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Global Sovereign Rating Trends Midyear 2021: Recovery Will Be Uneven As Pandemic Risks Linger


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Global Sovereign Rating Trends Midyear 2021: Recovery Will Be Uneven As Pandemic Risks Linger

This report does not constitute a rating action.

Rating Outlook And Trends

As the world makes progress in fighting COVID-19 and economic activity shows signs of recovery, S&P Global Ratings' sovereign ratings--while still tilted to the negative--are starting to gradually stabilize. We expect a strong rebound in economic activity across the world (see table 1), though the road to recovery is bumpy as several risks still lie ahead.

Table 1

Real GDP Growth
(%) 2020 2021f 2022f 2023f 2024f
World (3.4) 5.9 4.3 3.7 3.3
U.S. (3.5) 6.7 3.7 2.6 1.8
China 2.3 8.3 5.1 5.0 4.8
Asia-Pacific (1.5) 7.1 5.2 4.6 4.5
Latin America (6.9) 5.9 2.5 2.4 2.4
Eurozone (6.7) 4.4 4.5 2.2 1.6
f--Forecast. Source: S&P Global Ratings.

The evolution of the pandemic remains the main risk facing sovereigns across the world. Fiscal and monetary support from governments is still needed as countries emerge with uneven results from the pandemic. Many emerging markets are lagging in the rollout of vaccines and still enduring lockdowns to prevent the spread of the virus. In addition, new strains of the disease continue to surface, which pose additional threats as doubts increase about the effectiveness of some available vaccines against these new strains.

The uneven nature of the recovery also presents another risk for sovereign ratings: the resurgence of inflation and its upward pressure on interest rates, especially in developed markets where economic activity is resuming fast. This could have a ripple effect initially on sovereigns that rely on foreign funding to meet their financing needs while fighting the pandemic. Additionally, in the medium term, it could have a wider impact on the debt servicing requirements of a wider set of governments that have increased their debt stocks significantly over the past 12 months. It is still too early to determine whether the recent inflationary pressures are simply the result of a temporary dislocation of supply and demand--likely to level off over the next 12 months as more countries resume normal economic activity--or will be a much longer-lasting trend.

We recently conducted a scenario analysis exercise in which we looked at the effects of increasing refinancing rates by 100 basis points (bps) and 300 bps (see "Take a Hike: Which Sovereigns Are Best And Worst Placed To Handle A Rise In Interest Rates," May 24, 2021). In both cases, the impact seems to be manageable for all developed sovereigns and for most emerging market sovereigns as well. The sovereigns that would come under pressure from such increases are assigned ratings that already reflect those weaknesses. In any case, the pressure on interest so far is the result of a return to growth and normalizing economic activity, which in general should produce positive externalities that would likely somewhat offset the impact of higher refinancing costs.

The third key risk to sovereign ratings comes from the social impact that the pandemic has caused, which will likely linger for several years to come. Social tensions across the world were high before COVID-19 hit. They are worse now and will pose difficult constraints for policymakers as they plan and attempt to implement the unwinding of the fiscal and monetary support deployed over the past 16 months. We have already witnessed some of the first examples of this in Latin America, where Colombia and Chile recently faced serious sociopolitical unrest, ending in the withdrawal of a reform aimed to reestablish fiscal soundness in Colombia and in a constitutional reform in Chile that will likely change the fiscal structure of the government. These two instances are probably not going to be the only ones. Pressure to reestablish fiscal trajectories in line with those before COVID-19 will mount soon in many other sovereigns across the world if they are to remain at current rating levels.

Negative Bias Endures But Shows An Improving Trend

S&P Global Ratings rates 136 sovereigns globally (see charts 1 and 2). Among these, we have 19 negative outlooks and three positive outlooks. For the next six months, the global outlook for sovereign ratings is negative, with negative outlooks surpassing positive outlooks by 16, an improvement from 25 in January (see chart 3). The share of sovereigns with negative outlooks has gradually improved since June 2020, when we recorded the highest number of sovereigns with negative outlooks in four years.

