THE global sovereign outlook in 2021 will be affected by many competing influences.
Uncertainties over the spread of COVID-19 as well as its immediate and longer-term economic implications will continue to exert pressure on global public finances through automatic stabilisers and the implementation of more active policy measures, according to Fitch Ratings.
However, with the rollout of COVID-19 vaccines now looking imminent, Fitch expects economic recovery to begin mid-2021.
“Even so, the economic and fiscal implications of the virus are likely to recede only slowly, with varying degrees of persistence across countries,” the credit rating agency pointed out.
Meanwhile, the share of sovereigns on negative outlook has exceeded 30% since May and peaked at 40% in August. The previous high was 25% during the 2009 global financial crisis, but that share was only in place for six months.
In 2020, about half of downgrades that were eligible for an outlook rated ‘B-’ or higher were assigned a negative outlook, indicating that a number of sovereigns will probably lose several rating notches in the current cycle.
In fact, negative has been the most common outlook after a downgrade since 2000.
Fitch further expects fiscal policies to be flexible in 2021 as they were in 2020, adjusting to the needs of stop-and-start economies for at least the early part of the year.
“This makes forecasting more difficult but our global medians point to improvements in 2022,” noted the credit rating agency.
Next year, median fiscal balances by rating category are all forecast to improve with the biggest gains in the ‘AAA’, ‘AA’ and ‘A’ categories which experienced the biggest deteriorations in 2020.
Most of the lingering fiscal effects from COVID-19 will be on spending with medians of expenditure as a share of gross domestic product (GDP) higher in 2021 than the five-year average to 2019 in all rating categories.
As for fiscal deficits, wider fiscal deficits translate quickly to higher government debt ratios, especially when accompanied by deep economic contractions.
In 2020, the majority of Fitch-rated sovereigns experienced both, thus pushing debt ratios higher.
Fitch forecasts that 2021 will be more favourable in terms of debt dynamics with almost all rated sovereigns forecast to have positive nominal GDP growth, even though pressures on fiscal balances will remain.
On a positive note, the emergence of medical solutions to end the pandemic and the depth of economic decline in 2020 suggest that on a year-on-year sequential basis, the environment for sovereign credit will be more favourable in 2021.
‘Combined, these considerations support a stable sector outlook next year,” added Fitch. – Dec 9, 2020
