MNI INTERVIEW: Canada Needs Focus On Fiscal Slimdown- Moody’s

Canada's government needs to remain focused on medium-term fiscal consolidation as deficits swollen by pandemic spending fade, even with low interest rates and solid economic growth keeping higher debts affordable, the country's lead credit analyst for Moody's Investors Service told MNI.

"What's most important from a credit perspective for Canada is really ensuring that the country's fiscal strength doesn't weaken materially from this point onward," Bill Foster, senior credit officer in the sovereign risk group, said in a phone interview from New York.

"The government has used its balance sheet in a way that has been effective at least in limiting the damage to the economy and to jobs," he said. "But moving forward, there's a legacy from that and it needs to be something that the government is very much focused on in terms of how do you ensure that the debt dynamics remain sustainable."

Liberal Prime Minister Justin Trudeau on Tuesday will present a "Throne Speech" outlining plans for winding down record pandemic relief while continuing deficits to pay for a new federal daycare program and controlling climate change. The Liberals were re-elected to a minority government in September and sources have told MNI Trudeau can spend as if he has a majority.

FISCAL ANCHOR

Business groups have criticized Finance Minister Chrystia Freeland's reliance on a sole "fiscal anchor" of reducing debt as a percentage of GDP over the next several years, and for pledging deficit spending beyond what's needed to tackle the pandemic. Foster didn't comment on how the government should reach its fiscal goals, but said Canada's stable Aaa rating "signals that we believe the government will be committed to debt sustainability around these levels."

"It's going to be it's a different paradigm now because we don't have this extraordinary need for emergency spending; that will be phased out," he said. "But if there's a legacy of more spending, and more of a structural increase in spending, that's going to make it more challenging for the government to achieve its objectives, so that's something we're going to be very focused on."

One key measure of debt affordability is interest payments as a percentage of revenue and that's declined to about 6% from 16% since 2000, Foster said. While the Bank of Canada will likely raise interest rates before the Fed, borrowing costs will rise more slowly than in past cycles and debt levels should fade over the next five years, he said.

Federal finances have limited exposure to swings in energy prices or carbon transition risks, factors that are more prominent for the oil-producing provinces of Alberta and Newfoundland, he said.

Canada's supply of new federal debt should decline along with pandemic spending, while global demand for Canada's bonds remains supported by the country's dollar representing about 2% of global reserves, Foster said. "We've seen a deepening of the market for that, and that creates an important demand factor to absorb the supply that we've seen come on online as a result of the pandemic."