Nominal GDP (USD billions) Other factors that justify the assigned rating to the Rated Entity are:

Transcription

1 Ratings Long Term Foreign Currency Local Currency Short Term Foreign Currency Local Currency Outlook Contacts Jordy Juvera Economics Associate Cynthia Perez Economics Analyst Felix Boni Chief Credit Officer HR+1 (G) HR+1 (G) Stable HR Ratings ratified the long-term rating of and the short-term rating of HR+1 (G) with Stable Outlook to the foreign and local currency sovereign debt of. The ratification of the rating for the sovereign debt of is based on a responsible management of fiscal policy including the maintenance of a debt sustainability path albeit with the implementation of expansionary macroeconomic policies. For almost three years government spending has been used to raise infrastructure investment and household disposable income through higher child care benefits and tax cuts for the middle class, among others. The especially strong economic growth during 2017 resulted in a reduction of our measurement of s Central Government net debt as a share of GDP to 14.9% for Fiscal Year 2018 (FY18) while the budgetary deficit reached a small 0.88% ratio, the result of a primary surplus of 0.14% and interest costs of 1.01%. For the next two years, supported by a closing output gap, inflation contained within the central bank s target and with monetary policy tightening, HR Ratings expects the primary balance to continue to show moderate surpluses. As for interest costs, although their ratio to GDP has been decreasing since 2012, as the demand for Canadian bonds rose in the context of an accommodative monetary stance; HR Ratings expects this trend to moderately shift as monetary policy tightens in both and the United States, with unmatured net debt expected to slightly increase in the next fiscal year with a direct effect on the short-term debt stock, especially for treasury bills which accounted for almost 16% of debt stock at the end of FY18 and represented 45% of gross issuance during the year. s external sector in the last twelve months (LTM) through September has been boosted by a strong increase in exports resulting in a small current account deficit. External downside risks to the Canadian economy have decreased due to reduced trade policy uncertainty after the signing of a new trade agreement among the United States, Mexico and (USMCA). However, the 2018 U.S. Tax Cuts and Jobs Act threatens to erode s relative tax advantage. The recent decline in oil prices, the economy s capacity constraints, tightening monetary policy, including in the United States, the effects of macroprudential policies, weaker growth in advanced economies and a significant deceleration in China are some of the main risks this rating agency will be evaluating. Year Real GDP Growth Nominal GDP (USD billions) Primary Fiscal Balance** (share of GDP) Interest Costs** (share of GDP) % 1, % 1.20% 15.49% 2.26% -2.71% % 1, % 1.30% 15.17% 1.73% -3.24% % 1, % 1.35% 14.84% 1.71% -3.04% % 1, % 1.40% 14.57% 1.81% -2.89% % 1, % 1.45% 14.45% 1.91% -2.67% % 2, % 1.50% 14.33% 1.98% -2.65% % 2, % 1.55% 14.27% 2.00% -2.62% % 2, % 1.60% 14.27% 2.00% -2.64% Source: HR Ratings Forecast with data from 's Department of Finance, the Central Bank & Statistics. *Net Debt, as defined by HR Ratings, considers the unmatured debt of minus the financial assets. **Fiscal accounts are expressed in Fiscal Years so for this table 2018 represents FY18. Other factors that