DBRS maintains Canada's AAA rating despite record deficit,

DBRS Morningstar confirmed its triple-A rating for Canada's debt despite expectations of the country's record fiscal deficit, citing a strong recovery from the worst so far of the pandemic and a resilient housing market. The trend on the rating is stable, it said.

The government forecast in July the country's fiscal deficit will hit $334 billion or 15.9 per cent of gross domestic product by March. Yet, the economy has recovered around two-thirds of jobs lost at the height of the pandemic's economic impact while reports show improving retail sales and a robust housing market in most regions.

“These credit challenges are offset by Canada's considerable fundamental strengths, including its sound macroeconomic policy frameworks, large and diverse economy, and strong governing institutions,” DBRS said in a report Tuesday. “The federal government has space to provide temporary fiscal stimulus of this size while maintaining the AAA ratings.”

The stable triple-A debt rating is important for the government to secure favourable borrowing rates for its programs and economic stimulus that currently lie outside the ability of taxes and other income to pay for them.

The rating is a vote of confidence in the country amid the widely-anticipated Throne Speech from the federal Liberal government on Wednesday that will likely include hints on new spending plans to restart the economy.

DBRS said it will be watching for further signs of fiscal stewardship as well as the fiscal update or budget in the fall. “We will be focused on the medium-term sustainability, counter-cyclicality, and growth-enhancing features of the multi-year fiscal strategy.”

In June, Fitch Ratings downgraded Canada's sovereign credit rating to AA+, from AAA, citing the country's deteriorating public finances this year due to the coronavirus pandemic. However, Moody's Investors Service and S&P Global Ratings, the other major ratings agencies, reaffirmed their highest credit rating for the country in recent months.

Douglas Porter, chief economist and managing director at BMO Financial Group, called DBRS's report “a reasonable assessment.”

“They did have some appropriately cautionary words there, as well, suggesting the initial response was correct, but they also sent a fairly clear message that that doesn't give policymakers a free hand to keep supporting the economy to the extent they have in the last six months,” Porter said.

The Liberal government's tone in its fiscal message will be important in the Throne Speech, he said. It's likely to include words like prudent and responsible as a nod to the decades of effort to secure Canada's triple-A debt rating that shouldn't be cast aside after a short period of hardship.

“There's been somewhat conflicting messages coming out of Ottawa in recent weeks. Some of the aggressive talk we heard in late August from the prime minister has been dialed back a bit. This might be not quite as revolutionary a Throne Speech as it looked like it might have been a month ago.”

Canada's economy shrank by 13.4 per cent from the last three months of 2019 to the end of March. The Organisation of Economic Cooperation and Development expects this year's economic contraction to be 5.8 per cent, followed by a 4 per cent expansion in 2021.

“The longer the duration of the shock, the greater the risk of prolonged high unemployment and low investment, both of which could weaken medium-term growth prospects,” DBRS said. “The resulting damage to the economy's productive

THE STIMULUS HAS BEEN TIMELY IN DELIVERY, TEMPORARY IN DESIGN...

capacity could lead to more persistent pressures on balance sheets across the economy, including government finances.”

The income support programs such as the Canada Employment Response Benefit and the Canada Emergency Wage Subsidy are expected to contribute about $228 billion to the deficit. The debt rating company “views the overall fiscal response positively, as the stimulus has been timely in delivery, temporary in design, and sufficient in size given the scale of the shock.”

While the International Monetary Fund has forecast Canada's federal, provincial and municipal debt to expand from 89 per cent of GDP last year to 109 per cent of GDP in 2020, DBRS remains confident in the government's ability to handle the burden because its stimulus measures are temporary, were issued from a standpoint for fiscal strength and incur low borrowing costs. The 10-year government bond yield averaged just 0.6 per cent over the last six months, it said.