Following an election campaign that saw billions promised in new spending, DBRS Morningstar confirmed the Government of Canada’s AAA sovereign rating.
“Canada’s credit profile remains strong despite the economic and health impact of the pandemic,” said a report Wednesday from the rating agency, which cited a “stable” trend. “Sound management of economic policy is expected to continue after the Sept. 20 federal election.”
Justin Trudeau’s Liberals secured another minority Parliament on a platform that included about $78 billion in new spending over the next five years and around $25.5 billion in new revenue.
Using the Parliamentary Budget Office’s August projections, the Liberals forecast the $156.9-billion deficit in 2021–22 falling to slightly more than $32 billion in 2025–26, with the debt-to-GDP ratio declining to 46.5% from 48.5% over the same period.
“While new spending proposals announced during the federal election could add some upside risk the deficit trajectory, both the Liberals and the Conservatives have laid out similar deficit-reduction plans over the next five years,” the report said.
DBRS noted that while the fiscal response to the pandemic has been “massive,” it’s also temporary in design, with income and wage supports winding down. Canada also entered the pandemic from a strong position and could absorb the shock “without undermining debt sustainability,” the rating agency said.
Borrowing costs also are low, with the nominal yield on the 10-year government bond averaging 1.4% over the last six months. “As a result, debt servicing costs remain quite affordable despite the higher level of debt,” DBRS said.
The DBRS report comes after Statistics Canada reported a surprise 1.1% contraction in the second quarter. Even so, DBRS expects the recovery to accelerate in the next few quarters as pandemic restrictions ease and consumers spend excess savings.
“Covid-19 infections are rising but the level of hospitalizations and deaths remains low, and 70% of Canadians are fully vaccinated,” the report said.
However, DBRS also noted “mounting downside risks,” including supply-chain bottlenecks and the Delta variant’s spread.