justify the assigned rating to the Rated Entity are: Net Debt*/** (share of GDP) Inflation (share of GDP) Current Account (share of GDP) Definition The rating assigned of indicates that the issuer or issue with this rating is considered to have the highest credit quality, offering high safety for timely payment of debt obligations. Maintains minimum credit risk on a global scale basis in the long term. The rating assigned of HR+1 (G) indicates that the issuer or issue with this rating exhibits high capacity for timely payment of debt obligations in the short term and maintains the lowest credit risk on a global scale basis. The (+) sign indicates that the issuer or issue shows relative superiority. Unmatured Net Debt to GDP declined to 14.94% of GDP in the fiscal year (FY18). This metric excludes pension liabilities and other non-debt liabilities, while incorporating financial assets, including net assets of the Crown Corporations. HR Ratings estimates that this measure of Net Debt will decline as a percentage of GDP from FY19 onwards until reaching 14.05% in FY25. Budgetary Deficit was 0.88% of GDP in FY18, this as a result of a 0.14% ratio of primary surplus and 1.01% of interest costs. HR Ratings expects these fiscal metrics to continue to reflect fiscal prudence with increasing primary surpluses offsetting the projected greater financial costs. HR Ratings estimates the current account deficit will be above 3% of GDP in the next two years and will gradually decrease afterwards. Financial Account surplus reached 2.48 % of GDP in 2017; down from the 3.28% in 2016 albeit a decrease in the current account deficit of 40 basis points (bp) to reach 2.84% of GDP s economic growth is expected to decelerate after showing a strong 3% advance in 2017; HR Ratings assumes a 2.0% increase in 2018 and a gradual moderation to more sustainable levels from 2020 onwards as the impact of monetary and fiscal policy tightening take effect. Page 1 of 8

2 Main Factors Considered HR Ratings rating ratification of the sovereign debt of is based primarily on its economic policy combining both the improvement of growth and equality while maintaining a low level of debt relative to GDP. Over the last two years s strong economic growth has been driven by increasing consumer expenditure sustained by a moderately expansionary fiscal policy and a relaxed monetary policy stance. Government spending has emphasized investment in infrastructure and increased social program benefits such as the Child Benefit, the Working Income Tax Benefit (WIBT), among others. The result of this approach led to an acceleration of economic growth to 3% in 2017, the highest rate among the G7 group, alongside the creation of more than 600,000 new jobs over the past three years and a corresponding decrease in the unemployment rate from 7.1% to 5.6% 1 (the lowest level since 1976). As a result of these policies, s primary surplus for FY18 represented 0.14% of GDP, slightly above the 0.11% for FY17, but well below the 0.95% observed FY16. With respect to debt management, the fiscal authorities strategy consists of an increased bond issuance with maturities between two and five years where the cost-risk trade-off is considered as being the best. Notwithstanding, tighter monetary conditions, both local and external, and an exposure of nearly 16% in T-Bills, implies an upside risk for financial costs. Consequently, HR Ratings expects interest costs increase to 1.2% of GDP for FY19 and