4
  - Gross debt (percent of GDP):
    - 2015: 91.3
    - 2016: 91.8
    - 2017: 90.1
    - 2018: 89.7
- Consolidated general government (Table 3):
  - Overall balance:
    - 2016: -0.4
    - 2017: -0.3
    - 2018: -0.4
    - 2019 (proj): -0.8
    - 2020 (proj): -0.8
    - 2024 (proj): -0.5
  - Net public debt:
    - 2016: 28.8
    - 2017: 27.6
    - 2018: 26.8
    - 2019 (proj): 26.7
    - 2024 (proj): 22.7
  - Gross public debt:
    - 2016: 91.8
    - 2017: 90.1
    - 2018: 89.7
    - 2019 (proj): 87.5
    - 2024 (proj): 75.3

### Financial Sector Soundness and External Debt
- Financial soundness indicators (selected):
  - Total assets (billions Can$):
    - 2018: 5,643
  - Total assets as percent of GDP:
    - 2018: 254.5
  - Total capital ratio:
    - 2018: 15.2
  - Tier 1 ratio:
    - 2018: 13.2
  - Return on assets:
    - 2018: 1.2
  - NPLs to Gross Loans:
    - 2018: 0.4
  - Customer deposits to loans:
    - 2018: 99.4
  - FX loans to total loans:
    - 2018: 37.4
- External debt (percent of GDP and US$ billion):
  - Total all sectors (percent of GDP):
    - 2018: 121.4
  - Total all sectors (US$ billions, market value, end period):
    - 2018: 1,973
  - Gross external debt by sector (2018, percent of GDP):
    - General Government: 21.2
    - Banks: 49.8
    - Other Sectors: 39.6

### Medium-Term Projections and Scenario (2019–24)
- Real GDP growth projections:
  - 2019: 1.5
  - 2020: 1.9
  - 2021: 1.8
  - 2022: 1.6
  - 2023: 1.6
  - 2024: 1.7
- Employment and inflation projections:
  - Unemployment rate:
    - 2019: 5.9
    - 2020: 6.0
    - 2024: 6.5
  - CPI inflation:
    - 2019: 1.7
    - 2020: 1.9
    - 2024: 2.0
- Fiscal projections (General government):
  - General government fiscal balance (percent of GDP):
    - 2019: -0.8
    - 2020: -0.8
    - 2024: -0.5
  - General government gross debt (percent of GDP):
    - 2019: 87.5
    - 2020: 84.9
    - 2024: 75.3
- External projections:
  - Current account balance (percent of GDP):
    - 2019: -2.7
    - 2020: -2.2
    - 2024: -1.9

*International Monetary Fund staff compilation from source content.*

### Annex I. External Balance Assessment

### Annex I. External Balance Assessment

### Foreign asset and liability position and trajectory
- Background:
  - NIIP reached [23.8] percent of GDP in 2018, up from [20.6] percent in 2017 and [-18] percent in 2010.
  - Improvement largely reflects valuation gains on external assets.
  - Gross external debt increased to 121 percent of GDP, of which about one-third is short-term.
- Assessment:
  - Canada’s foreign assets have a higher foreign currency component than its liabilities, providing a hedge against currency depreciation.
  - The NIIP level and trajectory are sustainable.
- Overall assessment:
  - The external position in 2018 was weaker than implied by medium-term fundamentals and desirable policies, mainly reflecting sustained current account deficits.
  - It will take time for the economy to adjust to structural shifts in the allocation of resources, restore lost production capacity, and address productivity underperformance.
  - Recent developments do not suggest a material change in the assessment of the external position for 2018.
  - The current account is expected to weaken in 2019 and then strengthen over the medium-term as non-energy exports gradually benefit from improved price competitiveness and investment in services and manufacturing capacity.
- Potential policy responses:
  - Improve labor productivity.
  - Invest in R&D and physical capital.
  - Promote FDI.
  - Develop services exports.
  - Diversify Canada’s export markets.
  - The planned increase in public infrastructure investment should boost competitiveness and improve the external position in the medium-term.
  - A credible medium-term consolidation plan for fiscal policy will also be necessary to support the external rebalancing.
- Key 2018 positions (percent of GDP and levels as reported):
  - NIIP 17.2
  - Gross Assets 223.4
  - Debt Assets 57.3
  - Gross Liab. 206.2
  - Debt Liab. 105.0

