Moody's signals Canadian provinces can avoid post-COVID-19 downgrades, analysts say

TORONTO (Reuters) - Moody’s Investors Service is expecting Canadian provinces to shift rapidly to stabilizing their rising debt burdens once economic growth resumes, which analysts said could be a signal to provinces on how they can avoid downgrades.

The ratings agency said on Monday it expected Canada’s economy to contract by 7% in 2020 because of the coronavirus crisis 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. Fitch downgraded Alberta’s rating last week to AA- from AA.

Declining growth 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 indicate it is in no rush to downgrade the provinces’ debt.

Moody’s report signals “to the extent that the provincial governments return quickly to fiscal consolidation, they will not view the temporary deviation as credit negative,” said Maria Berlettano, head of Canadian government credit strategy at CIBC Capital Markets.

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 still gives Canada its highest rating of Aaa.

At over C$800 billion ($590 billion), provincial bonds outstanding exceed federal government issuance.

“Our view would be that provincial finances are shouldering much less of the COVID burden than the federal government,” said Robert Kavcic, a senior economist at BMO Capital Markets. “We are expecting the combined provincial deficit at about 3% of GDP this year, versus more than 11% for Ottawa.”

Reporting by Fergal Smith; Editing by Dan Grebler and Peter Cooney