British Columbia has lost a triple-A credit rating, with Fitch Ratings Inc. downgrading the province in part because of Canada’s rising federal debt burden.
But B.C. retains the title of the province with the best credit rating from Fitch, with the agency giving it a new rating of AA+ with a stable outlook on Friday, reduced from AAA with a negative outlook.
Fitch’s assessment includes comparisons of the province’s net adjusted debt and a pro-rata share of federal debt relative to B.C.’s gross domestic product. Both those comparisons were part of the analysis that led to B.C.’s downgrade.
“Certainly, the rise in federal debt is having an effect on our ratios for all of the provinces,” said Douglas Offerman, a senior director at Fitch.
In June, 2020, Fitch downgraded Canada’s rating to AA+ from AAA as COVID-19-related spending sent the federal debt burden soaring. Earlier this month, the agency reaffirmed that AA+ rating, while adding that some of Ottawa’s major commitments, such as increased health transfers to the provinces and territories, have not yet been incorporated into the government’s forecasts.
Fitch also flagged consumer indebtedness as a vulnerability for the Canadian economy.
Fitch is one of the big three U.S. rating agencies, and it affirmed the ratings of the four other provinces it covers – Alberta, Saskatchewan, Ontario and Quebec – last Thursday. Saskatchewan retained its AA stable rating, while Alberta, Ontario and Quebec kept their AA- stable ratings.
In part, those four provinces kept those ratings because of the expectation the federal government would continue its historic habit of providing any province with liquidity support, Fitch said. B.C., however, received no such uplift, because its own credit rating is on par with Canada’s.
B.C. entered the pandemic in a relatively strong fiscal position, but it is projecting a $9.7-billion deficit in the current 2021-22 fiscal year, falling to $4.3-billion in fiscal 2023-24. That will push up the province’s debt-to-GDP ratio to 26.9 per cent in 2023-24, from 20.3 per cent in 2020-21.
Alan Gibson, a director at Fitch, said B.C.’s most recent budget was “somewhat conservative” when it was issued in April.
Rebekah Young, director of fiscal and provincial economics at Bank of Nova Scotia, B.C.’s budget forecasts were “fiscally prudent and fiscally appropriate,” with about a third of the 2021-22 deficit attributable to various types of contingencies.
The province’s economy has rebounded more quickly than the budget forecast, as vaccines and U.S. stimulus spending accelerate growth, setting the stage for B.C. to turn in smaller deficits and debt than predicted, she said. “They have a whole lot of space to overperform.”
Ms. Young said Canada and the provinces are faring relatively well in debt markets, with the slight decline in credit ratings part of a larger international trend brought on by widespread massive deficits to fight the pandemic. “We’re certainly not standing out,” she said.
Ms. Young said B.C. is in line with other provinces in its strategy to ratchet down debt levels relative to the size of its economy in a gradual way. But its debt burden relative to GDP is much lower than some other provinces. Ontario, for instance, is projecting its net-debt-to-GDP ratio will hit 50.2 per cent in 2023-24, nearly double the level of B.C.
In a statement, B.C.’s Finance Ministry pointed out other Canadian jurisdictions, including the federal government, have seen their credit ratings revised because of the pandemic’s effects.
The ministry said the government had decided to support provincial residents during the past 15 months of economic turbulence. The B.C. budget contained “substantial levels of prudence,” including contingencies, forecast allowances and conservative forecasts, the ministry said.
“It will take time to repair the damage from the COVID-19 pandemic and improve our financial position, and we’ve made the right decision to put our focus on supporting British Columbians,” the statement said.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.