Canada’s Credit Rating Put In Jeopardy

Canada’s AAA (triple-A) credit rating is in jeopardy.

Among the Group of Seven leading industrialized countries, only Germany and Canada have AAA ratings from S&P Global Ratings. But now, Canada’s rating is in jeopardy as oil prices tank and the domestic economy grinds to a halt due to the COVID-19 pandemic lockdown.

Going into the COVID-19 crisis, Canada’s provincial governments had $853 billion ($602 billion U.S.) of debt securities outstanding, more than the national government. They also shoulder most of the cost for health care and education. Several provinces rely on energy revenues that are evaporating.

Canadian governments will have net borrowing needs of 11.8% of Gross Domestic Product this year, higher than all G7 countries except the U.S., according to the International Monetary Fund. Pricing on credit default swaps suggests traders see Canada’s profile as similar to Australia — whose top credit rating was put on a “negative outlook” by S&P on April 7.

Canada’s economy is forecast to contract by 5.3% in 2020, compared with a 2.4% decline globally, S&P said in an April 20 note. The federal and provincial governments have put together a virus response package of at least $315 billion, S&P said in its evaluation of Canada’s credit rating.

Newfoundland and some other provinces, including Manitoba, want the federal government to set up an emergency credit agency to help them borrow money more cheaply. They also want changes to the fiscal stabilization program, a federal mechanism created in the 1960s to help provinces facing revenue drops. Alberta continues to press for a package of between $20 billion and $30 billion to help oil and gas companies.

Provincial debt issuance for this year may reach $150 billion compared with about $100 billion estimated before the COVID-19 outbreak, Bank of Nova Scotia wrote in an April 15 note to clients. That’s on top of federal financing needs of about $450 billion.