NAFTA uncertainty a rail risk: experts

MONTREAL — The potential dismantling of the North American Free Trade Agreement poses a giant risk that Canada’s railways won’t benefit this year from healthy economies and a higher demand to move crude oil, industry observers say.

“What keeps us up at night?” said analyst Kevin Chiang of CIBC World Markets. “NAFTA renegotiations.”

Chiang said the earnings implications of the U.S. government’s move to disband the continental free trade agreement are unknown, but an almost immediate 10 per cent drop in values in the aftermath of the Brexit vote in the United Kingdom could be a guide post for Canada’s industrial and transportation sectors.

“We would not be surprised to see a similar immediate reaction in the Canadian industrial/transportation complex, especially for those companies tied to North American trade,” he wrote in a report.

Fadi Chamoun of BMO Capital Markets says a repeal of the 24-yearold NAFTA could potentially weigh on the valuations of Canadian National Railway and Canadian Pacific Railway.

About 30 per cent of the railways’ revenues are derived from crossborder trade, with 60 to 70 per cent of that being Canadian exports to the U.S., he wrote in a report.

The overall impact to the Canadian economy would be almost a one percentage point decrease in gross domestic product and a likely five per cent depreciation in the value of the Canadian dollar, said a Bank of Montreal study released in November.

The depreciation of the loonie would bolster Canadian export competitiveness and over time offset half the decline in GDP resulting from about a 1.7 per cent increase in tariffs.

BMO chief economist Douglas Porter has described the impact as a serious but manageable risk.