Canada Loses AAA Credit Rating as COVID Costs Rise to $150 Billion

With Canada having lost its AAA rating, things might look gloomy. Investors with a long-term investment horizon should consider investing in a stock like Brookfield Renewable for its gains.

Fitch Ratings is one of the big three credit rating agencies in the world, and it has been keeping a close eye on proceedings, as the pandemic and its effects unfold on economies worldwide. On June 24, 2020, the credit rating firm stripped Canada of its AAA credit ratings.

Moody’s and Standard and Poor’s are the two other firms that have yet to make moves regarding a change in Canada’s AAA status. Fitch stated that the company expects Canada’s response to COVID-19 will raise the country’s debt levels to 115.1% of the Gross Domestic Product (GDP) in 2020, which would be a massive hike from 88.3% last year.

Should you be worried as an investor about the downgrade in Canada’s credit rating? What can you do to secure your long-term prospects? I’ll discuss the situation and a value stock you could consider investing in for its potential a few years down the line.

Not the worst-case scenario

Fitch downgraded Canada’s rating from AAA to AA+, with the outlook of Canada’s debt-to-GDP stabilizing in the medium term. The company’s change in rating with the anticipation of debt-to-GDP stabilizing is not all bad for Canada.

Canada’s response to COVID-19 led to $150 billion in costs for the country. It led to the financial situation, which caused Fitch to downgrade the country’s credit rating. According to the Finance Minister Bill Morneau, Canada’s response was also why the country is not in a worse position.

The government’s response ensures that businesses and workers in the country have ample financial support to weather the ongoing crisis and make an excellent recovery once the situation subsides. The government plans to continue being fiscally responsible and protecting the country and economy.

Things could be worse

Parliamentary budget officer Yves Giroux was also not overly concerned by the downgrade. One rating agency downgraded the country but with a stable outlook. It came as a surprise to Canada, but it could be worse. He went on to tell BNN Bloomberg that if Moody’s and Standard & Poor’s also follow suit, the situation could raise alarms for Canadians.

A downgrade from all three globally recognized credit rating agencies for Canada, while the other G7 countries retain their status could send the kind of signals that throw off investor confidence. It would show that Canada’s markets are riskier than other countries, or that it has not managed its fiscal responsibilities well in dealing with the pandemic.

Protecting your future

While nobody can predict when the global health crisis will end, things will return to relative normalcy. Economies have already started to open up. The short term might not look bright, but the most successful investors have a long-term outlook, and I will discuss a stock that can help you capitalize on fantastic gains over the next decade.

I think Brookfield Renewable (TSX: BEP.UN)(NYSE: BEP) is the ideal play for investors who want to leverage the future of energy. There is a growing demand for renewable energy, and Brookfield is ahead of the curve. The pure-play renewable energy company has an assortment of diversified renewable assets.

Over the next 10 years, this sector is likely to see an increase in demand due to its eco-friendly and cost-effective energy production. BEP is well positioned to benefit from the rise in demand. The company has installed 19,000 megawatt-capacity assets with 13,000 megawatts in the pipeline.

At writing, the stock is also up 9.79% from its price at the start of 2020, as it trades for $65.05 per share. It also pays its shareholders at a juicy 4.59% dividend yield with no signs of slowing down. The company offers investors a unique mix of growth, defence, and income.

Brookfield’s earnings are backed by power-purchase agreements. The long-term and inflation-indexed agreements help the business continue to expand, despite economic slowdowns.

Foolish takeaway

Whether Canada’s credit ratings become worse or get an upgrade soon, the short term will be a challenge for the economy and investors alike. Investors with a long-term horizon should look for promising prospects like Brookfield Renewable and other sectors that will boom in the coming decades.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

voice-recognition-talking-to-a-smartphone
Dividend Stocks

1 Canadian Dividend Stock Down 22% I’d Buy Right Now

The Canadian dividend stock has witnessed a notable pullback, creating a buying opportunity for investors looking for steady income.

Read more »

Colored pins on calendar showing a month
Dividend Stocks

How to Build a Canadian Portfolio That Pays You Monthly

If you like monthly income, this mix of five real estate, industrials, and energy stocks can pay you attractive monthly…

Read more »

Concept of rent, search, purchase real estate, REIT
Dividend Stocks

The Best Monthly-Paying Dividend Stock on the TSX Right Now

This monthly dividend stock offers an attractive mix of nearly 5% yield, monthly distributions, and a deeply discounted unit price…

Read more »

Warning sign with the text "Trade war" in front of container ship
Dividend Stocks

The Trade War Is Raising Prices Again: This Canadian Grocer Can Protect Its Margins

Trade tensions can raise specific retail costs even when overall grocery inflation is slowing, putting purchasing scale at a premium.

Read more »

Forklift in a warehouse
Dividend Stocks

Apartment Rents Are Slowing: I’d Buy This Canadian REIT Instead

Cooling apartment asking rents make industrial real estate worth another look for investors seeking a different source of monthly income.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

3 Ways to Maximize Your TFSA Before Year-End

Maximize your TFSA before year-end with three different approaches to investing for long-term income and growth.

Read more »

monthly calendar with clock
Dividend Stocks

Turn Your TFSA Contribution Room Into $92 of Monthly Income

These high yield Canadian stocks offer monthly payouts and have sustainable payouts to generate steady recurring income.

Read more »

runner checks her biodata on smartwatch
Dividend Stocks

A 7% Yield Won’t Protect You From a Dividend Cut: This Payout Looks Safer

A smaller dividend backed by growing earnings can be more useful in retirement than an unsustainable headline yield.

Read more »