Fitch has raised concern but GMP’s Joey Mack says Bay Street is not worried right now
Canada’s continued government deficits and debt levels make the country vulnerable to a downturn, something increasingly expected by investors.
That’s the warning this week from credit agency Fitch which says that Canada’s gross government debt, combining federal and provincial fiscal accounts, is higher than other sovereigns with a AAA rating except the US.
The agency says that Canada is nearing levels that would make it incompatible with a AAA rating. However, it notes that the deficits are relatively low at less than 1% of GDP and it expects the government’s debt ratio to fall toward 85% over the medium term.
Referring to this week’s federal budget, Fitch notes that the budget plan continues to forecast deficits throughout the outlook period, with an additional $5 billion and $6.3 billion in spending for 2019-2020 and 2020-2021.
It says that the government’s growth forecast (1.8% in 2019, 1.6% in 2020) was in line with Fitch’s 1.6% for 2019 and 1.7% in 2020.
But it concludes that “the preference for continued deficits and increased program spending over fiscal consolidation could increase the vulnerability of public finances to a faster economic slowdown or sudden shock,” while noting that this is not its base case despite disappointing fourth quarter growth and weakening global macroeconomic outlooks.
Joey Mack, director of fixed income at GMP Securities says that Fitch’s comments could be a first step in it reviewing the AAA status, although that is neither certain or likely in the near-term.
Speaking to BNN Bloomberg, Mack added that Bay Street is not overly concerned, especially as other countries including the US and France have some sub-AAA ratings depending on the agency.
Although he was not sounding the alarm over credit ratings, Mack highlighted the lack of an economic driver in the federal budget, which is disappointing for the markets.
Talking about the equity market, Mack said that he is not predicting a large correction despite the disconnect between a cautious tone from the bond market and the rally for equities.
He also talked of the “great value” in the preferred share market among companies with strong credit.
