A Triple-Eh credit rating?
For Canada, maintaining the trust of borrowers is a source of national pride, like winning the gold medal in Olympic ice hockey: hard-earned international validation of the nation’s skill, discipline and strong stewardship.
But Fitch Ratings is warning that the country’s prized standing in the eyes of creditors may suffer because of protectionist measures proposed by U.S. President Donald Trump. In a report Friday, a Fitch research team led by James McCormack wrote that nations with close ties to the world’s largest economy, such as Canada, are “most at risk” of damage to their credit fundamentals.
“U.S. policy predictability has diminished, with established international communication channels and relationship norms being set aside and raising the prospect of sudden, unanticipated changes in U.S. policies with potential global implications,” Fitch wrote.
Trump is scheduled to meet Canada Prime Minister Justin Trudeau on Monday, and trade is expected to be at the top of the agenda. The U.S. president has pledged to renegotiate the North American Free Trade Agreement on more favorable terms for the U.S. or tear up the deal entirely.
In December, Fitch lowered its outlook on Mexico to negative following a plunge in the peso triggered by Trump’s rhetoric toward America’s neighbor to the south. But Canada’s economic reliance on the U.S. is also immense. Roughly three-quarters of the nation’s exports flowed stateside in December.
Stephen Schwarzman, chairman of Blackstone Group LP and head of the president’s strategic and policy forum, recently told Canadians not to “be enormously worried” about the new administration’s stance on trade. However, concern north of the 49th parallel lingers about the country becoming “collateral damage” of U.S. action against Mexico, a worry seemingly shared by Fitch.
“Countries hosting U.S. direct investment, at least part of which has financed export industries focused back on the U.S., are at risk of being singled out for punitive trade measures,” the credit rater wrote. “Countries with the highest stock of U.S. investment in manufacturing are Canada, the U.K., Netherlands, Mexico, Germany, China and Brazil.”
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Only 11 nations are currently rated as AAA by Fitch, the smallest number since 2003. The last time Canada lost the trust of international credit graders was in the early 1990s, when swelling government indebtedness elicited downgrades from Standard & Poor’s and Moody’s Investors Service. Moody’s and S&P raised their credit ratings for the country to AAA in 2002, while Fitch upgraded it in August 2004.
Any loss of Canada’s AAA credit rating could be seen as a blow to Trudeau’s fiscal record as he runs deficits to bolster the economy and improve the nation’s infrastructure with the goal of boosting long-term growth.
“If trade protectionist measures are produced that hit Canada, that’ll affect government revenue negatively and a credit rating downgrade would increase the risk premium investors demand for holding government bonds,” said Randall Bartlett, chief economist at the Institute of Fiscal Studies and Democracy in Ottawa. “At this point, all of the risk is to the downside.”
The increase in government debt yields since the election is expected to make it more expensive for Trudeau to fund his spending plans, Bartlett added, as new bond issues and rolling over existing borrowings from previous rounds of stimulus are poised to push up the cost of public financing.
Still, with Canada’s outlook characterized as “stable” by Fitch, it will take some time to reach the point where a ratings cut is warranted.
“U.S. positions on some countries may change quickly, at least initially,” Fitch wrote, “but any potential rating adjustments will depend on consequent changes to sovereign credit fundamentals, which will almost certainly be slower to materialize.”