Finance Minister Bill Morneau said Canada remains in a strong financial position relative to other major advanced and emerging economies.
Photo: DAVE CHAN/Agence france-Presse/Getty ImagesOTTAWA—Canada has become the first triple-A-rated sovereign entity to lose its rating because of the economic downturn and the extraordinary fiscal response triggered by the coronavirus pandemic.
Some market watchers, though, don’t believe the rating downgrade will have a meaningful impact on borrowing costs for the Group of Seven economy. Canadian debt securities remain highly coveted, they said, in a period when debt burdens among governments across the world are ballooning in response to the pandemic.
Fitch Ratings on Wednesday said it downgraded Canada’s long-term foreign-currency issuer default rating to AA+ from AAA, saying the decision “reflects the deterioration of Canada’s public finances in 2020 resulting from the coronavirus pandemic.” A spokeswoman for Fitch said this was the first triple-A sovereign it has downgraded since the onset of the pandemic.
Canada is on track to post its largest annual budget deficit on record this fiscal year, of about 256 billion Canadian dollars ($189 billion), or nearly 12% of the country’s gross domestic product, according to projections this month from Canada’s parliamentary budget watchdog. In contrast, data indicate Canada’s preliminary budget deficit for the 2019-20 fiscal year, ended March 31, was C$21.77 billion, or 1.2% of output.
Moody’s Investors Service has a triple-A rating for Canada with a stable outlook, and a spokesman said the firm wouldn’t comment on further action. Standard & Poor’s also gives Canada a triple-A rating. A representative didn’t comment on possible further action.
The downgrade marks a blow to the current Liberal government, which has argued its aggressive fiscal policy to stave off a virus-fueled depression—by committing upward of C$170 billion on emergency programs—was possible because of its effective management of public finances.
Canada regained its triple-A rating early this century, after losing it the decade before due to elevated budget deficits that eventually triggered austerity measures. Following the 2008-09 financial crisis, Canadian officials boasted about how the country maintained its triple-A rating and wasn’t forced to undertake bailouts or other extraordinary measures to protect its economy.
Finance Minister Bill Morneau said Canada remains in a strong financial position relative to other major advanced and emerging economies. “Moving forward, we will continue to be fiscally responsible while acting to protect our country and its economy.”
Fitch said it expects Canada’s fiscal response to the new coronavirus will lead to a rise in Canada’s general government debt—which incorporates the federal and provincial governments—to 115.1% of GDP in 2020, up from 88.3% of GDP in 2019. Fitch said the median rate among double-A rated countries is projected to be at 42.3% for 2020.
Generally, a downgrade in a country’s credit rating would lead to a marked increase in the government’s ability to borrow in financial markets. However, activity in Canadian bond yields and the Canadian dollar was muted following the Fitch downgrade.
Karl Schamotta, chief market strategist at Cambridge Global Payments, said demand for safe assets, such as those from Canada, remains “incredibly high—meaning that ratings changes are unlikely to push yields any higher.” The yield on the 10-year government of Canada bond is just above 0.5%, or down nearly a percentage point from trading late last year.
Foreigners bought Canadian securities at a record pace in April, for a total C$49.04 billion, with all of the net purchases in debt securities, according to Statistics Canada.
“Canada still offers material yield pick-up compared to many other countries in Europe and Asia,” said Derek Holt, economist at Bank of Nova Scotia. “There is about $13 trillion of negative yielding debt in the world right now and Canada isn’t a part of that.”
—Stephen Nakrosis contributed to this article.
Write to Paul Vieira at paul.vieira@wsj.com
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