TORONTO (Reuters) – Canada risks slowing the pace of economic recovery as it relies largely on repayable loans to help businesses weather the coronavirus crisis, rather than grant programs that are being promoted by the United States, according to economists.
Ottawa is rolling out a record amount of tax support of more than C$300 billion ($222 billion), or about 15% of GDP, which includes C$85 billion in deferred tax payments and C$81 billion in loans to small and medium enterprises that will eventually need to be serviced and repaid.
For some businesses, servicing debt could reduce capital to invest or make it impossible to take out a loan in the first place. The debt ratio of Canadian private non-financial corporations soared to 212% in the first quarter, the highest since 2009, and companies rushed into the bond market in the first five months of the year at the fastest pace fast for at least a decade.
“Many companies that were already heavily indebted before the spread of COVID-19 may not seek help structured as debt if their debt servicing costs are already too high,” said Colin Guldimann, economist at Royal Bank. from Canada. “That means these businesses may fail rather than fill the gap with a loan that will ultimately drive them to closure.”
While loans under the U.S. Paycheck Protection Program for Small Businesses turn into grants if certain conditions are met, Canada’s Emergency Loan Program for Small Businesses, the Emergency Canadian Business (CEBA), cancels only 25% of the debt.
Canada also offers wage subsidies to businesses, but has reduced the amount budgeted for the program.
According to a survey by the Canadian Federation of Independent Business, businesses see increasing the 25% forgivable portion of the CEBA as the highest priority for improving federal relief efforts. Of the estimated C$41 billion for CEBA, credit has been approved for C$26 billion, according to government data.
Finance Minister Bill Morneau’s office had no immediate comment.
There are also credit programs for medium-sized businesses, but the debt is fully repayable and interest is charged at market rates. Using market prices reduces distortions in the economy, such as businesses taking money they don’t need, and costs to government, but debt service over-indebtedness could weigh on economic growth.
Companies will have taken on more debt as they emerge from the crisis, so “it will be difficult for them to borrow to invest,” said Serge Dupont, senior adviser at law firm Bennett Jones.
“This debt, it has to be repaid and it will have to be repaid at a time when the economy is still not running at full capacity,” Dupont said.
Reporting by Fergal Smith; Editing by Denny Thomas and Steve Orlofsky
