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Moody’s Affirms Canada’s Aaa Rating, Citing Economic Strength

Esteban Duarte
·2 min read

(Bloomberg) -- Moody’s Investors Service upheld Canada’s top credit rating ahead of a fiscal update from Prime Minister Justin Trudeau’s government expected to show soaring debt.

The country’s economic strength and “policy effectiveness” give it a “very high degree of resilience to shocks,” Moody’s analysts including William Foster said in a report Thursday that affirmed the Aaa rating with a stable outlook. Moody’s said historically low interest rates mitigate the impact of this year’s sharp rise in spending to counter the Covid-19 pandemic, which will produce the largest budget deficit since World War II.

Finance Minister Chrystia Freeland is due to release updated government projections in coming weeks. Moody’s expects Canadian gross domestic product to contract by about 6% this year, followed by growth of 5% and 3.5% in 2021 and 2022, respectively. That’s a sharper decline this year but a swifter rebound than the median estimate in Bloomberg’s latest survey of economists.

The Moody’s affirmation will come as a relief to Trudeau, whose stewardship of the nation’s finances took a hit in July when Fitch Ratings downgraded Canada on concerns over the spike in spending.

In its last fiscal update that same month, the government projected a C$343 billion ($262.3 billion) budget deficit this fiscal year, or 16% of total output. It has since announced an additional C$40 billion billion in spending, and the finance minister has rejected calls for restraint until the pandemic subsides.

The general government debt burden -- which includes provincial and local debt -- will rise to about 104% of GDP in 2020, up from 79% in 2019, and remain around that level until gradually declining over the medium term as the government winds down emergency spending, Moody’s said. Since the Canadian dollar is among the world’s reserve currencies, Canada has “materially higher capacity” to carry a larger debt burden, the rating company said.

“The risk of a material, long-lasting deterioration to Canada’s economic or fiscal strength is low, including from the coronavirus shock,” Moody’s said. “Despite a sharp deterioration in the government’s fiscal position this year, Canada’s long-standing political consensus on fiscal health will lead to gradual fiscal consolidation after the pandemic subsides.”

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