thereafter to continue to increase until reaching 1.6% at the end of FY26. The primary surplus is also expected to continue expanding due to the need to offset rising interest costs and to gradually decreasing stimulus, rising in FY26 to 0.49% after finishing FY19 at 0.4% of GDP. In FY18 2, the overall balance reached a deficit of 0.88% to GDP and gross liabilities to GDP accounted for 53.62%. When considering the amount of financial and non-financial assets of 18.47% and 4.05% of GDP, respectively, s federal debt ratio represented 31.1% of GDP. HR Ratings main debt measure subtract pension liabilities, accounts payable and accrued liabilities from the gross debt and considers financial assets to get a net debt of 14.94%, level below the 16.13% obtained in FY17. According to HR Ratings estimates of interest payments and financial costs, our net debt measure will finish FY26 in 14.27% as a percentage of GDP 3. Despite an economy operating close to capacity, there are no signs of overheating with a core inflation near 2 per cent. Inflation remains subdued within the Central Bank s target 4 of 2% +/- 1% albeit with a less accommodative monetary stance. Through October, s inflation remained impacted by the accumulated increases in gasoline prices and minimum wages. However, since the crash in oil prices in October, the outlook has changed, and HR Ratings expects a substantial decline in s YoY inflation from 1.84% in 2018 to 1.63% in 2019 as a result of the energy inflation downward trend. 1 Labour Force Survey, November The 2018 Canadian Fiscal Year started April 2017 until March HR Ratings will evaluate the suitability of our current net debt measure in light of the growing tightness in monetary policy, especially the net asset position of the Crown Corporations given their level gross debt of debt. 4 Page 2 of 8

3 HR Ratings estimates that Central Bank will continue its monetary normalization 5 but not as fast as expected because the risks to headline inflation are skewed to the downside in a context of low oil prices, a gradual deceleration in the Chinese economy, which will be translated into a decrease in global commodities prices, and the absence of demand pressures. For 2018 HR Ratings anticipates exports to continue to accelerate with major contributions from energy shipments, due the higher petroleum prices (for most of the year), metal ores and non-metallic minerals led by higher volumes of iron ores and concentrates. This improvement in the export sector would be partially mitigated by an increase in outflows in the rent balance (primary income). HR Ratings estimates the current account deficit will reach 2.71% of GDP by the end of the year, below the 3.21% projected by the IMF. For 2019 HR Ratings estimates a current account deficit of 3.24% of GDP as a result of the deceleration in exports, particularly the energy products. Economic growth has moderated in the LTM. HR Ratings expects output to grow 2.09% in 2018 and to moderate gradually from 2019 onwards, keeping below potential output 6 at the end of projection horizon. This would be a result of capacity constraints, monetary policy tightening, a more conservative fiscal policy and the negative effects of tighter macroprudential policy 7 that weighs down on private credit growth. In the medium and longrun, weak external competitiveness, limited labor productivity growth as well as an aging population combined with poor demographic growth are the main risks to economic expansion. 5 In 2018 the Bank of decided to increase the overnight interest rate target on three occasions. Each movement was of 25bp and it finished November 2018 in 1 ¾ per cent from the 1 per cent at the end of The Central Bank of estimates the potential output is 1.8%. 7 Households have to adjust to revised mortgage guidelines and higher interest rates. Page 3 of 8

