Fitch Ratings has downgraded Canada’s AAA sovereign credit rating to AA+, citing the federal government’s much-expanded general deficit due to the current pandemic.
The larger deficit is largely driven by Ottawa’s public spending to counteract a sharp drop in parts of the economy that went into lockdown to prevent the spread of COVID-19.
Keeps stable outlook
However, Fitch kept the country’s “stable” outlook, saying it expects Canada’s consolidated debt/GDP to stabilize over the medium term and gradually recover.
Fitch said Canada's structural strengths also underpin the ratings. “These include its advanced, well-diversified and high-income economy, and Canada's political stability, strong governance and macro policy framework, which has delivered steady growth and low inflation.”
Relies on foreign portfolio flows
It also said Canada has a large positive net international investment position, driven by its foreign pension assets. “However, reliance on foreign portfolio flows to finance sustained current account deficits is a weakness, which has contributed to a persistent and growing level of net external debt.”
Fitch said the pandemic lockdown measures combined with depressed global oil demand will cause a severe recession in Canada later this year, with GDP dropping 7.1%. There will be a gradual improvement in 2021 thanks to slowly improving global trade, commerce and domestic labour market conditions.