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June 08, 2020 10:29 AM

Record sovereign downgrades on way in 2020 – report

Sophie Baker
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    Bloomberg

    A record number of sovereign downgrades are expected this year as a result of coronavirus-related policy responses, Fitch Ratings warned.

    A record number of sovereign downgrades are expected this year as a result of coronavirus-related policy responses, Fitch Ratings warned.

    Nearly all rated sovereign economies will experience an annual fiscal deterioration for the first time, with larger deficits or smaller surpluses in 2020 than in 2019 and an increase in government debt levels for almost all countries.

    A report by the ratings agency warned that a deterioration in public finances, economic downturns and, in some cases, external financing pressure, "is putting significant pressure on sovereign ratings."

    So far this year 25 sovereigns have been downgrades by a total of more than 30 notches, the report said.

    The ratings agency analyzed the impact of multitrillion fiscal support packages in leading industrial nations and China and large rounds of quantitative easing by central banks worldwide.

    See more of P&I's coverage of the coronavirus

    Authorities in major economies have also worked to increase liquidity for financial institutions and encourage them to extend credit to households and businesses through various financial and regulatory measures, Fitch said in a report.

    "Much of the burden of the coronavirus policy response is falling on sovereigns," the report said. "Fiscal policy is being eased on a scale and across a range of countries that is unprecedented. For the first time, Fitch forecasts that nearly all rated sovereigns will experience an annual fiscal deterioration, running larger deficits or smaller surpluses in 2020 than a year before."

    Fitch also looked at financial institutions, finding that many measures including those by central banks are supportive of credit profiles in the short term.

    However, most financial institutions' capital, asset quality and profitability will still be weakened in the medium and long terms, by "pandemic-related stress," the report said. "We will consider the rating implications of these factors alongside each issuer's headroom at its rating level, its risk appetite and the presence of sovereign or institutional support."

    A separate report by ratings agency Moody's Investors Service, also published Monday, said money managers based in the Gulf Cooperation Council remain somewhat resilient to the coronavirus crisis and its impacts, as well as to the collapse in oil prices.

    Established money managers will weather the COVID-19 and oil crises "due to their track record of strong performance and an affluent client base," Moody's said.

    However, low oil prices will be a headwind for these firms since their "customers rely on oil for the bulk of their revenues," the report said.

    The report can be accessed by Moody's subscribers.

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