4 Appendix 1 Table A1.1: Current Account in millions of Canadian Dollars (LTM) Year Current Account 70,536 64,885 60,129 60,624 74,716 73,356 72,506 69,569 71,701 73,747 78,770 Receipts 731, , , , , ,192 1,005,880 1,073,267 1,139,458 1,210,376 1,220,373 Goods and Services 627, , , , , , , , , , ,350 Goods 524, , , , , , , , , , ,721 Services 103, , , , , , , , , , ,629 Primary Income 92,454 98, , , , , , , , , ,647 Compensation of Employees 1,630 1,709 1,721 1,791 1,838 1,876 1,880 1,882 1,883 1,883 1,883 Investment Income 90,824 96, , , , , , , , , ,764 Secondary Income 10,929 11,944 12,485 13,411 14,080 14,698 15,225 15,662 16,017 16,310 16,376 Private Transfers 3,593 4,500 4,085 3,949 4,048 4,105 4,118 4,144 4,173 4,196 4,201 Government Transfers 7,336 7,444 8,400 9,462 10,032 10,593 11,107 11,519 11,844 12,114 12,175 Payments 801, , , , ,487 1,017,548 1,078,387 1,142,836 1,211,159 1,284,123 1,299,144 Goods and Services 677, , , , , , , , ,409 1,008,341 1,017,762 Goods 548, , , , , , , , , , ,458 Services 129, , , , , , , , , , ,304 Primary Income 108, , , , , , , , , , ,788 Compensation of Employees 3,733 4,050 4,075 4,205 4,423 4,691 5,023 5,480 6,105 6,973 7,189 Investment Income 104, , , , , , , , , , ,599 Secondary Income 15,121 15,319 15,338 15,750 16,203 16,616 17,064 17,541 18,019 18,511 18,594 Private Transfers 9,975 10,025 10,065 10,577 10,871 11,159 11,474 11,803 12,119 12,439 12,507 Government Transfers 5,146 5,294 5,273 5,173 5,333 5,457 5,589 5,738 5,900 6,071 6,086 Trade Balance 50,091 49,562 50,416 50,208 65,228 62,681 58,225 49,032 42,298 32,107 34,411 Rent Balance 16,253 11,948 6,860 8,077 7,364 8,758 12,443 18,658 27,401 39,440 42,141 Transfers Balance 4,192 3,375 2,853 2,339 2,123 1,918 1,839 1,878 2,002 2,200 2,218 Source: HR Ratings with data from de United States Federal Resrves and Statistics. Table A1.2: Current Account as Share of GDP Year Current Account -3.49% -3.25% -2.84% -2.71% -3.24% -3.04% -2.89% -2.67% -2.65% -2.62% -2.64% Receipts 35.97% 36.92% 37.55% 37.85% 38.52% 39.39% 40.44% 41.61% 42.59% 43.60% 44.62% Goods and Services 30.88% 31.44% 31.39% 31.33% 31.57% 32.06% 32.75% 33.62% 34.36% 35.17% 36.04% Goods 25.78% 25.98% 25.99% 25.98% 26.16% 26.64% 27.32% 28.19% 28.93% 29.76% 30.65% Services 5.11% 5.47% 5.41% 5.35% 5.41% 5.42% 5.43% 5.43% 5.43% 5.41% 5.39% Primary Income 4.55% 4.88% 5.57% 5.92% 6.33% 6.72% 7.08% 7.38% 7.64% 7.84% 8.01% Compensation of Employees 0.08% 0.09% 0.08% 0.08% 0.08% 0.08% 0.08% 0.07% 0.07% 0.07% 0.07% Investment Income 4.47% 4.80% 5.49% 5.84% 6.25% 6.64% 7.00% 7.31% 7.57% 7.78% 7.94% Secondary Income 0.54% 0.60% 0.59% 0.60% 0.61% 0.61% 0.61% 0.61% 0.60% 0.59% 0.57% Private Transfers 0.18% 0.22% 0.19% 0.18% 0.18% 0.17% 0.17% 0.16% 0.16% 0.15% 0.15% Government Transfers 0.36% 0.37% 0.40% 0.42% 0.43% 0.44% 0.45% 0.45% 0.44% 0.44% 0.43% Payments 39.46% 40.17% 40.40% 40.56% 41.76% 42.44% 43.33% 44.28% 45.24% 46.21% 47.26% Goods and Services 33.36% 33.93% 33.79% 33.58% 34.40% 34.66% 35.07% 35.50% 35.91% 36.29% 36.68% Goods 26.99% 27.26% 27.17% 27.05% 27.83% 28.13% 28.59% 29.08% 29.57% 30.04% 30.54% Services 