Canada's Debt Rating Faces Negative Outlook Amid Budget Uncertainty

Strategic Insights -

Finance Minister Paul Martin's February budget has come under mild criticism from Dominion Bond Rating Service Ltd., which has maintained its triple-A rating for Canada's Canadian dollar debt but revised its trend outlook to negative from stable. The negative trend outlook reflects the heavy burden of paying interest on the debt, now about 73 per cent of gross domestic product, and the government's failure to make specific changes in big social programs such as old age security, the Canada Pension Plan and unemployment insurance.

The negative trend assessment also applies to Ottawa's short-term debt, which is graded as R-1 (high), and government bonds issued in foreign currencies, which were cut to double-A (high) from triple-A a year ago. Standard and Poor's Corp., of New York, has maintained its triple-A rating on Canada's debt, but Moody's Investors Services Inc., which put Canada's debt under review for a possible downgrade last month, has yet to make a decision.

Mr. Martin has expressed regret over DBRS's decision, stating that the budget "contained deep and permanent structural reforms" that will reduce the deficit to 3 per cent of GDP by the 1996-97 fiscal year. The budget projects a deficit of $24.3 billion in 1996-97, down from $37.9 billion in the previous fiscal year.

Key Takeaways:

  • Dominion Bond Rating Service Ltd. maintained its triple-A rating for Canada's Canadian dollar debt but revised its trend outlook to negative from stable.
  • The negative trend outlook reflects the heavy burden of paying interest on debt, now about 73 per cent of gross domestic product.
  • DBRS criticized the government for not making specific changes in big social programs such as old age security, the Canada Pension Plan and unemployment insurance.
  • The negative trend assessment also applies to Ottawa's short-term debt, which is graded as R-1 (high), and government bonds issued in foreign currencies.
  • Mr. Martin has expressed regret over DBRS's decision, stating that the budget contained deep and permanent structural reforms that will reduce the deficit to 3 per cent of GDP by the 1996-97 fiscal year.
  • The budget projects a deficit of $24.3 billion in 1996-97, down from $37.9 billion in the previous fiscal year.
  • Only 30 per cent of the government's planned cuts between now and 1998 will take place in the 1995-96 fiscal year, and DBRS warns that out-year reductions may be influenced by an economic slowdown or recession.
  • The government has been criticized for not setting out a specific timetable for eliminating the deficit altogether.

Statistics:

  • Debt as a percentage of gross domestic product: 73%
  • Projected deficit for 1996-97: $24.3 billion
  • Deficit for the previous fiscal year: $37.9 billion
  • Percentage of planned cuts to take place in 1995-96: 30%
  • Percentage of debt held in Canadian dollars: unknown
  • Percentage of debt held in foreign currencies: unknown

Sources:

  • Dominion Bond Rating Service Ltd.
  • Statement from Finance Minister Paul Martin
  • DBRS, "Trend Outlook Revised to Negative"
  • The Globe and Mail
  • Budget 1995, Government of Canada
  • DBRS, "Rating Action: Canada Federal Debt"