Canada’s AAA Rating Confirmed By S&P On ‘Ample’ Fiscal Room

Canada’s AAA rating and stable outlook has been confirmed by S&P Global Ratings, which cited the country’s “ample” fiscal and monetary buffer and its diversified economy.

“Canada’s public finances were well positioned entering the pandemic to enable a strong policy response to contain its negative impact without weakening sovereign creditworthiness,” S&P analysts including Julia L Smith wrote in a note Wednesday.

S&P’s rating is based partly on the expectation of an economic rebound that will shrink the country’s fiscal gap. The federal government’s deficit may approach 16% of economic output this fiscal year, the largest since 1945, while the economy is on path to shrink 6.8% in 2020, the biggest drop in almost a century, according to government estimates released July 8.

“We expect the Canadian economy to recover in 2021, which will partially compensate for the loss of output this year, and continued GDP growth thereafter,” S&P analysts said. “This recovery will lead to an improvement in the government’s deficit in 2021.”

Read more: Canada’s AAA Rating Reflects Fiscal, Monetary Flexibility: S&P

Canada and Germany are the only members of the Group of Seven retaining their AAA ratings with S&P. Moody’s Investors Service also awards Canada its highest rating, while Fitch Ratings downgraded Canada in June, citing the deterioration in its public finances from the pandemic.

“We could lower the ratings over the next two years should the deterioration in the government’s fiscal position become more severe and prolonged than we currently anticipate,” S&P said. “We could also lower the rating should a deteriorated fiscal position be accompanied by a substantial weakening in Canada’s net external position beyond our current expectations.”

©2020 Bloomberg L.P.

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