### Current account
- Background:
  - The CA deficit narrowed to 2.6 percent of GDP in 2018 (from 2.8 percent of GDP in 2017), driven by an improvement in energy exports, partly offset by import growth.
  - The CA deficit has been partially financed by equity portfolio inflow and deposits, which have more than offset direct investment outflows.
- Assessment:
  - EBA estimates:
    - EBA CA norm 2.2 percent of GDP.
    - Cyclically-adjusted CA gap of -5.1 percent of GDP for 2018.
  - Staff adjustments and assessments:
    - Staff assess the CA gap to be lower after taking into account:
      - CA measurement issues 1/.
      - The authorities’ demographic projections and current immigration targets 2/.
      - The steeper-than-usual discount between Canadian oil prices and international prices 3/.
    - Taking these into consideration, staff assess the CA lower than warranted by fundamentals and desired policies, with a gap in the range between -0.6 and -3.6 percent of GDP.
- Key 2018 CA figures:
  - Actual CA -2.6
  - Cycl. Adj. CA -2.9
  - EBA CA Norm 2.2
  - EBA CA Gap -5.1
  - Staff Adj. -3.0
  - Staff CA Gap -2.1

### Real exchange rate
- Background:
  - The REER depreciated by around 0.6 percent on an annual average basis between 2017 and 2018.
  - As of [February] 2019, the REER has depreciated by about [1] percent relative to the 2018 average.
- Assessment:
  - EBA REER index model: overvaluation of 2.0 percent in 2018.
  - REER level model: undervaluation of around 7.0 percent in 2018.
  - Staff view: REER level model could overstate the extent of undervaluation.
  - Consistent with the staff-assessed CA gap, staff assesses the REER to be overvalued in the range of 2 to 13 percent.
  - Semi-elasticity of the CA with respect to the REER is estimated at 0.27.

### Capital and financial accounts: flows and policy measures
- Background:
  - The CA deficit in 2018 has been partially financed by net portfolio inflows and deposits.
  - Non-resident investors mostly purchased corporate debt securities.
  - In 2018 foreign direct investment recorded a lower net outflow of 0.6 percent of GDP (3.3 percent of GDP in 2017).
- Assessment:
  - Canada has an open capital account.
  - Vulnerabilities are limited by a credible commitment to a floating exchange rate.

### FX intervention and reserves level
- Background:
  - Canada has a free-floating exchange rate regime and has not intervened in the foreign exchange market since September 1998 (except participating in internationally concerted interventions).
  - Canada has limited reserves, but its central bank has standing swap arrangements with the U.S. Federal Reserve and four other major central banks (it has not drawn on these swap lines).
- Assessment:
  - Policies in this area are appropriate to the circumstances of Canada.
  - The authorities are strongly committed to a floating regime which, together with the swap arrangement, reduces the need for reserve holding.

### Technical background notes (selected)
- 1/ The statistical treatment of retained earnings on portfolio equity and inflation is estimated to generate a downward bias in the income balance of the current account of the order of 1.7 percent of GDP.
- 2/ EBA uses UN demographic projections. These differ from the authorities’ projections due to methodological differences. The authorities’ projections suggest slightly higher population growth and a slightly lower CA norm. The authorities’ demographic projections also do not incorporate recent increases in immigration targets, which are assumed to be permanent. Together, these effects reduce the EBA estimate of the CA norm by around 0.4 percent.
- 3/ The price discount between Canadian crude (WCS) and the West Texas benchmark increased in 2018 to an average of $26 per barrel (from $13 in 2017). The estimated temporary effect on the CA is about 0.9 percent of GDP.
- 4/ The approach includes commodity terms of trade rather than oil prices as an explanatory variable, while Canada’s REER has mirrored movements in oil prices much more closely than its commodity terms of trade.
- 5/ The semi-elasticity of the CA with respect to the REER is estimated at 0.27.

*Source: Annex I. External Balance Assessment, 1canea2019001 - Annex I. External Balance Assessment*

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### Annex II. Public Debt Sustainability Analysis

### Overall assessment
- Broadly unchanged from the 2018 Article IV staff report.
- Canada’s public debt remains on a sustainable trajectory over the medium term.
- Gross debt-to-GDP:
  - Peaked at 91.8 percent in 2016.
  - Fell to 89.7 percent in 2018.
  - Projected to decline to 75 percent by 2024 under the baseline scenario.
- The most significant stress scenario pushes debt to 95 percent, but the probability for debt remaining below 85 percent of GDP is high over the projection horizon.
- Sizable financial assets (about 61 percent of GDP) provide an additional cushion.
- Net debt-to-GDP stood at 26.8 percent in 2018 and is expected to fall below 23 percent by 2024.

### Fiscal space
- General government gross debt is 89.7 percent of GDP.
- If accounts payable are excluded, gross debt falls to 73.7 percent of GDP.
- General government holds sizable financial assets (about 61 percent of GDP), including:
  - Around 27 of GDP in highly-liquid assets (currency, deposits, and bonds).
  - Around 32 percent of GDP in other financial assets (including accounts receivable and equity).
- Net debt ratio expected to fall below 23 percent by 2024.
- At the federal level, gross debt is around 35 percent of GDP.

### Baseline scenario and realism of projections
- Fiscal adjustment:
  - General government primary deficit projected to decline from 0.8 percent of GDP in 2019 to 0.5 percent by 2024.
- Gross debt dynamics:
  - Real GDP growth expected to exceed real interest rates until 2022, contributing to debt reduction.
  - Beyond 2022, real interest rates expected to be slightly higher than real GDP growth, putting upward pressure on debt dynamics.
  - Net effect: gross debt-to-GDP ratio expected to fall to 75 percent by 2024 due to steady decline in the primary deficit.
- Gross financing needs:
  - Around 14 percent of GDP in 2018.
  - Expected to remain within a range of 13-17 percent of GDP through the projection horizon, below the indicative high-risk threshold of 20 percent.
- Realism of baseline projections:
  - Projection errors in recent years for real GDP growth, primary balance, and inflation were moderate; median forecast error in line with other economies.
  - No evidence of systematic projection bias that could undermine the DSA assessment.
- Market perceptions:
  - Confidence in Canada’s sovereign debt is high.
  - Canada has maintained AAA ratings since 2002.
  - At end-March 2019, Canada’s benchmark 10-year bond yields were around 1.6 percent, about 80 basis points below U.S. 10-year treasury note yields.

### Public DSA risk assessment
- Under the symmetric distribution of risk, there is more than a 75 percent probability that debt will be below 85 percent of GDP over the medium term.
- Under the asymmetric scenario (no positive shocks to the primary balance), there is a 75 percent chance that the debt path will remain below 85 percent of GDP over the projection horizon.
- Fan charts illustrate predictive densities of gross nominal public debt (in percent of GDP) with percentile bands for Baseline, Symmetric Distribution, and Restricted (Asymmetric) Distribution.

### Stress tests
- Primary balance shock:
  - A deterioration in the primary balance by about one percent of GDP would raise the gross debt-to-GDP ratio by about 3 percentage points over the projection period.
  - Sovereign risk premium assumed to increase by 25 basis points for each one percent of GDP deterioration in the primary balance, raising gross financing needs by 1-2 percentage points of GDP compared to baseline.
- Growth shock:
  - A one standard deviation shock to growth in 2020 and 2021 will reduce real GDP growth rates to about 0-0.1 percent.
  - This would lead to a deterioration in the primary balance, with the deficit peaking at 2 percent in 2021.
  - Gross debt-to-GDP ratio would peak at 88.2 percent in 2021 and then gradually decline as GDP growth recovers.
  - Gross financing needs about 1 percentage point higher than baseline over 2020-21.
- Interest rate shock:
  - An increase in the sovereign risk premium by 200 basis points for two years would raise the effective interest rate 0.3-0.6 percentage points higher than the baseline.
  - Impact on debt and gross financing needs are mild.
- Exchange rate shock:
  - About 90 percent of general government outstanding marketable debt instruments are in Canadian dollars.
  - The fiscal impact of an exchange rate shock is minimal, even with a substantial exchange rate depreciation of about 23 percent (which Canada experienced in 2008).
- Stagnant growth in major economies:
  - Structurally weak growth in key advanced and emerging economies could reduce demand for Canadian exports.
  - Canada’s real GDP growth could fall below the baseline scenario by ½ percentage points over the projection horizon.
  - In this scenario, the gross debt-to-GDP ratio will still fall but at a much slower pace.
- FSAP stress test scenario:
  - Assumes a severe recession, significant financial market stress, a large exchange rate depreciation, and a sharp housing market correction.
  - Mortgage insurers are assumed to receive a capital injection of Can$15 billion from the federal government to meet the supervisory target ratio.
  - In this scenario, gross debt would peak at 94.7 percent of GDP and gross financing needs would peak at 22.4 percent of GDP.

