MOODY’S Investors Service expects the global default rate to rise to 10.6% at end-2020 and edge higher to 11.3% by end-March 2021 compared with the March 2020 level of 3.5%.
It said the forecast is underpinned by the expectation of recessions in many large economies, following the unprecedented turmoil in the financial markets caused by three shocks in March 2020.
“Firstly, the Covid-19 emerged as a pandemic, spreading more widely and rapidly than previously expected, posing a substantial threat to the global economy.
“Secondly, oil prices plummeted to the US$20s — the lowest level in two decades.
“Thirdly, financial conditions tightened severely as asset prices fell sharply in both the equity and fixed income markets,” it said in a report today.
Moody’s said the baseline default forecast assumes a sharp downturn in the global economy during the first half of the year, followed by a recovery later in the year and into 2021.
It estimates that the United States’ high yield spreads will increase and remain elevated at recessionary levels in the next two quarters — 1,261 basis points (bps) in the second quarter (2Q 2020) and 986 bps in 3Q 2020, before falling to 735 bps in 4Q 2020 and returning to 588 bps in 1Q 2021.
“We further assume that the US unemployment rate will jump to 8.7% in 2Q 2020 from 3.8% in 1Q 2020, before easing to 6-7% in the subsequent three quarters.
“Our baseline forecast assumes that 2Q 2020 will be the weakest in terms of economic activity, and the pandemic will be contained by the second half,” it said.
Subsequently, the easing of social-distancing restrictions and the considerable stimulus provided by global central banks and governments will alleviate some of the economic shock in the first half and support a recovery once the virus is contained, it said.
Meanwhile Moody’s also predicted the virus will persist into 2021 and create wider and deeper economic disruptions.
“This scenario assumes that US high-yield spreads will stay at recessionary levels throughout the upcoming four quarters, peaking at 1,755 bps in the third quarter.
“The US unemployment rate will soar to about 17% in the second quarter and remain at around 10% in the subsequent three quarters.
“Under such a scenario, the global speculative-grade default rate will rise to 16.3% by the end of March 2021,” it said.
Moody’s also expects default rates to be highest in the hotel, gaming and leisure segments in both Europe and the US, given the sectors’ high exposure to the coronavirus fallout.
“When measured by default count, however, business services and oil and gas (O&G) are likely to see the most defaults.
“O&G, which saw a wave of defaults during the 2015-16 commodity price downturn, will be particularly hard hit this time due to the combination of a supply shock, as Saudi Arabia and Russia fail to agree on production cuts, and a demand shock as the coronavirus forces economic activities to decline substantially,” it added. — April 13, 2020
