A RETURN to gross development product (GDP) growth in 2021, rise in commodity prices, pick-up in capital inflows and weaker US dollar add up to a more favourable credit environment for emerging markets (EM) than in 2020, but favourable funding conditions will not prevent pockets of acute stress and possible defaults.
This is because dynamics of the COVID-19 pandemic – including vaccine roll-outs – and its economic impact remain highly uncertain, according to Fitch Ratings.
“It has left a legacy of higher budget deficits and debt burdens,” the credit rating agency pointed out in a non-rating action commentary on What Investors Want to Know: Emerging-Market Sovereigns in 1Q 2021.
According to Fitch Ratings, the median EM general government deficit widened to 7.7% in 2020 from 2.8% in 2019, while debt/gross domestic product (GDP) has climbed to 62% from 48%.”
“We expect only gradual fiscal consolidation owing to concerns over the health situation, social pressures, and choking-off of the nascent recovery, so that median debt/GDP will rise further to 64% at end-2021,” projected the credit rating agency.
“The increase in unemployment, deterioration in social indicators and rise in income inequality provides fertile ground for political shocks.”
Since the beginning of 2021, Fitch Ratings has 29 EM sovereigns on a Negative Outlook, up from 13 at end-2019, signalling that further downgrades are likely this year.
In 2020, there were 45 downgrades of Fitch-rated sovereigns (across 27 different entities). A record five Fitch-rated sovereigns defaulted in 2020 and 11 are rated below ‘B-‘ which is another record. – Jan 21, 2021
