Sovereign credit fundamentals and ratings already under pressure from the coronavirus outbreak may be further hit by the oil price shock, Fitch Ratings.
How the dual-hit of COVID-19 and the latest oil price collapse — driven by Saudi Arabia's announcement Sunday that it will increase production and cut prices following failed talks with Russia — will affect countries depends on their classification.
Markets worldwide fell Monday. The Dow Jones Industrial Average was down almost 5% at midday Eastern Daylight Time; the FTSE 100 was down more than 6%; and the Nikkei 225 index was down 5.1%. The per barrel price of Brent crude oil and West Texas Intermediate crude each fell about 21%.
For developed markets, key issues will be the effect of the virus and oil price on growth and responses from governments and central banks. Emerging markets face risks relating to commodity export receipts, capital flows and the impact on exchange rates, Fitch said Monday in an article published on its website.
A number of emerging market sovereigns were downgraded following the 2014 to 2016 oil price collapse and many oil exporters "are still struggling to adjust to that shock, with break-even oil prices well above current market rates," Fitch said. Higher-rated oil exporters have sovereign wealth funds and other buffers, the ratings agency said.
The economic impact of the latest oil shock may also last longer than the effect of the coronavirus outbreak. "Indeed, the impact of cyclical economic downturns on sovereign credit profiles is typically temporary as countercyclical policies and automatic stabilizers are usually reversed during subsequent recoveries," Fitch said. However, the agency cited that impacts are likely to linger on the travel and tourism sector, which in turn would hit countries where tourism brings large direct and indirect contributions to gross domestic product such as Thailand, the Maldives and Croatia.
Fitch cited fiscal and monetary policies by a number of sovereigns in their bids to control the economic impacts of COVID-19, with moves in China, Japan, Korea, Singapore, Malaysia and Italy. It also highlighted the 50-basis-point interest-rate cut by the U.S. Federal Reserve last week.
The ratings agency expects fiscal expansion to spread to other sovereigns, noting that "timely and targeted policies can help to reduce the risk of a permanent loss of output," Fitch warned. "Even so, there is scope for some ratings migration as policy responses are formulated and enacted, given the importance of public finances and sovereign credit profiles."
