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Fitch: Pace of EM downgrades eases

The pace of negative Emerging- Market (EM) sovereign rating actions has slowed sharply since March-April when uncertainty over the impact of the coronavirus shock was at its height, Fitch Ratings has said.

 

In a new report, the credit rating agency said that some of the pressure points of the shock have eased, but downside risks remain severe, and further downgrades and defaults are likely.

 

Fitch said: “There were 18 EM downgrades in the six weeks from mid-March, but only three since 12 May – Argentina and Suriname (twice).

 

The net balance of Positive Outlooks (positives less negatives) plummeted from -3 at end-February to -25 in the first week of May. It now stands at -31, a further deterioration, but at a much slower pace.”

 

According to the Agency, “stresses from capital outflows, the collapse in oil prices and depreciation of currencies against the US dollar have eased, as oil prices are off lows, capital has flowed back to EMs, international capital markets have reopened, currencies have retraced some lost ground and FX reserves have been reasonably stable in most cases.”

 

It noted that international policy action has underpinned many of the more positive trends, pointing out that huge developed market monetary and fiscal stimulus has supported global demand, liquidity and confidence.

 

The development, the agency said “has increased the capacity of many EMs to cut interest rates and some to deploy quantitative easing.”

 

However, according to Ed Parker, head of EMEA Sovereigns at Fitch Ratings, “EMs face a deep recession and higher government debt burdens.

 

Oil prices and currencies remain below pre-crisis levels. Coronavirus cases are still rising rapidly.

 

Economic setbacks, renewed financial instability and political shocks are material risks. Many EMs have limited buffers and resilience to navigate the shock.”

 

There have been a total 28 downgrades of EM sovereigns in 2020 – the highest ever annual total. A record four sovereigns have defaulted so far in 2020: Argentina, Ecuador, Lebanon and Suriname. Fitch believes others are probable.

 

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