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For Canada, Keeping Triple-A Rating May Not Be the Focus It Once Was

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TORONTO—Preserving Canada’s triple-A credit rating could be less of a priority for Ottawa than in years gone by, with the focus on digging the economy out of a hole rather than staying in a shrinking group of top-rated sovereign borrowers, analysts say.

To maintain its top rating, Canada would likely need to convince credit rating agencies it has a tenable plan to restore fiscal health once the coronavirus pandemic recedes, say the analysts.

Ottawa has projected a budget deficit of $343 billion for the current fiscal year ending March 31 as it spends to cushion the economic blow from the pandemic, which at about 16 percent of GDP would be a record shortfall.

Credit rating agencies will be closely watching Ottawa’s fiscal update expected in the fall to assess Canada’s financial health. But the threat of a downgrade may not shape policy as much as it did in the 1990s, when S&P Global Ratings and Moody’s Investors Service stripped Canada of its triple-A rating.

Back then, Canada entered into a multi-year period of fiscal austerity, spurred by the unflattering disparity between its finances and those of peers. Now, Canada is not an outlier.

“The whole thing is relativity … when you put it in the international context, Canada doesn’t look as bad as it might,” said John Manley, a senior business adviser at Bennett Jones and former federal finance minister and industry minister in Liberal Party governments.

Globally, government spending to offset the economic impact of the virus totals $12 trillion, or about 12 percent of gross domestic product, according to the International Monetary Fund, while the number of sovereign borrowers rated triple A has fallen to 10 to 12, depending on the rating agency, from as many as 19 a decade ago.

‘No Time for Austerity’

S&P has said that Canada is better positioned than most countries to spend temporarily in support of its economy. It, Moody’s and DBRS Morningstar give Canada their highest rating. But Fitch Ratings downgraded the country’s rating in June.

Canada’s borrowing costs have not suffered. With the Bank of Canada buying much of the government’s debt issuance, through its quantitative easing program, bond yields have held near record lows.

That has emboldened Prime Minister Justin Trudeau to promise even more spending by his Liberal government, saying that “this is not the time for austerity.”

Any government that runs a deficit the size of Canada’s “doesn’t care much about what the rating agencies have tRead More – Source

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