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Coronavirus To Weaken Sovereign Fiscal Positions: Fitch Ratings
Sovereigns' fiscal records will be one component of the credit impact of supplementary fiscal measures.
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The economic impact of coronavirus combined with associated policy responses is likely to result in a higher-than-average number of sovereign rating actions in 2020 and a more pronounced downward bias in sovereign rating changes than in any year since the aftermath of the global financial crisis in 2009, according to Fitch Ratings.
Sovereigns' fiscal records will be one component of the credit impact of supplementary fiscal measures. The intent will be to evaluate whether temporary -- and in many cases urgent -- fiscal measures introduced to counter the impact of coronavirus will have public finance implications that last through the medium term. Fitch said global economic policymakers face an unprecedented combination of challenges including a health crisis, economic disruption, severe financial market dislocation, changes in investor sentiment, exchange-rate volatility and a commodity price shock.
One of the primary economic consequences for regions and countries affected by coronavirus is sudden stops in activities.
Traditional macroeconomic policies will have limited effects on curtailments motivated by health concerns but can have a role in softening the consequent impact on household and corporate income streams, preventing a more marked and extended economic decline.
Fitch said it expects that fiscal policy responses will over time come to match those already underway on the monetary side, at least in terms of the number of countries engaged.
The relationship between changes in fiscal positions and changes in sovereign ratings is well-established. Fitch measures and compares sovereign public finances by considering fiscal balances relative to GDP, government debt stocks relative to GDP, interest payments as a share of government revenue and shares of government debt denominated in foreign currency.
"We create individual sovereign scores on this basis. The sum of the changes in these scores is strongly correlated with global sovereign rating changes, implying that a period of fiscal weakness ahead will be accompanied by sovereign rating downgrades."
In the current environment, Fitch said it will continue to assess fiscal initiatives in terms of their medium-term effect on credit fundamentals. In developed market sovereigns, automatic stabilisers associated with a slowdown in economic growth or a recession are inherently cyclical, and thus of less rating influence.
Instead, its focus will be on supplementary measures including much-needed support to households, businesses and economic sectors hit hardest by the economic decline.