Higher interest rates could put some Canadian businesses at risk, poll finds

According to a new survey of middle-sized companies.

The poll, conducted by accounting firm KPMG, highlights the tightrope the Bank of Canada must walk on as it tries to rein in rising consumer prices without strangling the recovery, especially more than the central bank said a robust recovery in business investment would be essential to support Canada’s economy as the COVID-19 pandemic recedes.

Fifty-five percent of businesses said a one-percentage-point increase in the prime rate would put “significant, substantial, or significant pressure on their business and cash flow,” according to the survey of early February business owners. CEOs of over 500 companies.

Companies in the consumer and retail sector were the most vulnerable, with 62% saying their cash flow would be under pressure, while only 27% of business leaders in the manufacturing sector shared this concern .

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When business leaders were asked what level of increase in borrowing rates would jeopardize their growth or investment plans, 11% said a one percentage point increase would mark a tipping point for them, with that share rising to 33% if their borrowing costs increase by two percentage points.

“It’s surprising when you look at people’s stress levels with a 1.5 to two [percentage point] rate increases, but we have lived in a world of low interest rates for so long,” said Paul van Eyk, national head of restructuring and turnaround services at KPMG in Canada.

The Bank of Canada raised its benchmark rate by 0.25 percentage points earlier this month to 0.5%, its first rate hike since 2018. Many forecasters expect rate hikes to continue. continue, despite the uncertainty caused by the war in Ukraine, since inflation has shown few signs of slowing down. Scotiabank economists expect Canada’s key rate to hit 2% by the end of the year, rising to 2.5% next year.

Unlike previous cycles of rate hikes, companies have fewer levers to pull to relieve pressure on their bottom line, van Eyk said.

“You can’t fire people because you’re just trying to retain the people you have, your supply chain is in chaos, and then you add all the geopolitical events and the pandemic,” he said.

“You’ve got this perfect storm brewing where historically companies haven’t faced this level of chaos in the markets when rates go up.”

Corporate debt is one of the concerns facing the Canadian economy as interest rates rise. Canadian businesses were already heavily indebted before COVID-19 and have borrowed heavily throughout the pandemic.

This is offset by the ample cash that companies have accumulated, thanks to the cheap cost of debt and strong corporate earnings during the pandemic.

Mr van Eyk said it is too early to tell whether headwinds from rising rates, supply chain disruptions and geopolitical uncertainty will cause companies to struggle with their debt, but signs will first appear in the loan loss reserves of the major Canadian banks.

In a note on Friday, debt rating agency Fitch Ratings said banks’ loan loss provisions rose in their first fiscal quarter of 2022, but remained well below historical averages. Bad loans were more than 25% below pre-pandemic levels, Fitch said.

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