Chart 1


Chart 2


Chart 3


Regional Outlooks

Latin America and Africa:  Although we have no positive outlooks on any sovereign ratings in Latin America or in Africa, about three-quarters are assigned stable outlooks; however, pressures are still tilted to the downside over the next six to eight months.

Asia-Pacific:  The outlook on Asia-Pacific, which has the most positive sovereign rating outlooks globally, remains optimistic. The region's proportion of negative outlooks is the same as at year-end 2020, but most outlooks remain stable.

Eurozone:  Ratings on eurozone sovereigns remain mostly stable given the region's economic recovery, the extraordinary support provided by the European Central Bank, and future support from the Next Generation EU program.

Europe, the Middle East, and Africa (EMEA)


Developed Europe.  Our rating outlooks on 28 out of 30 rated developed European sovereigns are stable. The 'BB' ratings on Greece have a positive outlook, and the 'A' ratings on Spain have a negative one.

S&P Global economists forecast the eurozone economy will rebound by 4.4% in 2021 and 4.5% in 2022, following a contraction of 6.7% in 2020, as vaccination rollouts enable the European authorities to gradually phase out social distancing requirements. We project the EU will achieve its objective of inoculating about 70% of the adult population by mid-summer 2021 (see "EU's Vaccine Supply Boost Will Aid The Race Against COVID Mutations," April 28, 2021).

In these circumstances, and as in other cases elsewhere in the world, the trajectory of sovereign ratings in the region rests on the government's ability to take advantage of the economic recovery to repair balance sheets and implement structural reforms. That said, a premature withdrawal of government support could also risk delaying the pace of recovery. Consequently, we expect most European sovereigns to still run large deficits in 2021 and to start lowering those in 2022. Sustaining growth will be necessary to stabilize--and hopefully put on a downward trend--the debt trajectory.

We view the Next Generation EU program as a mechanism to propel economic activity. However, structural reforms at the national level will be as important for growth to be sustained, though the implementation risks related to political fragmentation and policy complacency are not negligible.

Emerging EMEA.  The average rating in emerging EMEA is at a historical low, reflecting the fallout of the pandemic on reserve adequacy, fiscal fundamentals, and growth. Nevertheless, on a GDP-adjusted basis, ratings trends in emerging EMEA have stabilized.

While S&P Global economists project global growth of 5.6% this year (and 6.4% in emerging markets excluding China), low vaccination rates in Africa, much of the Middle East, and even in Russia make these economies potentially more vulnerable to variants of the COVID-19 virus, as well as at risk of underperforming. At the same time, the strong recovery of commodity prices, including oil, will help reinflate commodity producers, which make up 25 of 53 of the sovereigns we rate in emerging EMEA.

We have downgraded four emerging EMEA sovereigns so far in 2021: Cape Verde (B-/Stable/B), Kenya (B/Stable/B), Montenegro (B/Stable/B), and Morocco (BB+/Stable/B). These suffered from a combination of volatile commodity prices, flagging internal demand, and increasing health expenditure. Among the seven sovereigns currently with negative outlooks, the toll of the pandemic has been greater on those with limited monetary flexibility and hence low capacity to monetize the initial cost of the virus for households and firms.

Two sovereigns, Lebanon and Zambia, are currently rated 'SD' (selective default). Without greater clarity on the direction of future policy in Zambia, the potential for rating improvement seems limited, despite a considerable improvement in external dynamics, including those afforded by the possible distribution of the special drawing rights allocation by the IMF. In the case of Lebanon, mounting pressure on the banking system, with a run in deposits and political deadlock, do not augur well for a quick resolution of the sovereign default.



