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At S&P Global Ratings we are continuously assessing the economic and credit impact of the COVID-19 pandemic around the world. Subscribe to our Coronavirus Bulletin today and we will ensure you have all our latest research and forecasts as they are published.

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Daily Update

August 4, 2020

Here is today’s essential intelligence.

After reopening to tourists on July 15, the Maldives – a nation of islands in the Indian Ocean – has seen a resurgence in coronavirus cases. The 215 new cases confirmed on Sunday brought the total to 4,164. The Maldivian government has shut down 22 local business for failing to comply with health guidelines and is reportedly considering further lockdowns, despite the economic toll of further restrictions on tourism.

Countries around the world that had earned praise for aggressive lockdown measures in the early months of the crisis are now seeing a resurgence of cases as lockdown measures ease.

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Global Credit Conditions: July 2020

The Shape Of Recovery: Uneven, Unequal, Uncharted

As we start the second half of 2020, the COVID-19 pandemic continues to expand globally, with confirmed cases exceeding 10 million and emerging markets now the epicenter. The fight to contain the virus remains the priority until a vaccine or effective treatment is found, but progress has been sufficient enough in many countries to allow lockdowns to ease. Consequently, the focus has shifted to assessing the shape of the economic recovery.

The pandemic will likely leave profound scars on the world economy. A deeper hit than initially anticipated in emerging markets, notably for India, is now pushing our forecast to a 3.8% contraction in global GDP in 2020 (worse than the 2.4% previously expected). The dire effect of extended lockdowns on employment and consumer confidence also means that recovery will take longer than expected into 2021-2023, with a permanent loss in output.

Key Takeaways

  • Credit damage: The COVID-led recession will likely weigh on credit metrics well into 2023 from the combination of lost output and increased debt burdens, threatening corporate solvency.

  • A different recovery: The shape of recovery will differ from previous crises, with a wide range of outcomes across industries and geographies, and accelerating some secular industry shifts.

Read our latest analyses and insights on oil markets, as the global oil production cut agreed upon by OPEC and OPEC+ nations takes effect and the coronavirus crisis continues to hamper global demand.


Global Economic Research

The Global Economy Begins A Slow Mend As COVID-19 Eases Unevenly

The story of the pandemic-driven steep drop in output is by now familiar. Countries imposed strict social distancing measures to slow the spread of the virus and keep cases from overwhelming health systems. Businesses that were able to function remotely moved to working from home, while people-to-people businesses saw an unprecedented collapse of activity. GDP declined on the order of 30% to 40% at an annualized rate for a one-quarter shutdown in China (January-March), much of Europe (spanning the first and second quarters) and the U.S. (April-June).

Emerging Markets: The Long Road to a New Normal

S&P Global Ratings now forecasts a deeper economic contraction in 2020 for most key emerging market (EM) economies. Our downward GDP revisions mostly reflect the overall worsening pandemic for many emerging markets and a larger hit to foreign trade compared to our expectations at the end of April. We project the average EM GDP (excluding China) to decline by 4.7% this year and to grow 5.9% in 2021. Risks remain mostly on the downside and tied to pandemic developments.

Read the Full Article

As some analysts see storm clouds on the horizon, the danger of deteriorating economic and credit fundamentals looms. After an unprecedented era of easy credit, what will be the impact when the cycle turns?


North America Economic Research

U.S. Real-Time Economic Data Suggests Hopeful Signs Of A U.S. Recovery Could Be Short-Lived

Traditional economic data (which gets published with varying degrees of time lag) shows economic activity picking up at above consensus pace in May and June following a sharp decline in the preceding two months. While good news, it is backward looking. The more recent rise in COVID-19 cases across large swaths of the country in July gives us reason to question the sustainability of current economic momentum.

Canadian House Prices Are Likely To Decline Sharply Into Next Year; Strong Fundamentals Restrain Broader Housing Market Risks For Now

With Canada's economy facing a patchy recovery from the steep, COVID-19-induced recession, the country's housing market looks set to suffer sharp price declines and an overall challenging period into next year.

Although borrowing rates will likely remain historically low and recent data on a housing rebound have been encouraging, the combination of elevated unemployment this year and next, uncertainty about the pandemic's duration, stricter lending rules, and slower near-term flow of new immigrants will create headwinds for housing activity and prices.

