Mumbai: Uncertainties over the spread of coronavirus as well as its immediate and longer-term economic implications will continue to exert pressure on global public finances in 2021, according to Fitch Ratings. With vaccine rollouts now looking imminent, the agency assumes global economic recovery will take a firmer hold by mid-year, even though the economic and fiscal implications of the virus are likely to linger.
“The unknown path of coronavirus; the degree to which governments impose lockdowns to tackle the virus; the economic impact of these lockdowns; and fiscal responses to alleviate those impacts,” the rating agency said in its 2021 outlook for global sovereigns. “But with a rollout of vaccines now looking imminent, Fitch expects economic recovery to begin mid-year. Even so, while coronavirus arrived quickly, it is likely to recede only slowly, with varying degrees of persistence across countries.”
Fitch expects fiscal policies to be flexible in 2021, as they were in 2020, adjusting to the needs of stop-and-start economies for at least the early part of the year. Median fiscal balances by rating category are all forecast to improve next year, with the biggest gains in the ‘AAA’, ‘AA’ and ‘A’ categories, which experienced the biggest deteriorations in 2020.
The record number of sovereign rating downgrades in 2020, at more than 30, will be followed by another year of credit stress in 2021, as about one-third of the global sovereign portfolio is assigned a Negative Outlook, the rating agency said in its note.
Fitch in 2020 downgraded several sovereigns that will enter 2021 on Negative Outlook, implying a number of multi-notch downgrades in the current cycle.
Interest service burdens (interest payments relative to revenue) remain largely manageable in developed markets in light of low interest rates and central bank bond purchase programmes, it said.
Emerging-market sovereigns have had a greater degree of policy flexibility in this regard than previously envisaged, although Fitch believes it will be important to explore this newfound flexibility carefully.
Even with central bank support, the median interest service burden in emerging markets is high, at about 10%, reflecting government debt increases that predated the pandemic.
In 2020, the majority of Fitch-rated sovereigns experienced both, pushing debt ratios higher. The rating agency forecasts that 2021 will be more favourable in terms of debt dynamics, with almost all rated sovereigns forecast to have positive nominal GDP growth, even though pressures on fiscal balances will remain.
The global sum of government debt (converted at average annual exchange rates) will reach about $78 trillion at end-2020 and $84 trillion at the end of 2021, approaching 100% of global GDP, Fitch forecasted.