MNI POLICY: Canada FM Defends Record Deficit After Rating Cut

--Finance Minister Morneau Reacts to Fitch Stripping AAA Rating

By Greg Quinn

     OTTAWA (MNI) - Finance Minister Bill Morneau said Wednesday that Canada's

fiscal picture remains stronger than many G20 peers despite losing its triple-A

credit rating from Fitch due to record spending to shield the economy from

Covid-19. 

     "Going into the global pandemic, Canada was in a great position to deploy

our fiscal firepower to protect Canadians, and we have," Morneau said in

comments emailed by spokeswoman Maeva Proteau to MNI. "A worse case scenario for

Canadians and the economy would have been to not act."

     "Global markets continue to invest in Canadian bonds driving our cost of

borrowing to historic lows," Morneau said. "We will continue to be fiscally

responsible while acting to protect our country and its economy."

     Fitch lowered Canada's credit rating from AAA to AA+ with a stable outlook,

citing the immediate cost of a record budget deficit and medium-term growth

that's limited to around 1.7% by forces like weak business investment. The

ratings cut takes away the bragging rights of being in the small club of nations

with top grades from all three major credit agencies. 

     --ROLLOVER RISK

     The federal deficit will reach a record 16% of GDP this year then narrow to

6.5% in 2021 and 3% in 2002, Fitch said. Morneau has yet to present a budget for

the fiscal year that began April 1 but has scheduled a partial update for July

8. 

     Fitch said Canada's general government debt will increase to 115% of GDP in

2020 from 88% in 2019, and stabilize around 120% by 2022. 

     GDP will drop 7.1% this year and climb just 3.9% in 2021, Fitch said, and

the country's external debt level is "elevated" at 45%.

     Morneau told lawmakers Tuesday the government may shift into more long-term

debt to avoid rollover risks. The National Bank Financial brokerage said Tuesday

that Bank of Canada federal bond purchases including QE worth CAD5 billion a

week means little new net debt will come to market in the third quarter, and an

initial burst of t-bill sales has passed. 

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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