For about a year, Asia-Pacific has recorded its highest proportion of sovereigns with negative outlooks since June 2017. However, among the 21 long-term sovereign ratings in the region, we have positive outlooks on two--more than in any other region--and stable outlooks on 15. Consequently, we expect most of the region's sovereign credit ratings to be unchanged in the next one to two years. The average Asia-Pacific sovereign rating continues to lie between 'BBB' and 'BBB+', slightly above the 'BBB' global average rating.

We expect gradual economic improvement for the region as higher vaccination rates globally allow demand to normalize for Asia-Pacific exports. Nevertheless, slow vaccine rollouts in certain Asia-Pacific countries may drag on the recovery of some sectors. Amid low inoculation rates, social distancing will still limit the extent of economic and fiscal stabilization.

Additionally, central banks in the U.S. and Europe may be forced to normalize monetary policy earlier than most, which could cause capital flows to Asia-Pacific emerging markets to slow or reverse and cause funding costs to rise.

China.  A new administration came to Washington, D.C., at the beginning of this year, and until now, there are few signs of a U.S.-China rapprochement. Although there have been open political disagreements between these governments, President Joe Biden's administration has not enforced any economic or policy measures against China. Tensions with the U.S., along with increased Chinese military activities near Taiwan, pose a risk of accidental military conflicts that could put at hazard the economic and financial stability in the region. Regional growth prospects could also suffer if Chinese policy reactions to external pressures intensify.



U.S. and Canada.  After the shock of the COVID-19 pandemic, U.S. and Canadian net debt to GDP has increased. However, the burden of interest payments has declined thanks to their strong monetary flexibility, which has facilitated low cost of funding.

Canada's high wealth, economic diversification, and ample fiscal and monetary buffers are helping the country weather the impact of the pandemic on economic activity and will ease the recovery. The country's public finances were well positioned entering the pandemic, enabling a strong policy response to contain its negative effects without weakening sovereign creditworthiness. We expect the Canadian economy will post a strong recovery in 2021.

We also expect a rapid economic recovery in the U.S., along with a gradual withdrawal of unprecedented fiscal stimulus to stabilize the net general government debt burden. The quick policy response to the economic challenges posed by the pandemic, despite intense bipartisan political disputes, demonstrated the resilience of the U.S. economy and institutions.

Latin America and the Caribbean.  The average credit rating of sovereigns in Latin America and the Caribbean has consistently been lower than in emerging markets globally and has deteriorated slightly over the past year and a half, to between 'BB' and 'BB-'. Since the start of the pandemic, we have taken negative rating actions (either outlook changes or downgrades) on 18 of the 32 sovereigns we rate in the region. As a result, it has suffered a disproportionately larger erosion of its creditworthiness.

Since the beginning of 2021, we have lowered our long-term foreign currency ratings on Colombia to 'BB+' from 'BBB-', Chile to 'A' from 'A+', and Aruba to 'BBB' from 'BBB+'. Among other factors, one reason for these downgrades was the combination of economic recession, higher public spending, and weak tax revenue, which resulted in a sharp rise in governments' debt. However, despite that, low global interest rates have helped contain the rise in interest payments, giving governments some space for reversing the weakening of public finances.

Apart from debt and interest trends, the social and political dynamics resulting from the pandemic will propel the sovereign ratings trajectory in Latin America and the Caribbean. Many policymakers in the region understand the need to establish credible fiscal plans to contain the damage caused by the pandemic. However, governments have taken note of recent widespread protests in countries such as Colombia, which led the government to withdraw proposed fiscal reforms. Consequently, public finances' recovery might be placed second in priority after political and social stability, setting the stage for worse outcomes and perhaps lower ratings.

Primary Credit Analyst:Roberto H Sifon-arevalo, New York + 1 (212) 438 7358;
Secondary Contacts:Joydeep Mukherji, New York + 1 (212) 438 7351;
KimEng Tan, Singapore + 65 6239 6350;
Frank Gill, Madrid + 34 91 788 7213;
Remy Carasse, Paris + 33 14 420 6741;
Nicole Schmidt, Mexico City;

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