Saturday, 28 March 2020

Rating Agencies Take Aim at Sovereign Debt Ratings

In this short post today, we will look at the news recently regarding the rating agencies’ declarations regarding two countries’ sovereign debt ratings, what underpins them, and what may be next for countries facing up to the COVID-19 pandemic, amongst a number of other impactful factors.

The first news came from South Africa. As was to be expected on account of the other two rating agencies downgrading South Africa to ‘junk status’, Moody’s finally took the leap and cut South Africa’s rating to Ba1, from Baa3, with the outlook remaining negative. In providing details as to why Moody’s finally followed S&P and Fitch in downgrading South Africa to junk status, albeit 3 years later, the agency stated that the key driver underpinning the downgrade was ‘the continuing deterioration in fiscal strength and structurally very weak growth, which Moody’s does not expect current policy settings to address effectively’ (sign-in required). The agency then went on to detail the reasoning for the negative outlook it ascribed, stating that the country’s access to funding will be negatively impacted by market conditions, thus making the prospect of recovery that much harder. This negative view on the country’s progression is shared by many onlookers and experts, with economists warning of further upheaval as South Africa’s GDP is predicted to continue to fall. For its part, the Government of South Africa has admitted that the downgrade comes at the worst possible time and that it, along with the COVID-19 pandemic, ‘will truly test South African financial markets’. It is highly likely that the South African economy will experience more hardship in the near future.

The second country to have its rating changed recently by one of the Big Three is the UK, with Fitch cutting its sovereign rating to AA-, the same as Belgium and the Czech Republic. It is also putting the UK on a negative outlook as it predicts that a further cut could follow. In detailing why it took this action, Fitch stated that ‘a significant weakening of the UK’s public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent’ was at fault. Furthermore, the negative outlook was based upon the agency’s view that ‘reversing the deterioration in the fiscal metrics beyond 2020 will not be a political priority for the UK government. Moreover, uncertainty around the future trade relationship with the EU could constrain the strength of the post-crisis economic recovery’. The UK Treasury has recently stated that its borrowing is the right course of action to protect the economy, but given the downgrade comes only a few short months after a recent improved assessment by Fitch, the volatility will be worrying for all concerned. With health experts suggesting the UK’s measures to fight the COVID-19 pandemic could extend into months, the economic impact of such measures will only add pressure to this downward movement for the country’s sovereign rating.

In other news regarding sovereign debt ratings, Mexico saw its rating cut by S&P to BBB from BBB+, with the agency declaring that the pandemic, alongside the shocks to the price of oil, were determining factors in its decision. In a similar vein, Oman saw its rating from S&P lowered even further into junk territory, on account of the country’s dependence on oil revenue. Fitch recently cut Ecuador’s rating to CC because its fuel-dependent economy is struggling, alongside its decision to recently renegotiate some of its commercial responsibilities. Elsewhere, analysts have suggested that Germany’s prized AAA rating may come under threat as its increased spending in reaction to the pandemic takes hold. With Nigeria and Angola all experiencing downgrades recently because of their dependence on oil price movements, whilst Russia and Saudi Arabia only just escaped downgrades from S&P. With Russia’s banking system being sized up for downgrades by both S&P and Moody’s however, the volatile climate looks set to be represented in the sovereign bond market also. The sovereign debt analysts at all the rating agencies will be working hard to keep abreast of the ever-changing conditions, with many more rating decisions likely to be forthcoming. Analysts are predicted downgrades globally by much bigger delineations than we are currently seeing, and the current trend makes that difficult to argue with.

Keywords – ratings, sovereign debt, downgrades, COVID-19, business, @finregmatters

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