Canada's fiscal plans could renew credit rating pressure, Fitch warns

Parliament Hill is shown in Ottawa on March 11, 2020. THE CANADIAN PRESS/Sean Kilpatrick

TORONTO — Fitch Ratings, which in June stripped Canada of its triple-A credit rating, has warned that Canada could face renewed pressure on its rating if Ottawa sticks to spending plans outlined last week in a fiscal update without raising revenue.

"Canada's recently released medium-term financial roadmap reinforces the likelihood of a rising public debt burden and expansionary fiscal policy without precise details of a return to a fiscal anchor and consolidation," Fitch Ratings said in an article posted on its website on Monday.

"Canada's public financial profile would weaken relative to its 'AA' category peers if the federal budgets for fiscal years 2021-22 and 2022-23 adhere to the government's medium-term operational forecasts and stimulus plans as outlined in the Fall Economic Statement (FES) without new revenue-raising measures," Fitch added.

Canada's budget deficit is forecast to hit a historic $382 billion on COVID-19 emergency aid, with the federal government eyeing $100 billion in stimulus to be rolled out once the virus is under control, the finance department said last week.

Fitch downgraded Canada to 'AA+' in June, making it the first time since August 2004 that the ratings agency did not give Canada top marks. Canada had been one of a handful of countries with a AAA rating from all three of the main agencies.

Moody's Investors Service last month affirmed Canada's triple-A rating, saying the risk of a material, long-lasting deterioration of Canada's economic or fiscal strength due to the coronavirus crisis is low.

S&P Global Ratings and DBRS Morningstar also continue to give Canada their highest rating, while bond investors are giving Ottawa "the benefit of the doubt," expecting a historic budget deficit to be slashed once the pandemic subsides.

Canada's 10-year note yield eased 3.1 basis points on Tuesday to 0.736%, having pulled back from its highest intraday level in more than three weeks on Monday at 0.810%.