6.37% 6.67% 6.62% 6.52% 6.57% 6.53% 6.48% 6.42% 6.34% 6.24% 6.14% Primary Income 5.35% 5.48% 5.89% 6.28% 6.66% 7.08% 7.58% 8.10% 8.66% 9.26% 9.92% Compensation of Employees 0.18% 0.20% 0.19% 0.19% 0.19% 0.20% 0.20% 0.21% 0.23% 0.25% 0.28% Investment Income 5.17% 5.28% 5.70% 6.09% 6.46% 6.89% 7.38% 7.89% 8.43% 9.01% 9.63% Secondary Income 0.75% 0.76% 0.72% 0.71% 0.70% 0.69% 0.69% 0.68% 0.67% 0.67% 0.66% Private Transfers 0.49% 0.50% 0.48% 0.47% 0.47% 0.47% 0.46% 0.46% 0.45% 0.45% 0.44% Government Transfers 0.26% 0.26% 0.25% 0.23% 0.23% 0.23% 0.22% 0.22% 0.22% 0.22% 0.22% Goods & Services Balance -2.48% -2.49% -2.39% -2.24% -2.82% -2.60% -2.32% -1.87% -1.55% -1.12% -0.64% Rent Balance -0.80% -0.60% -0.32% -0.36% -0.32% -0.37% -0.50% -0.72% -1.02% -1.42% -1.91% Transfers Balance -0.21% -0.17% -0.13% -0.11% -0.09% -0.08% -0.07% -0.07% -0.07% -0.08% -0.09% Source: HR Ratings with data from de United States Federal Resrves and Statistics. Page 4 of 8

5 Table A1.3: LTM Financial Account in millions of Canadian Dollars Year Financial Account* 3,159 47,565 60,105 48,869 62,691 58,627 46,734 71,898 65,624 52,389 Foreign Direct Investment 18,912 19,321 6,513 12,348 12,743 12,368 1,399 30,185 45, ,688 Direct investment liabilities 73,990 23,448 30,479 37,579 49,334 68,758 71,039 76,271 45,035 71,006 Direct investment assets 92,902 42,769 36,992 49,927 62,077 56,390 72, ,456 90, ,694 Portfolio Investment 50, , , ,248 63,716 27,953 36,387 61, , ,502 Foreign Portfolio Investment 39, , , ,579 98,856 57,263 92, , , ,817 Debt Securities 36,432 86, , ,443 97,889 38,367 67, , , ,873 Equity and Investment Fund Shares 2,746 26,246 18,195 21, ,896 25,216 13,609 53,214 99,944 Canadian portfolio investment 11,648 8,732 14,453 18,331 35,140 29,310 56,427 60,107 12, ,315 Foreign Debt Securities 19,570 7,186 1,063 7,924 11,933 23,008 20,622 34,745 7,122 3,702 Foreign Equity and Investment Fund Shares 7,922 15,918 13,390 26,255 23,207 6,302 35,805 25,362 20, ,613 Other Investment 27,045 25,491 42,626 33,970 13,416 23,175 17,632 51,465 39,099 10,810 Foreign Investment 7,443 9,013 1,014 1,844 44,737 14,649 32,383 84,912 47, ,475 Loans 5,945 11, ,361 5,813 3,978 5,023 8,752 6,848 17,378 Currency and Deposits 3,648 13,185 1,814 1,267 38,768 10,731 34,497 72,374 40, ,135 Special Drawing Rights 0 8, Other Accounts Payable 2, ,120 1, ,445 Others Within Net Errors and Omissions ,238 1, ,789 2, Canadian investment 34,488 34,504 43,640 35,814 31,321 8,526 14,751 33,447 86, ,665 Loans 1,513 17,481 17,331 14,630 23, ,304 22,638 10,029 17,012 Currency and Deposits 37,234 17,946 10,909 28,172 1,566 1,323 10,171 10,258 55,492 63,697 Other Accounts Receivable 4, ,883 7,242 6,477 8,419 1, ,572 37,595 Others Within Net Errors and Omissions , ,667 2,361 Net incurrence of liabilities 120, , , , , , , , , ,298 Net acquisition of financial assets* 117,452 97,622 99, , ,236 82, , , , ,656 Official international reserves 1,710 11,617 3,989 8,061 1,698 4,869 5,886 10,934 7,481 6,982 Discrepancy (net errors and omissions) 4, ,363 3,263 2, , ,640 Source: HR Ratings w ith data from Statistics. *Includes "Official international reserves". Table A1.4: Financial Account as share of GDP Year Financial Account* 0.09% 3.08% 3.63% 2.76% 3.44% 3.06% 2.34% 3.57% 3.28% 2.48% Foreign Direct Investment -1.17% -1.23% -0.40% -0.63% -0.71% 0.65% -0.03% -1.50% -2.23% -3.33% Direct investment liabilities 4.42% 1.54% 1.85% 2.13% 2.71% 3.60% 3.53% 3.78% 2.24% 1.69% Direct investment assets 5.59% 2.78% 