July 6, 2020 / 5:34 PM / a month ago

Moody's sees Canadian provincial debt loads stabilizing once growth resumes

TORONTO, July 6 (Reuters) - Moody’s Investors Service is expecting Canadian provinces to shift rapidly to stabilizing the additional debt burdens they are taking on due to the coronavirus crisis once economic growth resumes.

The ratings agency expects Canada’s economy to contract by 7% in 2020 and all 10 provinces to post “material deficits” in the fiscal year that began in April. That includes an expected deficit of more than 30% of revenue for Alberta, which faces the additional challenge of low oil prices.

That will lead to a sharp increase in debt burdens for the provinces this fiscal year, Moody’s said. But the ratings agency sees debt loads stabilizing in 2021-22 as revenue recovers, which could signal it is in no rush to downgrade the provinces’ debt.

“We forecast that the debt burden of each province will return to the respective pre-pandemic trend dynamics across the next three years,” Moody’s said.

Less than two weeks ago, Canada’s sovereign debt lost one of its coveted triple-A ratings when Fitch downgraded it for the first time, citing expected much higher public debt ratios.

Moody’s, which still gives Canada its highest rating of Aaa, expects provincial debt burdens to remain above pre-pandemic levels for at least the next three years but for debt affordability to remain strong due to downward pressure on interest rates.

The Bank of Canada has since March slashed interest rates to a record low of 0.25%. (Reporting by Fergal Smith; Editing by Dan Grebler)

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