December 09, 2020: 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 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 largest number of negative actions was in the 'B' category, and in Latin America and sub-Saharan Africa, but no region or rating category has been spared. Fitch in 2020 downgraded several sovereigns that will enter 2021 on Negative Outlook, implying a number of multi-notch downgrades in the current cycle.
Regarding fiscal policies, Fitch expects them 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. This makes forecasting more difficult, but our global medians point to improvements in 2022. 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. Most of the lingering fiscal effects from coronavirus will be on spending, with medians of expenditure as a share of GDP higher in 2021 than the five-year average to 2019 in all rating categories.
Wider fiscal deficits translate quickly to higher government debt ratios, especially when accompanied by deep economic contractions. In 2020, the majority of Fitch-rated sovereigns experienced both, pushing debt ratios higher. Fitch forecasts that 2021 will be more favorable 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.
According to the Fitch Rating, 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. The median interest service burden as per Fitch’s calculation should remain below 4% in 2021 in developed markets, lower than it has been for most of the past decade. 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.
Fitch Ratings
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