A downgraded Canada faces further rating pressure: Fitch

With Canada’s AAA rating already gone, the spending plans outlined in the federal government’s fall economic statement could put further pressure on the country’s sovereign rating, says Fitch Ratings.

“Canada’s recently released medium-term financial roadmap reinforces the likelihood of a rising public debt burden and expansionary fiscal policy without precise details of a return to a fiscal anchor and consolidation,” Fitch said.

If the federal budgets for the next couple of years follow through on those spending plans without introducing new revenues, Canada’s finances would weaken relative to its peers in the AA category, Fitch said.

Provincial governments also face tough budget scenarios, given the added costs of the second wave of the pandemic, Fitch said, predicting that the renewed pressure on provincial finances “will add to risks to the general government deficit over the next two years.”

Fitch now forecasts that consolidated general government debt will reach 117% of GDP in 2020, rising to 125% in 2022.

The expectation of ultra-low interest rates for the next few years will limit debt service costs, Fitch noted.

“However, a relatively low potential economic growth rate (near 1.7% before the pandemic) and the expected fiscal policy mix indicate that the debt service ratio is likely to remain elevated and significantly above the AA median for the foreseeable future,” the rating agency said.

On the upside, Fitch is now forecasting a smaller than expected economic contraction this year, with GDP now seen declining 5.7%, compared to Fitch’s previous forecast of a 6.6% drop.

Fitch’s forecast for 2021 is unchanged, with growth expected to reach 4.5%, but it has revised its forecast for 2022 up to 3.6% from 3%.

“Canada’s extraordinary fiscal and monetary policy supports have effectively buttressed the national economy through pandemic restrictions and should help bolster the recovery further in 2021,” Fitch said. “Strong residential investment and export recovery trends also support our expectation for a less severe recession in 2020.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.