### Accounting issues for international comparisons
- Canada’s general government debt includes sizable accounts payable, which many advanced economies do not report. If accounts payable were excluded, general government debt would be about 73.7 percent of GDP in 2018.
- General government debt increased in recent years reflecting the government’s policy to fund public sector employee pension plans by issuing new debt.
- General government debt as reported here does not include unfunded pension liabilities. Including unfunded pension liabilities, general government gross debt would be about 104 percent of GDP in 2018.

*Source: Annex II. Public Debt Sustainability Analysis, 1canea2019001 - Annex I. External Balance Assessment*

### Annex II. Figure 3. Canada Public DSA – Composition of Public Debt and Alternative Scenarios

### Annex II. Figure 3. Canada Public DSA – Composition of Public Debt and Alternative Scenarios

### Underlying Assumptions (in percent)
- Baseline Scenario (2019 2020 2021 2022 2023 2024)
  - Real GDP growth: 1.5 1.9 1.8 1.6 1.6 1.6
  - Inflation: 1.8 1.9 2.1 2.1 2.2 2.0
  - Primary Balance: -0.5 -0.4 -0.3 -0.2 -0.1 0.1
  - Effective interest rate: 3.2 3.4 3.4 3.5 3.7 3.8
- Historical Scenario (2019 2020 2021 2022 2023 2024)
  - Real GDP growth: 1.5 1.7 1.7 1.7 1.7 1.7
  - Inflation: 1.8 1.9 2.1 2.1 2.2 2.0
  - Primary Balance: -0.5 -1.1 -1.1 -1.1 -1.1 -1.1
  - Effective interest rate: 3.2 3.4 3.6 3.8 4.0 4.1
- Constant Primary Balance Scenario (2019 2020 2021 2022 2023 2024)
  - Real GDP growth: 1.5 1.9 1.8 1.6 1.6 1.6
  - Inflation: 1.8 1.9 2.1 2.1 2.2 2.0
  - Primary Balance: -0.5 -0.5 -0.5 -0.5 -0.5 -0.5
  - Effective interest rate: 3.2 3.4 3.4 3.5 3.7 3.7

### Composition of Public Debt — charted elements and projections
- Net debt (in percent of GDP): charted for 2017 2018 2019 2020 2021 2022 2023 2024 under Baseline, Historical, Constant Primary Balance scenarios (values shown as a time series in the figure).
- Gross Nominal Public Debt (in percent of GDP): projection chart covering 2017–2024.
- Public Gross Financing Needs (in percent of GDP): projection chart covering 2017–2024.
- By Maturity (in percent of GDP): breakdown into Medium and long-term and Short-term, projection series covering 2008–2024.
- By Currency (in percent of GDP): breakdown into Local currency-denominated and Foreign currency-denominated, projection series covering 2008–2024.

### Notes on chart presentation
- All composition items are presented as projections in the figure.
- Time horizons shown vary by panel (some panels display 2008–2024, others 2017–2024).
- Scenarios plotted: Baseline, Historical, Constant Primary Balance.

*Source: IMF staff.*

### Annex IV. Table 2. Canada: Other Housing Finance Related Regulatory Measures

### Annex IV. Table 2. Canada: Other Housing Finance Related Regulatory Measures

### Legislative and statutory changes
- June 2011 (effective on January 1, 2013)
  - Protection of Residential Mortgage Hypothenar Insurance Act (PRMHIA) and amendments to the National Housing Act assented
    - Formalizes the rules for government-backed mortgage insurance and other existing arrangements with private mortgage insurers
    - Provision for the Minister of Finance to charge fees to compensate the Government for its exposure to risk represented by loan insurance
- May 15, 2015
  - Amendments to PRMHIA. Substitution of loans in portfolio insurance pools was prohibited to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector

### Reporting and accounting measures
- November 2011/January 2012
  - FIRS standards were implemented requiring banks to report debt securitizations on balance sheet

