Canada is at greater risk of losing its AAA credit rating than other top-rated countries if the government fails to show fiscal discipline, Royal Bank of Canada has warned on the eve of Finance Minister Chrystia Freeland’s new budget.
A downgrade has the potential to raise the borrowing costs across the economy, economist Rachel Battaglia said in a note. “Even though deeper deficits and higher associated sovereign borrowing costs may feel like a distant problem for many Canadians, the impact has the potential to trickle down to most households and businesses,” Battaglia wrote.
Canada is one of a handful of countries to enjoy the highest credit rating from both S&P Global Ratings and Moody’s Investors Service. It has a relatively low level of net government debt, but its households are highly leveraged, partly because of high housing costs.
Freeland is due to release the federal government’s 2024-2025 fiscal year budget on April 16. A softer economy and increasing expenses are expected to weigh on its balance sheet, Battaglia wrote.
The threat of higher costs is already a reality for some provincial governments. Quebec’s bond yields widened versus Ontario’s after it announced a large borrowing plan to plug large deficits. A budget shortfall and growing borrowing needs in British Columbia saw S&P cut the province’s credit rating to AA- earlier this week — its third downgrade in three years.
“The development in Quebec should not be lost on the federal government as it puts together its fiscal plan. Any signs of a loosening grip on the public purse will result in a similar reaction from bond markets — bringing up the relative borrowing cost on Canada’s sovereign debt,” Battaglia noted. The rates that banks charge consumers for mortgages and other loans are closely correlated to the federal government’s borrowing rate, she noted.
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