Read the Research

Latin America Economic Research

Latin American Economies Are Last In and Last Out of the Pandemic

Latin America is now the global epicenter of the COVID-19 pandemic, with the number of new daily reported infections increasing, or remaining close to recent peaks, in most major countries. In some countries, this has meant the extension of stringent lockdowns, and in others, it has meant a slower relaxation of those measures. Across the board, households and businesses are more cautious. As a result, S&P Global Economics has lowered its GDP projection for Latin America by just over 2 percentage points to a contraction of roughly 7.5% in 2020. We expect growth to be just shy of 4% in 2021. Risks are mostly to the downside and tied to the evolution of the pandemic.

Note: Q120 to Q423 are S&P Global Ratings' forecasts. The Latin America GDP growth aggregate represented is a PPP weighted average of Argentina, Brazil, Chile, Colombia, and Mexico. SAAR--Seasonally adjusted annual rate. Sources: Oxford Economics and S&P Global Ratings.

LatAm Expected to Reach Pre-COVID GDP No Sooner Than 2023

Prospects of a rapid economic recovery in Latin America have evaporated as the region grapples with the full impact of the coronavirus crisis. A slow transition back to normal activity could mean that it may be 2023 before GDP again reaches pre-COVID-19 levels, recently published estimates suggest.

Latin America and the Caribbean are expected to see GDP contract 9.4% in 2020, according to an International Monetary Fund report from June. Latin America's $5 trillion GDP could rebound at a pace of 3.7% in 2021 if the crisis abates.

Read the Full Article

APAC Economic Research

Asia-Pacific Losses Near $3 Trillion As Balance Sheet Recession Looms

S&P Global Ratings now expects a steeper decline of economic growth in Asia-Pacific in 2020. We forecast a 1.3% contraction this year before growth of 6.9% in 2021, compared with our previous projection of 0.9% and 6.7%. This means our GDP forecast for the region for 2020 and 2021 is about $2.7 trillion lower than before the pandemic began.

Asia-Pacific has shown some success in containing COVID-19 and, by and large, responded with effective macroeconomic policies. This can help cushion the blow and provide a bridge to the recovery. Still, by the end of 2023, we expect permanent damage to the level of output of between 2% and 3%. Risks are more balanced as pandemic curves flatten but remain prominent.

Note: PPP weighted real seasonally-adjusted GDP for Asia-Pacific excluding China and India. Forecast for COVID-19. Source: National Statistical Authorities, International Monetary Fund, CEIC, and S&P Global Economics.

Hong Kong's Trend Growth to More than Halve by 2030

Hong Kong's comparative advantage is a blend of ingredients that make it unique in the global economy and financial system. This blend cannot be replicated and has propelled its economy for decades. Now, however, these advantages are at risk of erosion. Rising policy uncertainty, fraying social cohesion, and greater competition from mainland China are making Hong Kong less special. S&P Global Ratings believes trend growth will more than halve through 2030 to about 1.1%.

Read the Research

China's Deflating Recovery Still Needs Stimulus

China's real GDP growth in the second quarter was an upside surprise for us and the markets. At 3.2% compared with the same quarter in 2019, it suggests that China's economy is well on the road to recovery and could grow above 2% for the full year. This clearly poses upside risks to S&P Global Ratings' 1.2% forecast for 2020.

Read the Research

In episode 5, Hina and Sandeep are joined by Paul Watters, head of EMEA Research at S&P to discuss global macro-economic conditions since the start of the Covid pandemic.

Listen in as we also discuss the shape of the economic recovery, the divergence in performance between corporate sectors and how recent trading by European CLO managers highlights a similar trend pattern.

Listen to the Podcast

Eurozone Economy

The Balancing Act To Recovery

The latest economic data is confirming S&P Global Ratings' view of a severe contraction in the eurozone economy in April and May because of lockdowns to slow the coronavirus pandemic. However, it's a little more pronounced than we expected, with economic activity likely to have dropped 11.4% in the second quarter, after a 3.6% contraction in the first. Therefore, we now expect eurozone GDP to contract 7.8% this year and rebound 5.5% next year (instead of our previous forecast of -7.3% and 5.6%). The services sector is taking the biggest hit because social-distancing measures are constraining consumers' ability to buy. That said, the manufacturing sector has been forced to adjust to a sharp drop in demand for consumer and capital goods as companies pull back investment. External demand has also collapsed, with the global economy facing a synchronized recession because of widespread containment measures.

