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Canada’s top-notch, AAA credit rating is under increasing pressure due to the fallout from Covid-19, says National Bank Financial Inc. (NBF) in a new report.

While Canada managed to retain its AAA rating through the global financial crisis of 2008-09 and the collapse in oil prices in 2015, the report suggested, the pandemic is a much tougher challenge.

“As related shutdowns/shut-ins lay waste to the global economy, fiscal fortunes have sunk … deep and quick,” the report said. “In Canada’s case, the deterioration in public sector finances appears more acute than elsewhere, owing to a hefty fiscal response to the virus and the added pressure of low commodity prices.”

As a result, it warned that the risks to Canada’s AAA rating are rising.

While the government has yet to be present its federal budget for 2020, NBF noted, recent scenarios presented by the Parliamentary Budget Officer (PBO) warn that the federal deficit for 2020-2021 could be around $250 billion, equivalent to 12.7% of GDP.

“In dollar terms, that would be a roughly 10-fold increase in the deficit vs. the government’s prior guidance,” it said, adding that the debt-to-GDP ratio in that scenario would be equivalent to 48.4%.

This significant deterioration in government finances represents a growing risk to Canada’s sovereign rating, NBF noted, although it added that the ratings in more immediate jeopardy are those of the provincial governments.

“Today’s sharp erosion in provincial deficit and debt profiles could well result in provincial downgrades, particularly in those cases where economic and fiscal recovery paths are slow/uncertain,” it said.

In a separate report published today, Fitch Ratings cautioned that, while provincial governments have some room to add debt, they will face credit rating downgrades if their fiscal situations deteriorate significantly.

“The likely depth of each province’s downturn, the speed of their recoveries and the lasting damage to their economies and balance sheets are all relevant to assessing whether the current ratings sufficiently reflect long-term credit quality,” Fitch said.

“For most provinces, a credible updated economic and revenue forecast remains at least weeks away, once the immediate health crisis passes, economic reopening progresses, and the magnitude of the recession becomes clearer,” the report added.

Rising federal debt would reduce the capacity for added provincial debt at current rating levels, Fitch said.

In the meantime, NBF suggested in its report, the growing threat to the federal sovereign rating may well prove justified.

“If aggressively fighting the coronavirus ultimately ends up jeopardizing one of Canada’s “As,” that may well be an acceptable trade-off for millions of disaffected workers and a growing number of distressed business owners,” NBF said.

“Bond investors are understandably watching Canada’s unfolding economic and fiscal situation closely, capable of expressing their attitudes and anxiety via positioning and flow. Still, the final say on this country’s fiscal future and the true value of credit rating will, as it always has, rest with Canadian voters,” it concluded.