### CMHC, securitization programs, and federal securitization limits
- March 2012 — Economic Action Plan 2012 announcements
  - Canadian banks prohibited from issuing covered bonds backed by government-insured mortgages (sets strong eligibility criteria for mortgages in the cover pool)
  - CMHC designated as administrator of the covered bond framework
  - CMHC's mandate was enhanced to include financial stability as an objective of CMHC's commercial activities
  - CMHC commercial activities subject to OSFI examination
- February 2014 — Economic Action Plan 2014 announcements
  - CMHC will pay guarantee fees to the Receiver General to compensate for mortgage insurance risks (pursuant to NHA 8.2), effective January 1,2014. This will align CMHC with guarantee fees paid by private mortgage insurers. Fees are 3.25 percent of premiums written and 10 basis points on new portfolio insurance written
  - CMHC will reduce its annual limit of issuance of portfolio insurance from $11 billion to $9 billion
  - For 2014, the Minister of Finance authorized $80 billion for NHA MBS (down from $85 billion in 2013) and $40 billion for CMB (down from $50 billion in 2013)
- December 11, 2015
  - CMHC announced changes to its securitization programs
    - Changes in the guarantee fee schedule (effective on July 1, 2016). Fees were raised for large MBS issuers
    - For 2016, the Minister of Finance authorized $105 billion for NHA MBS and $40 billion for CMB.

### OSFI underwriting, capital, and regulatory guidance
- June 2012
  - Guideline on Sound Residential Mortgage Underwriting Practices (B-20)
    - A guideline for residential mortgage underwriting practices and procedures was issued by OSFI (including assessment of borrower's background and demonstrated willingness to service debt payment in a timely manner, assessment of borrower's capacity to service debt, assessment of property value/collateral, effective credit and counterparty risk management, comprehensive residential mortgage underwriting policy)
    - Maximum LTV on the revolving portion of HELOCs cut (from 80 to 65 percent)
    - Stated income mortgages are no longer allowed without some verification of income
- December 11, 2015 (announcements)
  - OSFI announced its plan to update the regulatory capital requirements for residential mortgages
    - OSFI will propose a risk-sensitive floor for one of the model inputs (losses in the event of default) that will be tied to increases in local property prices and/or to house prices that are high relative to borrower incomes
    - For federally regulated private mortgage insurers, OSFI will introduce a new standardized approach that updates the capital requirements for mortgage guarantee insurance risk. It will require more capital when house prices are high relative to borrower incomes
- October 17, 2017 (effective on January 1, 2018)
  - OSFI revised its Guideline on Residential Mortgage Underwriting Practices and procedures (B20):
    - setting a new minimum qualifying rate, or “stress test” for uninsured mortgages: the minimum qualifying rate for uninsured mortgages has to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2 percent;
    - federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve;
    - placing restrictions on certain lending arrangements that are designed or appear designed to circumvent LTV limits.

### Capital framework for insurers
- September 2014 (effective on January 1, 2015)
  - Revised Minimum Capital Test Guideline for property and casualty insurers
    - The guideline introduces new and updated risk factors and margins plus a revised definition of available capital

### Funding and securitization funding restrictions
- February 10, 2016 (effective on July 1, 2016)
  - The DOF required that portfolio-insured loans be funded only through CMHC securitization programs

### Provincial tax and demand-side measures
- July 25, 2016 (effective on August 2, 2016)
  - British Columbia introduced a new 15 percent property transfer tax on foreign real estate buyers in Vancouver.
- April 20, 2017 (effective on April 21, 2017)
  - Foreign purchasers of residential property in the Greater Golden Horseshoe will be liable for a new 15% non-resident speculation tax.
- January 2018
  - B.C. increased the tax to 20 percent and expanded its geographic coverage. B.C. also introduced a new speculation and vacancy tax that targets foreign and domestic speculators that own residential property in B.C. but do not pay income taxes in B.C. The vacancy tax ranges from 0.5 percent on secondary homes left vacant by B.C. residents to 2 percent for foreign-owned properties left vacant.

### Other regulatory changes and program details
- December 11, 2015 (announcements)
  - OSFI will propose a risk-sensitive floor for model input tied to increases in local property prices and/or house prices relative to borrower incomes
  - For federally regulated private mortgage insurers, OSFI will introduce a new standardized approach that requires more capital when house prices are high relative to borrower incomes
- March 19, 2019 — Federal Budget 2019:
  - First-Time Home Buyer Incentive: CMHC will offer low-income first-time home buyers a 10 percent shared equity mortgage for a newly built home or 5 percent shared equity mortgage for a resold home.
  - Home Buyers’ Plan: increase withdrawal limit of registered retirement savings plans (RRSPs) from $25,000 to $35,000 for people who want to buy or build a qualifying home.

*Source: Annex IV. Table 2. Canada: Other Housing Finance Related Regulatory Measures (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1canea2019001.pdf_