Canada’s AAA rat­ing on thin ice as Trump poli­cies threaten trade

The Hamilton Spectator - - BUSINESS - LUKE KAWA

A Triple-Eh credit rat­ing? For Canada, main­tain­ing the trust of bor­row­ers is a source of na­tional pride, like win­ning the gold medal in Olympic ice hockey: hard­earned in­ter­na­tional val­i­da­tion of the na­tion’s skill, dis­ci­pline and strong ste­ward­ship.

But Fitch Rat­ings is warn­ing that the coun­try’s prized stand­ing in the eyes of cred­i­tors may suf­fer be­cause of pro­tec­tion­ist mea­sures pro­posed by U.S. Pres­i­dent Don­ald Trump. In a re­port Fri­day, a Fitch re­search team led by James McCor­mack wrote that na­tions with close ties to the world’s largest econ­omy, such as Canada, are “most at risk” of dam­age to their credit fun­da­men­tals.

“U.S. pol­icy pre­dictabil­ity has di­min­ished, with es­tab­lished in­ter­na­tional com­mu­ni­ca­tion chan­nels and re­la­tion­ship norms be­ing set aside and rais­ing the prospect of sud­den, unan­tic­i­pated changes in U.S. poli­cies with po­ten­tial global im­pli­ca­tions,” Fitch wrote.

Trump is sched­uled to meet Cana­dian Prime Min­is­ter Justin Trudeau on Mon­day, and trade is ex­pected to be at the top of the agenda. The U.S. pres­i­dent has pledged to rene­go­ti­ate the North Amer­i­can Free Trade Agree­ment on more fa- vourable terms for the U.S. or tear up the deal en­tirely.

In De­cem­ber, Fitch low­ered its out­look on Mex­ico to neg­a­tive fol­low­ing a plunge in the peso trig­gered by Trump’s rhetoric to­ward Amer­ica’s neigh­bour to the south. But Canada’s eco­nomic re­liance on the U.S. is also im­mense. Stephen Sch­warz­man, chair of Black­stone Group and head of the pres­i­dent’s strate­gic and pol­icy fo­rum, re­cently told Cana­di­ans not to “be enor­mously wor­ried” about the new ad­min­is­tra­tion’s stance on trade. How­ever, con­cern north of the 49th par­al­lel lingers about the coun­try be­com­ing “col­lat­eral dam­age” of U.S. ac­tion against Mex­ico, a worry seem­ingly shared by Fitch.

“Coun­tries host­ing U.S. di­rect in­vest­ment, at least part of which has fi­nanced ex­port in­dus­tries fo­cused back on the U.S., are at risk of be­ing sin­gled out for puni­tive trade mea­sures,” the credit rater wrote. “Coun­tries with the high­est stock of U.S. in­vest­ment in man­u­fac­tur­ing are Canada, the U.K., Nether­lands, Mex­ico, Ger­many, China and Brazil.”

Only 11 na­tions are cur­rently rated as AAA by Fitch, the small­est num­ber since 2003. The last time Canada lost the trust of in­ter­na­tional credit graders was in the early 1990s, when swelling gov­ern­ment in­debt­ed­ness elicited down­grades from Stan­dard & Poor’s and Moody’s In­vestors Ser­vice. Moody’s and S&P raised their credit rat­ings for the coun­try to AAA in 2002, while Fitch up­graded it in Au­gust 2004.

Any loss of Canada’s AAA credit rat­ing could be seen as a blow to Trudeau’s fis­cal record as he runs deficits to bol­ster the econ­omy and im­prove the na­tion’s in­fras­truc­ture with the goal of boost­ing long-term growth.

“If trade pro­tec­tion­ist mea­sures are pro­duced that hit Canada, that’ll af­fect gov­ern­ment rev­enue neg­a­tively and a credit rat­ing down­grade would in­crease the risk premium in­vestors de­mand for hold­ing gov­ern­ment bonds,” said Ran­dall Bartlett, chief econ­o­mist at the In­sti­tute of Fis­cal Stud­ies and Democ­racy in Ot­tawa. “At this point, all of the risk is to the down­side.”

The in­crease in gov­ern­ment debt yields since the elec­tion is ex­pected to make it more ex­pen­sive for Trudeau to fund his spend­ing plans, Bartlett added, as new bond is­sues and rolling over ex­ist­ing bor­row­ings from pre­vi­ous rounds of stim­u­lus are poised to push up the cost of pub­lic fi­nanc­ing.

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