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Fitch Downgrades More Sovereign Ratings, As Coronavirus Continues To Devastate Economies

Fitch Ratings is adding more countries to its list of downgraded sovereign ratings. This is while governments dig deeper into their reserves to support their economies with fiscal and monetary policies to fight coronavirus.

The first half of 2020 has seen the top sovereign rating agency downgrade 33 countries. 44 more are already on a negative credit rating outlook. The agency stated that there is a “strong downward pressure” on worldwide credit ratings. 29 countries downgraded by April 2020.

Fitch also warned that sovereign defaults will hit its highest record this year. He attributed this to the development of the coronavirus pandemic, the “collapse” in oil prices as well as underlying credit “weaknesses.”

“The sovereigns most exposed to the coronavirus and oil prices shock are those with generally weak and credit fundamentals, such as high government debt and weak policy credibility.” The report stated.

Other affected countries in the list include those heavily reliant on tourism, exports, those with huge financing requirements and foreign debt.

 

More Countries Are On a Downgrading Waiting List

We have seen the largest number of downgraded countries in the history of Fitch Ratings. This is due to the unanticipated and prolonged economic effects of the coronavirus pandemic on individual economies and the global economy.

Speaking during an interview, the head of sovereign ratings at Fitch Ratings, James McCormack, stated that countries on their negative watch could potentially be downgraded.

“We’ve never in the history of Fitch Ratings had 40 countries on the negative outlook at the same time.” He added that “since its foundation in the early 90s, Fitch has ‘never downgraded 33 in any given year.'”

The agency also added that coronavirus mitigation efforts are driving some countries deeper into debt. This is increasing the probability of “sovereign defaults” this year.

“Sovereign defaults are relatively rare. Fitch has recorded just 23 defaults of rated sovereign across 14 countries since it started its sovereign coverage in the mid-1990s.” said the report.

Currently, Ecuador, Argentina, and Lebanon have defaulted on 2020’s Sovereign debt. They fall under some of the most affected nations dependent on tourism, oil, and with huge credit weaknesses.

Europe and Asia will also feel the effects of downgraded Sovereign points. This is while the UK and Hong Kong join the list of finalized downgrades by Fitch Ratings.

Fitch rates a total of 119 countries. Their “financial positions”, according to the agency, will most likely continue to deteriorate if governments continue increasing expenditure against coronavirus.

According to McCormack, the debt could manifest as a smaller or larger surplus in the individual government budgets. It could also manifest as a rise in debt. For now, the agency says it can only watch how governments will handle the debt crisis. This is only once economies start to recover from coronavirus’ effects.

 

Coronavirus Will Drive Global Debt To 100% of Global GDP

The global reach of coronavirus has resulted in the most unfavourable worldwide economic news since 2008’s financial crisis. The global public debt will rise to its all-time-high at 100.1% of GDP in 2020, and 103.2% in 2021. This was according to the International Monetary Fund.

“The steep contraction in economic activity and fiscal revenues, along with the sizable fiscal support, has further stretched public finances, with global public debt projected to reach more than 100% of GDP this year,” The IMF said.

The IMF has had to revise its projections for growth this year more than once. In its latest World Economic Outlook Report, the IMF stated that the current crisis is “like no other”. Furthermore, it said it represents an “uncertain recovery”.

“The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast” the report stated.

The global projected growth will regress by 4.9%, which is 1.9% more than April’s forecast. The growth projected for 2021 at 5.5% represents hope but is still lower than the earlier projection in January.

The IMF has offered billions of dollars to help struggling countries cushion their economies and support their healthcare systems. In many parts of the world, including developed nations, small businesses have suffered the most. Many were forced to shut down for good. The IMF estimates that low-income houses will feel the full impact of Covid-19’s aftermath.

“The adverse impact on low-income households is particularly acute, imperilling the significant progress made in reducing extreme poverty in the world since the 1990s.” Said the report.

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