THE sovereign issuer-based default rate has risen to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the COVID-19 pandemic.
Although downgrade pressures have eased this year, there are already indications that more defaults are possible this year, according to Fitch Ratings.
The international rating agency’s recent Sovereign 2020 Transition and Default Study shows that five of its sovereigns defaulted in 2020, up from only one in the previous year.
“As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017,” Fitch Ratings pointed out.
“The scale and breadth of the pandemic’s economic impact and of governments’ policy responses put widespread pressure on sovereign ratings with Fitch downgrading 32 sovereigns in 2020 compared with just two upgrades (both pre-pandemic).”
The majority of last year’s downgrades occurred early in the pandemic between late-March and mid-May.
“The resulting ratio of downgrades to upgrades was 16 to 1, whereas the ratio was 0.8 to 1 in 2019,” disclosed Fitch Ratings. “By comparison, the 2009 ratio following the global financial crisis was 7 to 1.”
Although Fitch Ratings has downgraded three sovereigns in 2021 – with no upgrades – its outlook changes this year have had a positive bias.
The ratings agency has revised the outlooks on the ratings of six sovereigns to “Stable” from “Negative” and three to “Positive” from “Stable” in 2021, while just one (Kuwait) has been assigned a “Negative Outlook”.
No developed market (DM) sovereigns defaulted in 2020 with the majority of downgrades being emerging market (EM) sovereigns (six DM sovereigns were downgraded).
Notwithstanding their huge fiscal responses to the pandemic, DMs enjoy advantages over EMs in their financing capacity and structural credit strengths as well as historically low debt service costs which reflect extraordinarily accommodative monetary policy.
EMs contributed all 11 of 2020’s multiple sovereign downgrades of individual issuers. – June 9, 2021
