The Covid-19 outbreak is likely to spark a spate of sovereign downgrades this year, according to Fitch Ratings.
The rating agency reported that it is expecting a higher-than-average number of sovereign ratings actions in 2020, and that these moves will have the strongest downward bias since the global financial crisis.
“Global economic policymakers face an unprecedented combination of challenges including a health crisis, economic disruption, severe financial market dislocation, changes in investor sentiment, exchange-rate volatility and a commodity price shock,” Fitch said.
While traditional macroeconomic policies will have limited effects on the halt to economic activity due to health concerns, Fitch said that it can soften the impact on household and corporate income.
“Over time, fiscal policy responses will come to match those already underway on the monetary side, at least in terms of the number of countries engaged,” it said.
And this expected fiscal weakening will likely be accompanied by sovereign rating downgrades.
“With the probability of a large number of supplementary fiscal measures being adopted across a wide range of [developed markets], judgments on whether such measures should affect ratings will be guided in part by sovereigns’ records of fiscal consolidation during more favourable economic times,” it said.
In emerging markets (EM), fiscal conditions are often more sensitive to cyclical variations, such as changes in commodity prices, exchange rates and global funding conditions.
“All of these factors are currently evident, and will also be part of our ongoing sovereign rating review processes. They make EM public finances more volatile, both in terms of revenues and expenditures, and that too is expected in the period ahead,” Fitch said said.