2.25% 2.76% 3.42% 2.95% 3.56% 5.29% 4.47% 5.02% Portfolio Investment 3.03% 6.78% 6.80% 5.77% 3.49% 1.46% 1.90% 3.15% 7.85% 4.95% Foreign Portfolio Investment 2.50% 7.22% 7.68% 6.78% 5.42% 2.99% 4.70% 6.05% 8.49% 8.94% Debt Securities 2.30% 5.50% 6.58% 5.59% 5.37% 2.02% 3.41% 5.37% 5.84% 6.33% Equity and Investment Fund Shares 0.20% 1.72% 1.09% 1.19% 0.06% 0.96% 1.28% 0.68% 2.65% 2.62% Canadian portfolio investment -0.54% 0.44% 0.87% 1.01% 1.94% 1.53% 2.79% 2.91% 0.64% 4.00% Foreign Debt Securities -1.08% -0.50% 0.08% -0.46% 0.66% 1.19% 1.00% 1.67% -0.34% 0.76% Foreign Equity and Investment Fund Shares 0.54% 0.94% 0.80% 1.47% 1.28% 0.34% 1.79% 1.24% 0.98% 3.24% Other Investment -1.66% -1.70% -2.53% -1.93% 0.77% 1.20% 0.76% 2.46% -1.97% 0.92% Foreign Investment 0.39% 0.65% 0.14% 0.14% 2.51% 0.72% 1.53% 4.04% 2.34% 2.74% Loans 0.36% -0.77% -0.01% -0.09% 0.33% 0.21% -0.27% 0.45% 0.34% 0.60% Currency and Deposits 0.14% 0.89% 0.18% 0.13% 2.17% 0.52% 1.66% 3.42% 1.99% 1.95% Special Drawing Rights 0.00% 0.60% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other Accounts Payable -0.15% -0.03% 0.05% 0.04% 0.02% 0.05% 0.06% 0.05% 0.04% 0.18% Others Within Net Errors and Omissions 0.05% -0.04% -0.08% 0.07% -0.02% -0.05% 0.09% 0.13% -0.02% 0.01% Canadian investment 2.05% 2.35% 2.67% 2.07% 1.74% -0.48% 0.77% 1.58% 4.31% 1.82% Loans 0.05% 1.16% 1.07% 0.84% 1.30% 0.00% 1.32% 1.12% 0.52% 0.94% Currency and Deposits 2.24% 1.27% 0.66% 1.64% 0.08% 0.03% -0.49% 0.43% 2.77% 0.37% Other Accounts Receivable -0.24% -0.06% 0.97% -0.42% 0.37% -0.46% -0.06% 0.02% 0.95% 0.47% Others Within Net Errors and Omissions 0.00% -0.02% -0.03% 0.01% -0.02% -0.05% 0.00% 0.01% 0.08% 0.04% Net incurrence of liabilities 7.31% 9.42% 9.67% 9.06% 10.64% 7.31% 9.75% 13.88% 13.08% 13.37% Net acquisition of financial assets* -7.22% -6.34% -6.04% -6.30% -7.19% -4.26% -7.41% % -9.80% % Official international reserves 0.11% 0.77% 0.24% 0.45% 0.10% 0.26% 0.29% 0.53% 0.37% 0.05% Discrepancy (net errors and omissions) -0.27% -0.04% -0.01% -0.24% 0.17% 0.14% 0.02% -0.08% -0.03% 0.36% Source: HR Ratings w ith data from Statistics and the Federal Reserve of the United States. *Includes "Official international reserves". Page 5 of 8

6 Appendix 2 Table A2.1: Public Finance Accounts in millions of Canadian Dollars Account / Fiscal Year Revenues 293, , , , , , , , , ,444 Tax Revenues 244, , , , , , , , , ,266 Income Taxes 192, , , , , , , , , ,031 Personal Income Tax 143, , , , , , , , , ,832 Corporate Income Tax 42,216 47,805 47,801 48,939 49,639 51,461 52,085 54,034 56,065 58,181 Non-resident income Tax 7,071 7,845 8,304 8,157 8,475 8,786 8,073 8,375 8,690 9,018 Excise Taxes/Duties 51,348 53,819 53,187 54,532 57,145 59,745 61,981 64,300 66,717 69,235 Goods and Services Tax 34,368 36,751 37,029 37,986 39,953 42,173 43,751 45,388 47,095 48,872 Customs import taxes 5,478 5,416 4,713 4,894 5,327 5,523 5,729 5,944 6,167 6,400 Other excise Taxes/Duties 11,502 11,652 11,445 11,652 11,865 12,049 12,500 12,968 13,456 13,963 Employment Insurance premium revenues 22,125 21,140 21,993 22,605 23,246 24,099 25,001 25,936 26,911 27,927 Other Revenues 27,055 29,378 30,847 32,235 33,686 35,033 36,434 38,037 39,665 41,252 Total Program Expeneses 291, , , , , , , , , ,246 Major Transfers to Persons 90,938 93,791 98, , , , , , , ,906 Elderly Benefits 48,162 50,644 53,625 57,766 60,806 64,049 65,313 68,178 71,126 73,956 Employments Insurance benefits 22,065 23,432 22,684 22,802 23,029 23,327 26,378 