Pandemic drops Canada’s credit rating below AAA

Country’s investment, growth prospects to continue to ‘face challenges’: agency

TORONTO A measure of Canada’s sovereign debt was downgraded a notch by Fitch on Wednesday, with the ratings agency citing “deterioration of Canada’s public finances in 2020 resulting from the coronavirus pandemic.”

The country will run a “much expanded” general government deficit this year and emerge from recession with much higher public debt ratios, Fitch said, knocking the country’s triple-a long-term foreign currency issuer default rating down to AA+.

However, the country’s debt “ceiling” was maintained at Triple-a and its short-term debt was also affirmed, according to Kelli Bissett-tom, director and primary rating analyst at Fitch.

While the ratings agency said the higher deficit is largely being driven by public spending to counteract a sharp fall in output as swathes of the economy were shuttered to contain the spread of the coronavirus, the economy’s investment and growth prospects is expected to continue to “face challenges” even if this spending is wound down.

Lower credit ratings generally make it more expensive to borrow money and a country’s credit ratings can have an impact on the functioning of the rest of the economy because sovereign debt is often pegged as the ceiling for corporate credit ratings.

However, Fitch said it was not downgrading Canada’s big banks, which are already rated below the most recent sovereign cut.

Avery Shenfeld, chief economist at CIBC World Markets, said Fitch downgraded Canada’s measure of risk of default “from essentially a perfect score to one that still has Canadian debt rated as very safe.”

“This should not result in a material increase in the government’s borrowing costs, as its debt position is still in better shape than most G20 countries,” he said.

But David Rosenberg, president and chief economist of Rosenberg Research & Associates Inc., has been predicting a downgrade on Canada’s sovereign debt since late April and thinks this won’t be the last. “The real question is: What took so long?’” he said Wednesday, adding that “Canada’s excessively leveraged national balance sheet has looked a lot like China, Italy and Greece for quite a while.”

While the federal government may appear to be in “solid” financial shape to some, this has “masked bloated debt ratios” in households, business sectors, and most of the provinces, he said.

“This won’t be the last ratings cut, I can assure you,” said Rosenberg.

Gord Nixon, former chief executive of Royal Bank of Canada who steered Canada’s biggest bank through the 2008 financial crisis, said he expects “little real impact in the short term” from the ratings downgrade.

Any immediate effects are likely to be “more reputational,” he said, recalling “little impact” from a U.S. sovereign debt downgrade by Standard & Poor’s during the crisis more than a decade ago. “The long-term trend is much more important and whether our debt levels become an issue in future,” Nixon said.

Fitch said its downgrade on Canada’s sovereign debt Wednesday resulted in a “stable” trend.

But as the novel coronavirus continues to spread at varying rates around the world amid fears of a possible second wave in the fall, the road for many economies is expected to get bumpier.

In a report Wednesday, the International Monetary Fund said the economic impact is expected to be deeper and longer for world economies than previously forecast, revising its own projections from just a couple of months ago.

The new economic outlook in Wednesday’s IMF report projects global growth of negative 4.9 percent in 2020, just shy of two percentage points below the April forecast. “The COVID -19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,” the IMF said in its report, which came the same day the United States recorded its second-largest rise in virus cases since the pandemic was declared in March.

In 2021, global gross domestic product is expected to be some 6.5 percentage points lower than PRECOVID -19 projections in January.

“The IMF view is somewhat more gloomy than our forecast for both the U.S. and Canada,” said CIBC’S Shenfeld, adding that the global monetary cooperation organization’s forecast for this year’s decline in gross domestic output is more than a full percentage point steeper than the bank’s.

Still, he said, the overall story “is one we share, in that we went through a massive plunge in the first half of 2020 and it will be a long time before we can return to full employment.”

Shenfeld noted, however, that Canada did not fare badly in the IMF’S review of fiscal stimulus to counter the effects of the pandemic. “IMF projections show that Canada is only in the middle of the pack in terms of what we have unleashed in fiscal stimulus relative to other countries,” he said, adding that this country is forecast to remain well below the U.S. and other advanced economies in our gross debt to GDP levels in 2021.

The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated.