Canada enjoys AAA sovereign ratings from two top rating agencies and its finances could withstand a wave of U.S. tariffs, but some of its provinces could take a ratings hit if a trade war persists, analysts and economists said.
Ratings agencies said some provinces were more at risk from U.S. President Donald Trump’s threat to impose a 25 per cent duty on most Canadian imports on March 4 due to their disproportionate exposure to U.S. exports or weaker financial positions.
A lower credit rating potentially increases government borrowing costs, impacts revenue streams, and increases debt and deficits.
“There’s no doubt that tariffs … would have potentially significant differential effects on the provinces,” Douglas Offerman, senior director at Fitch Ratings, said in an interview.
Ontario and Quebec, the two provincial manufacturing powerhouses, face a significant threat, he said.
Alberta and Saskatchewan, with energy and potash exports to the U.S., also are vulnerable, though Alberta boasts better financial health than most other provinces, Offerman added.
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British Columbia and Nova Scotia, though not heavily exposed to exports to the U.S., have been running higher deficits and debts, making them vulnerable even if tariffs have a minimal impact, said Travis Shaw, senior vice president and sector lead for global sovereign ratings at Morningstar DBRS.
The impact of tariffs on provinces will depend on the extent of the levies, how long they persist, and which sectors are targeted, Shaw said.
A trade war remains a “material downside risk on provinces which we are closely watching,” he said, adding that Morningstar has not changed last year’s “stable” outlook on these provinces.
In a report last month, Moody’s Ratings described a potential trade dispute as “credit-negative for all Canadian provinces.” Tariffs would lower growth and reduce revenue, it said.
Fiscal support
Canada’s provinces are already preparing to be dented financially by the federal government’s plans to curb immigration substantially. Alberta is due to give a financial update in its annual budget later on Thursday. Ontario and Quebec will release their budgets next month.
Most ratings agencies currently have a strong rating and stable outlook on the provinces, and they have not updated them since the tariff threats. The ratings are usually done once a year unless there is some kind of economic shock.
Ontario, which contributed almost half of Canada’s economic growth of 1.2 per cent in 2023, draws almost 17 per cent of its GDP from U.S. exports, primarily through shipments of cars, vehicle parts, metals, consumer goods, and other products, according to estimates from BMO Capital Markets and Statistics Canada.
Quebec and Manitoba closely follow Ontario as the most vulnerable to tariffs among the non-oil producing provinces, analysts said. More than 15 per cent of the GDP of Quebec, with a major aerospace industry, depends on U.S. exports, while the figure for Manitoba is more than 16 per cent.
These three provinces will also likely require more support from their governments in the face of tariffs and subsequent retaliation, analysts predicted.
All provincial governments combined have the fiscal capacity to provide about $100 billion (US$69.93 billion) before breaching their debt-to-GDP ratio beyond the COVID-19 pandemic level, said Laura Gu, senior economist at Desjardins.
–Reporting by Promit Mukherjee; Editing by Caroline Stauffer and Paul Simao