26,763 27,501 28,477 Children's benefits 20,711 19,715 21,987 22,904 23,433 23,830 25,500 26,634 27,519 28,474 Major Transfers to other levels of government 68,652 70,519 73,834 76,672 78,696 81,333 84,377 87,535 90,825 94,253 Health & Social Transfers 49,405 50,872 53,568 55,789 57,270 59,299 61,188 63,558 66,019 68,531 Oher Transfers 19,247 19,647 20,266 20,883 21,426 22,034 23,189 23,976 24,807 25,721 Direct Program Expenses 131, , , , , , , , , ,087 Transfer Payments 41,580 47,138 47,836 48,031 49,962 52,161 52,087 54,489 56,648 58,922 Capital Amortization & Operating Expenses 90,050 99,230 94,671 95,059 96,291 98, , , , ,165 Primary Balance 2,275 2,928 9,078 12,193 15,525 16,457 13,517 13,722 14,156 14,198 Public Debt Charges (Interest Costs) 21,232 21,889 26,930 30,296 32,689 35,144 37,761 40,525 43,450 46,544 Financial Balance -18,957-18,961-17,852-18,103-17,164-18,687-24,244-26,803-29,294-32,346 Liabilities (Gross Debt) 1,116,856 1,157,402 1,180,266 1,212,379 1,245,646 1,282,594 1,323,815 1,367,204 1,413,654 1,463,551 Total Unmatured Debt 713, , , , , , , , , ,433 Total Pensions and other liabilities 270, , , , , , , , , ,377 Accounts Payable and accrued liabilities 132, , , , , , , , , ,742 Financial Assets 382, , , , , , , , , ,321 Net Debt* 330, , , , , , , , , ,112 Source: HR Ratings w ith information from 's Department of Finance. Table A2.2: Public Finance Accounts as share of GDP Account / Fiscal Year Revenues 14.31% 14.53% 14.42% 14.39% 14.36% 14.34% 14.21% 14.20% 14.19% 14.18% Tax Revenues 11.91% 12.19% 12.07% 12.04% 12.01% 11.98% 11.85% 11.83% 11.82% 11.80% Income Taxes 9.41% 9.69% 9.70% 9.70% 9.65% 9.60% 9.47% 9.45% 9.44% 9.42% Personal Income Tax 7.00% 7.12% 7.20% 7.25% 7.25% 7.20% 7.16% 7.14% 7.13% 7.11% Corporate Income Tax 2.06% 2.21% 2.13% 2.10% 2.05% 2.05% 2.00% 2.00% 2.00% 2.00% Non-resident income Tax 0.34% 0.36% 0.37% 0.35% 0.35% 0.35% 0.31% 0.31% 0.31% 0.31% Excise Taxes/Duties 2.50% 2.49% 2.37% 2.34% 2.36% 2.38% 2.38% 2.38% 2.38% 2.38% Goods and Services Tax 1.68% 1.70% 1.65% 1.63% 1.65% 1.68% 1.68% 1.68% 1.68% 1.68% Customs import taxes 0.27% 0.25% 0.21% 0.21% 0.22% 0.22% 0.22% 0.22% 0.22% 0.22% Other excise Taxes/Duties 0.56% 0.54% 0.51% 0.50% 0.49% 0.48% 0.48% 0.48% 0.48% 0.48% Employment Insurance premium revenues 1.08% 0.98% 0.98% 0.97% 0.96% 0.96% 0.96% 0.96% 0.96% 0.96% Other Revenues 1.32% 1.36% 1.37% 1.38% 1.39% 1.40% 1.40% 1.41% 1.41% 1.42% Total Program Expeneses 14.20% 14.39% 14.02% 13.87% 13.72% 13.68% 13.69% 13.69% 13.69% 13.69% Major Transfers to Persons 4.43% 4.34% 4.38% 4.44% 4.43% 4.43% 4.50% 4.50% 4.50% 4.50% Elderly Benefits 2.35% 2.35% 2.39% 2.48% 2.51% 2.55% 2.51% 2.52% 2.54% 2.54% Employments Insurance benefits 1.08% 1.09% 1.01% 0.98% 0.95% 0.93% 1.01% 0.99% 0.98% 0.98% Children's benefits 1.01% 0.91% 0.98% 0.98% 0.97% 0.95% 0.98% 0.99% 0.98% 0.98% Major Transfers to other levels of government 3.35% 3.27% 3.29% 3.29% 3.25% 3.24% 3.24% 3.24% 3.24% 3.24% Health & Social Transfers 2.41% 2.36% 2.39% 2.39% 2.37% 2.36% 2.35% 2.35% 2.36% 2.36% Oher Transfers 0.94% 0.91% 0.90% 0.90% 0.88% 0.88% 0.89% 0.89% 0.88% 0.88% Direct Program Expenses 6.42% 6.78% 6.35% 6.14% 6.04% 6.01% 5.95% 5.95% 5.95% 5.95% Transfer Payments 2.03% 2.18% 2.13% 2.06% 2.06% 2.08% 2.00% 2.02% 2.02% 2.03% Capital Amortization & Operating Expenses 4.39% 4.60% 4.22% 4.08% 3.98% 3.93% 3.95% 3.93% 3.93% 3.92% Primary Balance 0.11% 0.14% 0.40% 0.52% 0.64% 0.66% 0.52% 0.51% 0.50% 0.49% Public Debt Charges (Interest Costs) 