One of U.S.'s big 3 credit agencies downgrades Canada's credit rating

Fitch Ratings has downgraded Canada's credit rating to AA+ from AAA, citing the federal government's move to borrow about a quarter of a trillion dollars to prop the economy up during the pandemic lockdown.

Fitch Ratings, Moody's and S&P Global Ratings are are considered to be the three big credit rating agencies in the U.S.

Fitch last confirmed Canada's rating in July of last year. S&P Global Ratings and Moody's both still have Canada listed as top tier borrowers. S&P Global Ratings last confirmed Canada's rating in November of last year, while Moody's last confirmation came in May of this year.

The agency said that while it is downgrading Canada's rating, it expects Canada's debt-to-GDP ratio to stabilize over the medium term before the economy gradually starts recovering with the help of monetary and fiscal stimulus. 

Finance Minister Bill Morneau's office responded to the news with a statement saying that Canada's pre-pandemic economic health allowed the federal government to "deploy our fiscal firepower to protect Canadians" and that the economy would be in far worse shape had it not acted. 

"Canada continues to be in a stronger financial position than many other countries in the G7 and G20," the statement said. "Global markets continue to invest in Canadian bonds, driving our cost of borrowing to historic lows. Moving forward, we will continue to be fiscally responsible while acting to protect our country and its economy."

Fitch predicts Canada's pandemic response will increase its consolidated gross general government debt to 115.1 per cent of GDP in 2020, up from 88.3 per cent of GDP in 2019.

A Fitch spokesperson said that to come up with that figure, the company added together Canada's "federal, provincial and territorial, local and other governmental debt liabilities" and subtracted from that amount the value of the Canada Pension Plan and Quebec's Caisse de dépôt et placement du Québec, which manages several public pension plans. The number does not include unfunded pension liabilities. 

Fitch said it expects Canada's debt-to-GDP ratio to stabilize at about 120 to 121 per cent sometime between 2022 and 2024. 

The report said Fitch has confidence in Canada's economic recovery in 2021 because of the advanced, well-diversified and high-income nature of its national economy. It also cites Canada's political stability, strong governance and policies that have "delivered steady growth and low inflation."

No country will be spared fiscal challenges as a result of the coronavirus pandemic, but we cannot afford to be complacent. We can't risk further downgrades.- Aaron Wudrick, director, Canadian Taxpayers Federation

On Monday, Moody's released an analysis of the 14 most advanced economies. It said that while Canada has experienced one of the largest increases to its debt burden during the pandemic, it is still better positioned than other similar economies for an economic recovery. 

"Among countries with a high debt burden, Belgium ... France, Japan, Spain, the U.K. and the U.S. are most at risk," the analysis said.

Fitch warned that several factors could undermine Canada's return to steady growth.

"The pandemic has caused several provinces to pause deficit-reduction plans, and some premiers have urged greater direct federal financial support to the provinces," Fitch said. "The current crisis will likely increase the need for federal support of provinces. Federal borrowing for Crown corporations also increases debt."

The report goes on to say that depressed global demand for oil will "cause a severe recession of the Canadian economy with 7.1 per cent GDP contraction in 2020" before things start to get better next year. 

A 'necessary thing'

"I would have been disappointed if Fitch hadn't downgraded Canada," Moshe Lander, a senior lecturer in economics at Concordia University, told CBC News.

"Its a necessary thing. It reflects that Canada is no longer the top end of credit worthy borrowers. I would be very surprised if there's any country out there in 2020 that are considered to be high credit worthy borrowers. Every government has spent billions and billions to try and fight off a pandemic."

Lander said that the bond market is reacting not only to Canada's increased borrowing but to the lack of a full fiscal update explaining how the country is going to get its finances back on track. The fiscal snapshot promised by the Liberal government, he said, will not be enough to assuage concerns.

The Canadian Taxpayers Federation made the same point today in response to the credit downgrade.

"No country will be spared fiscal challenges as a result of the coronavirus pandemic, but we cannot afford to be complacent. We can't risk further downgrades," CTF director Aaron Wudrick said in a media statement.

"The sooner the Trudeau government begins to address its massive budgetary deficit, the better the prospect of returning ourselves to an AAA rating and reduced borrowing costs."

Getting back to balance

Conservative finance critic Pierre Poilievre said the federal government was increasing the federal debt before the pandemic hit and must now offer a plan to get back to fiscal balance.

"They at the very least need to tell us how bad is the mess they've made, and how they are going to clean it up. Until they do, international agencies, lenders and investors are going to become increasingly nervous about Canada," he told CBC.

Poilievre also said that Canada could face further credit rating downgrades in the future if it can't get its finances under control.

Fitch's rating shift evokes memories of the early 1990s, when major rating agencies slashed Canada's credit rating in response to its deficit — which was, at the time, one of the highest among G7 countries.