Despite a massive jump in spending to support the economy throughout the pandemic, Canada has still earned a AAA sovereign rating from DBRS Morningstar.
The rating agency confirmed its rating on Canada, citing a “stable” trend and saying that it sees the credit profile as strong, notwithstanding the effects of Covid-19.
“The recovery of the Canadian economy looks set to continue as health conditions improve,” the agency said.
At the same time, higher commodity prices and stronger demand from the U.S. also boost the outlook for the economic recovery.
While the domestic government’s finances have been significantly impacted by its pandemic response, DBRS said it views fiscal measures as a positive overall.
The report noted that gross government debt-to-GDP is projected to increase by nearly 30 percentage points between 2019 and 2021.
“However, Canadian public finances entered the pandemic in a strong position, and debt servicing costs are very low despite the higher level of debt,” the agency said.
And, it sees the deficit coming under control quickly as the economy regains its footing.
“Once the virus is contained and the recovery firmly takes root, we expect the deficit to quickly decline as revenues rebound and emergency spending winds down,” DBRS said.
The stable outlook for the rating indicates that a downgrade remains unlikely in the short term.
“Canada has considerable capacity to absorb shocks and cope with pending challenges,” the report said. “However, the ratings could be downgraded if there is a weakened commitment to fiscal sustainability.”