1.04% 1.01% 1.20% 1.30% 1.35% 1.40% 1.45% 1.50% 1.55% 1.60% Financial Balance -0.92% -0.88% -0.80% -0.78% -0.71% -0.74% -0.93% -0.99% -1.05% -1.11% Liabilities (Gross Debt) 54.45% 53.62% 52.59% 52.02% 51.44% 51.09% 50.83% 50.61% 50.43% 50.31% Total Unmatured Debt 34.79% 33.41% 33.76% 33.32% 32.96% 32.76% 32.62% 32.45% 32.33% 32.26% Total Pensions and other liabilities 13.20% 13.03% 12.71% 12.57% 12.43% 12.33% 12.26% 12.22% 12.18% 12.15% Accounts Payable and accrued liabilities 6.46% 7.17% 6.13% 6.13% 6.05% 6.00% 5.95% 5.93% 5.92% 5.90% Financial Assets 18.66% 18.47% 18.27% 18.15% 18.12% 18.20% 18.17% 18.12% 18.06% 17.99% Net Debt* 16.13% 14.94% 15.49% 15.17% 14.84% 14.57% 14.45% 14.33% 14.27% 14.27% Nominal GDP (milllions of Canadian dollars) 2,051,196 2,158,632 2,244,197 2,330,443 2,421,411 2,510,274 2,604,239 2,701,683 2,803,249 2,909,030 Real GDP Growth 1.47% 2.99% 2.05% 1.76% 1.79% 1.74% 1.72% 1.70% 1.70% 1.70% Source: HR Ratings w ith information from 's Department of Finance. *Net debt, as meassured by HR Ratings, considers the unmatured debt minus the financial assets. Page 6 of 8

7 HR Ratings Management Contacts Management Chairman of the Board Vice President Alberto I. Ramos Aníbal Habeica Chief Executive Officer Fernando Montes de Oca Analysis Chief Credit Officer Deputy Chief Credit Officer Felix Boni Pedro Latapí Public Finance / Infrastructure Financial Institutions / ABS Ricardo Gallegos Fernando Sandoval ricardo.gallegos@hrratings.com fernando.sandoval@hrratings.com Roberto Ballinez roberto.ballinez@hrratings.com Corporates / ABS Methodologies José Luis Cano Alfonso Sales joseluis.cano@hrratings.com alfonso.sales@hrratings.com Regulation Chief Risk Officer Head Compliance Officer Rogelio Argüelles Rafael Colado rogelio.arguelles@hrratings.com rafael.colado@hrratings.com Business Development Business Development Francisco Valle francisco.valle@hrratings.com Page 7 of 8

8 Mexico: Avenida Prolongación Paseo de la Reforma #1015 torre A, piso 3, Col. Santa Fe, México, D.F., CP 01210, Tel 52 (55) United States: One World Trade Center, Suite 8500, New York, New York, ZIP Code 10007, Tel +1 (212) The rating assigned by HR Ratings de México, S.A. de C.V. to the entity, issuer and/or issue is based upon the analysis performed under a base case and stress case scenario, in accordance with the following methodology(ies) established by the rating agency: Rating Methodology for, May 19, 2017 General Criteria Methodology, November 2017 For more information with respect to this (these) metodology(ies), please consult the website: Complementary information in accordance with section V, paragraph A) of Annex 1 of the General Provisions applicable to Credit Rating Agencies. Previous Rating. Foreign and Local Currency:, HR+1 (G) Date of the last Rating Action. November 3, 2017 Period of the financial information used by HR Ratings for the assignment of the current rating. Main sources of information used, including third parties. Ratings assigned by other rating agencies that were used by HR Ratings (if so). HR Ratings considered at the moment of assigning or reviewing the rating, the existence of mechanisms designed to align the incentives between the originator, servicer and guarantor and the possible buyers of the rated instrument (where it applies). January 1999 to December Statistics, s Department of Finance and s Central Bank. N.A. N.A. HR Ratings de México, S.A. de C.V. 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