The Great White Short Redux

The International Monetary Fund (IMF) released their bi-annual Fiscal Monitor Report earlier this month, which drew a lot of attention. Governments are increasingly relying on fiscal stimulus measures to keep their economies afloat in various stages of lockdown while trying to battle the COVID-19 pandemic, and investors are wondering what the ramifications of this increased debt burden will be.

The Financial Post ran an article about Canada’s dangerous fiscal situation and how “money printing” is an ill-advised solution. While the author of the article is correct in stating that the Canadian budget deficit is projected to be -19.9% for fiscal 2020 – which would be the largest deficit of the world’s advanced economies – the IMF is forecasting for this surge in spending to be short-lived. Further, by 2025, Canada will have the second lowest budget deficit of advanced economies. The reason that Canada has been able to increase its fiscal spending by such a large amount in response to the Great Lockdown is because its balance sheet was in much better shape than other advanced economies heading into the pandemic. At the end of 2019, general government debt in Canada was just under 90% of GDP, third place in the rankings for advanced economies. The uptick in debt across the country is something that shouldn’t be marginalized or brushed off without accountability of politicians on how those funds are utilized, but when looking at the big picture, Canada hasn’t gotten to the point where our debt burden is an outlier relative to other advanced economies.

Looking at currency markets, you can see a similar narrative from market participants. Across a wide swath of currencies, the Canadian dollar has strengthened 2.4% on average from the end of 2019 to October 27, 2020. However, if you only look at major currencies from advanced economies in the IMF’s opportunity set (EUR, JPY, GBP, and USD), then the picture looks different and the Canadian dollar has weakened -3.4% on average over the same time period. While the market has clearly priced in an increased rate of fiscal spending relative to other advanced economies, we are not at the point where the market is signaling Canada is on the precipice. There is no guarantee that this current situation won’t change in the coming years as governments continue to tackle how best to navigate through the pandemic, and we encourage our readers and ourselves to remain curious and inquisitive as the situation continues to unfold.