Canada’s sovereign debt is poised to reach a 20-year high, potentially jeopardizing the country’s AAA credit rating, according to a report by Macquarie Capital Markets. The analysis, released on Wednesday, highlights a significant escalation in the federal deficit, projected to approach $400 billion (approximately $284 billion) due to the expansion of emergency programs designed to mitigate the economic impact of the COVID-19 shutdowns. Macquarie analysts David Doyle and Neil Shankar estimate that this increased spending would push the federal net debt-to-gross domestic product ratio to approximately 55 percent, marking the highest level since the 1998-99 fiscal year. This projection underscores the considerable strain on the nation’s finances.
The analysts’ assessment considers not only the federal figures but also the anticipated deficits of provincial governments. Adding in the projected deficits of provinces, the overall shortfall is estimated to reach around $500 billion, or a net debt of 90 percent of the nation’s total output for the 2020-21 fiscal year. This substantial figure reflects the widespread economic disruption caused by the pandemic and the subsequent government interventions. The report specifically notes that this situation is likely to attract the attention of credit rating agencies, placing pressure on Canada’s current AAA rating. Agencies will be closely monitoring the country’s economic performance and fiscal trajectory.
A key driver of this escalating debt burden is the ongoing economic slowdown. The analysts predict that continued underperformance in the economy, particularly given its reliance on housing and energy sectors over the past decade, could further exacerbate the situation. They anticipate that rating agencies may react negatively to these developments, recognizing the increased vulnerability of Canada’s creditworthiness if economic growth remains sluggish. The report highlights that the country’s finances are now heavily reliant on borrowing to sustain economic activity.
Specifically, the Ontario government, the world’s largest sub-sovereign debt issuer, is expected to see its budget deficit more than double compared to earlier government projections. This increase is a direct consequence of the 9 percent contraction in Ontario’s economy during 2020, attributable to the COVID-19 shock. Similarly, Quebec, which had been operating budget surpluses prior to the crisis, projects a deficit between $12 billion and $15 billion and estimates it will take five years to restore balance to its books. These provincial challenges add further complexity to Canada’s overall debt situation.
The Financial Accountability Office of Ontario, the province’s fiscal watchdog, detailed these projections earlier this week. Furthermore, Quebec’s Finance Minister, Eric Girard, confirmed the province’s anticipated deficit during a press conference on Wednesday. The escalating debt levels are a consequence of the pandemic’s profound and sustained impact on the Canadian economy, requiring significant financial support from the government. These projections underscore the pressing need for sustainable fiscal policies going forward.