The EU Recovery Plan Could Create Its Own Green Safe Asset

The EU is intending to use its post-pandemic recovery plan to reinforce its fight against climate change. About 30% of the "Next Generation EU" €750 billion fiscal plan to aid the post-COVID-19 recovery would target climate-friendly projects, according to European Council President, Charles Michel's latest proposal. This translates to a potential of €225 billion of additional green financial instruments, reinforcing the EU Green Deal's pledges.

Even if, according to the European Commission, this is still too little to bridge the required investment gap of 1.5% of GDP per year to meet 2030 carbon-reduction goals, it is a huge improvement from the €7.5 billion of "fresh money" announced in the Green Deal.

Read the Full Article

Default, Transition, and Recovery

2020’s U.S. Oil and Gas Defaults Have Already Surpassed 2019’s Full-Year Tally

So far in 2020, the oil and gas sector leads the default tally with 27 defaults globally. The sector has also surpassed both its year-end 2019 U.S. and global tallies of 18 and 20, respectively. The largest portion of the global total comes from the U.S and Canada at 82%. In North America, we expect a high number of defaults to continue as access to capital markets for lower-rated speculative-grade issuers remains limited and liquidity shrinks due to cuts to the borrowing bases of revolving credit facilities.

A Credit Rating is an Informed Opinion

A credit rating is an educated opinion about an issuer’s likelihood to meet its financial obligations in full and on time. It can help you gain knowledge of—and access to—new markets, enhance transparency, serve as a universal benchmark, and assess and demonstrate creditworthiness. It’s not a guarantee or absolute measure, but is a crucial tool for investors in the decision-making process.

Learn more about Understanding Ratings

Energy Sector

The Oil And Gas Sector Leads 2020 Corporate Defaults

The 2020 global corporate default tally has reached 132, after six issuers defaulted since our last report. The defaulters are: Plano, Texas-based oil and gas exploration and production company Denbury Resources Inc., Fort Worth, Texas-based oil and gas exploration and production company, Lonestar Resources U.S. Inc., Houston-based specialty apparel retailer Tailored Brands Inc., Indonesia-based property developer PT Modernland Realty Tbk, and two confidential issuers.

Additionally, we have revised our default tally due to a monthly reconciliation process to include one confidential issuer.

The 2020 year-to-date tally--at 132--has surpassed the full-year 2008 total of 127 defaults but remains below the 2009 year-to-date tally of 175.

Oil, Fossil Fuel Demand May Have Peaked in 2019 Thanks to COVID-19: Report

Both crude oil and overall fossil fuel demand may have permanently peaked in 2019 if a slower economic recovery from the coronavirus pandemic becomes reality, hastening the arrival of peak oil demand by more than a decade, according to a new report from the Boston Consulting Group.

Read the Full Article

Risky Credits

The Drop-Off To The 'CCC' Rating Category From 'B-' Still Looms Large

After peaking in late March, the number of negative rating actions both globally and in North America has slowed as S&P Global Ratings has reviewed many of its ratings. The percentage of U.S. and Canadian companies downgraded to the 'CCC' rating category from 'B-' decreased in May to 3.1%, but the three-month average remains at an all-time high of 10.3%, and the number of companies in the 'CCC' rating category has nearly doubled since the beginning of February 2020, when the COVID-19 pandemic and rapid deterioration in oil prices began.

Issuers in the 'CCC' category have an unsustainable capital structure and therefore are particularly vulnerable to default; their historical default rates from 1981 through first-quarter 2020 are 11x higher than those in the 'B' category. Now, as social distancing measures aimed at curbing the spread of COVID-19 allow economies to begin reopening, we think the recovery will likely be slow and vary by sector.

The U.S. Distress Ratio Continues to Ease from its March Peak

The steep global recession and sudden and deep market dislocation have taken a heavy toll on speculative-grade issuers' revenues and access to funding sources. Speculative-grade credit spreads have widened as the cost to refinance or raise additional liquidity has risen, and overall access has been restricted. Due to central banks' and governments' rapid and sizable support programs, credit markets have since reopened, but access remains limited for riskier issuers rated 'B-' and below.

The U.S. distress ratio--the proportion of speculative-grade issues with option-adjusted composite spreads of more than 1,000 basis points (bps) relative to U.S. Treasuries--decreased to 12.7% as of June 19 from 22.8% as of May 6, significantly lower than the March 2020 peak of 36%. However, as credit spreads remain elevated, the current distress ratio is still higher than its precrisis levels of 8%.

Read the Full Article

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