Download Scope’s Q3 2020 Sovereign Update (report)
Scope Ratings’ latest baseline scenario embeds a renewed increase in Covid-19 infections in the second half of 2020 in advanced economies, but one that is “manageable” in most such nations. Renewed virus transmission does not halt economic recovery but forces it onto a more gradual and uneven trajectory.
Only a selective second round of economic restrictions is imposed; more intensive in countries such as the United States or the United Kingdom. This scenario is similar to a check mark- or wing-shaped global recovery with a decelerating recovery slope after the speedy pick-up in activity of recent months.
“The implications of this crisis more broadly for the creditworthiness of sovereign states link significantly to the activation of monetary and fiscal policy responses,” said Dr Giacomo Barisone, head of sovereign ratings at Scope Ratings. “These raise debt ratios longer term, could increase moral hazard and weaken government balance sheets. Higher unemployment, non-performing loan ratios and private sector default instances weaken private and banking sector resiliencies – especially under our stressed scenario.”
“However, central bank actions continue to transfer a significant share of new public debt to monetary authorities – momentarily at least easing the scale of sovereign liquidity or solvency risk from the standpoint of private sector creditors,” Barisone says. “Weakened reserve coverage ratios and FX instability are additional risks to emerging market issuers.”
Sharp 2020 contractions globally; 2021 recovery speeds vary
Under the rating agency’s baseline economic scenario, the euro area (EA) economy contracts sharply – by 9.1% in 2020, led by deep recessions in Spain (-12.5%), France (-11.0%) and Italy (-10.0%), with a more moderate growth decline in Germany (-5.5%). Of the four largest euro area member economies, expected 2021 recoveries range from 3.2% in Germany to 7.5% with Italy.
The UK, the US and Japan also see significant contractions in activity in 2020 (-10.4%, -7.5% and -6.0%, respectively), with recoveries of 8.8%, 6.0% and 3.0% in 2021. China sees its weakest economic growth since 1976 of 1.3% in 2020, while Russia’s and Turkey’s economies contract by 6.8% and 4.2% respectively.
A stressed scenario assumes fresh lockdown in H2 2020
In a stressed scenario, there is a second round of coronavirus cases and non-essential economic activity in Europe and the US by Q3 or Q4 2020, forcing countries to reimpose highly disruptive full or partial lockdowns – leading to a double-dip economic contraction extending into prolonged economic weaknesses in 2021.
This stressed case is akin to a W-shaped recovery with, on top, severely weakened economic conditions in 2021. The stressed scenario sees global growth contract by 7.3%, with the EA seeing growth decline by 12.7% and the US by 12%. China experiences near zero growth. Under the stressed scenario, 2021 economic recoveries are more moderate.
“There is both upside and downside risk to Scope’s economic baseline, however,” said Barisone. “A more robust-than-anticipated release of pent-up demand supported by extraordinary fiscal and monetary stimulus and/or better than anticipated Q2 2020 GDP could present upside growth potential. Conversely, downside growth risks include those under the stressed case or any reversal in inflated global asset markets, crystallisation of corporate debt risks or intensification of global trade tensions.”
Giacomo Barisone is Managing Director in Public Finance at Scope Ratings GmbH.