Moody’s Investors Service Upholds Canada’s Top Credit Rating Ahead of Fiscal Update
In a report released Thursday, Moody’s Investors Service reaffirmed Canada’s top credit rating, citing the country’s economic strength and policy effectiveness as key factors in its decision. The AAA rating, with a stable outlook, comes ahead of a fiscal update from Prime Minister Justin Trudeau’s government, which is expected to show soaring debt.
Economic Strength and Policy Effectiveness
Moody’s analysts, including William Foster, noted that Canada’s economic strength and policy effectiveness give it a "very high degree of resilience to shocks." This assessment is based on the country’s robust economic performance, strong institutions, and effective monetary and fiscal policies. Moody’s expects Canadian gross domestic product (GDP) to contract by about 6 per cent this year, followed by growth of 5 per cent and 3.5 per cent in 2021 and 2022, respectively.
Mitigating Factors: Historically Low Interest Rates
Moody’s analysts pointed out that historically low interest rates are mitigating the impact of this year’s sharp rise in spending to counter the COVID-19 pandemic. The rating agency expects Canada’s budget deficit to be around $343 billion (US$262.3 billion) this fiscal year, or 16 per cent of total output. However, with interest rates at historic lows, the impact of this increased borrowing is reduced.
Government Debt Burden
Moody’s also noted that the general government debt burden – which includes provincial and local debt – will rise to about 104 per cent of GDP in 2020, up from 79 per cent in 2019. However, the rating agency believes that Canada has "materially higher capacity" to carry a larger debt burden due to its status as one of the world’s reserve currencies.
Outlook and Implications
Moody’s stated that the risk of a material, long-lasting deterioration to Canada’s economic or fiscal strength is low, including from the coronavirus shock. The rating agency believes that Canada’s long-standing political consensus on fiscal health will lead to gradual fiscal consolidation after the pandemic subsides.
Implications for the Government
The affirmation of Canada’s AAA rating comes as a relief to Prime Minister Trudeau, whose stewardship of the nation’s finances took a hit in July when Fitch Ratings downgraded Canada due to concerns over the spike in spending. The Moody’s report is also seen as a vote of confidence in Canada’s economic resilience and policy effectiveness.
Government Response
Finance Minister Chrystia Freeland is expected to release updated government projections in coming weeks, which will likely provide further insight into Canada’s fiscal position. However, with Moody’s affirmation, the government may be under less pressure to implement immediate austerity measures.
Conclusion
Moody’s affirmation of Canada’s AAA rating reflects the country’s strong economic fundamentals and effective policy framework. While the COVID-19 pandemic has presented significant challenges for Canada’s economy, Moody’s analysts believe that the country is well-equipped to navigate these difficulties and emerge stronger in the long term.
Sources:
- Moody’s Investors Service report
- Bloomberg.com article
Share Your Thoughts:
- What do you think about Moody’s affirmation of Canada’s AAA rating?
- How do you see the government responding to this news?
- Do you believe that Canada is well-equipped to navigate the challenges posed by the COVID-19 pandemic?
