The Shape Of Recovery: Uneven, Unequal, Uncharted
Published: July 1, 2020
Credit conditions across regions are rife with risks, with the COVID-led recession likely to weigh on credit metrics well into 2023, from the combination of lost output and increased debt burdens—thus threatening corporate solvency.
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.
Swift stimulus worked; pull-back carries risks. Central banks and governments acted promptly and massively to limit the damages to the real economy and the markets, but debt levels took another step up, making the unwinding of this liquidity support difficult, and widening the gap between market prices and credit fundamentals.
Profound political impact. National and international fragmentation could intensify as lowincome populations are suffering disproportionately, exacerbating inequalities and social tensions, while the disruption of critical supply chains revives economic nationalism.
Opportunities. The crisis could present an opportunity for governments to support the recovery through infrastructure investment, supporting a green, digital, and more sustainable economy.
Overall: As corporate borrowers confront both operating constraints due to social distancing and diminished consumer demand, the recovery path will likely be rocky and uneven, and many in the industries hit hardest by the severe economic shock will be lucky to escape default—especially if we see a significant pull-back in federal stimulus.
Risks: Short of a coronavirus vaccine or effective treatment, there is a risk that a resurgence of the outbreak could lead states to extend, or restart, social restrictions and worsen the pain associated with historically high unemployment and severe business disruption. Moreover, corporate borrowers have incurred more debt, and concerns about high leverage and potential for insolvency are increasing.
Credit: At the same time, amid signs the worst of the recession is behind us, financing conditions for U.S. corporations have improved even faster than economic data have. Equity and fixed-income markets are showing exceptional optimism even as new cases of the virus have risen in some areas and the full reopening of the economy is some way off.
Overall: The road to recovery for Asia-Pacific GDP trends and earnings will stretch to 2023. Geographically, China leads, followed by developed economies, with emerging markets last. Sectorwise, essential retail and telecoms are the first to rebound; oil and gas, and autos, will be the last; real estate, capital goods and other corporate sectors in between.
Risks: During this recovery, the top risks include a build-up of leverage, economic disruption from COVID-19 measures, economic spillover from the U.S.-China strategic confrontation, and uneven access to U.S. dollar funding.
Credit: COVID-19 and an oil price decline have triggered negative rating actions on a third of our regional pool. Indeed, the net negative rating outlook bias comprises one-sixth of issuer ratings. Consequently, while there are "green shoots" signalling a regional recovery, the likelihood of rating downgrades and defaults persists.
Overall: Improving external conditions--including resumption in business activity in key emerging market (EM) trade partners such as the U.S., the Eurozone and China, along with unprecedented accommodative monetary conditions--are shoring up financing conditions for EMs. Activity in EM economies is slowly picking up, but it will take long to get back to business as usual.
Risks: Risks remain firmly on the downside, the deep economic shock in 2020 will spike debt levels across governments, corporations, and households in EMs, some of which were suffering from already high debt burdens prior to the pandemic. Lockdown fatigue driven by mounting political pressures and economic costs could lead to poor policy choices. Most EMs have limited room to maneuver, but the absence of proper economic stimulus could derail recovery and prolong the economic downturn.
Credit: Issuers will remain under pressure over the coming months. Those able to stay afloat during the severe downturn will probably do with higher debt levels and weaker profits.
Overall: Supported by stimulus measures, European economies are tentatively reopening since the first wave of the coronavirus has passed its peak. Credit conditions may enjoy some respite over the summer before difficult policy and business decisions need to be made, as the shape of recovery and the timelines for ending support schemes for corporate and household borrowers become clearer.
Risks: Key risks remain a resurgence in the virus before a vaccine becomes available; deteriorating credit fundamentals raising solvency issues, notwithstanding short-term liquidity support measures; escalation in (mainly U.S.) bilateral trade tensions globally, including the risk of no free trade agreement (FTA) between the U.K. and EU; and uncertainty and job insecurity inhibiting a recovery in consumer spending.
Credit: The severity of the recession and lingering fears of a resurgence in the virus in the absence of a vaccine point to a varied and complicated path to recovery that will differ substantially among countries and sectors. Taking the biggest hit this year are more service-oriented economies such as Spain, Italy, and France, while our new assumption of a limited U.K.-EU FTA at year-end slices 1.7% off U.K. GDP through to 2023. Consumer discretionary sectors affected by social distancing and likely changing consumer preferences, including those related to travel, may not fully recover until at least 2023.