Non-investment-grade sovereigns face stronger fiscal and liquidity challenges: Moody’s

• Expects debt-to-GDP ratios to jump by 13% on average; only 1/3 likely to see declines in debt burdens by 2021 end
• Gross borrowing requirements to remain elevated, foreign exchange reserves for debt payments to narrow

Moody’s Investors Service in a new report yesterday warned the uneven global economic recovery would intensify fiscal and liquidity challenges for non-investment-grade sovereigns, including Sri Lanka, with recovery to pre-crisis levels not expected till 2022. 

The rating agency has taken 80 rating actions on such sovereigns during 2020 with over half of these actions principally motivated by the effects of the pandemic, which has more severely hit many of these emerging and frontier market economies across multiple channels, it said in a statement.

“While the number of non-investment-grade sovereigns has remained unchanged since the first half of 2020, the credit impact of the coronavirus pandemic has led to widespread credit stress, with around one-third of such sovereigns now carrying negative outlooks,” says Michael S. Higgins, a Moody’s Analyst.

Last month Moody’s downgraded Sri Lanka but kept its outlook stable. This was followed by similar downgrades by Fitch and Standard & Poor, largely on debt sustainability concerns. The Sri Lankan Government has said it disagrees with the rating agencies and was confident of a growth turnaround in 2021 and meeting all debt obligations. 

Emerging and frontier market economies will recover unevenly following unprecedented declines in economic activity, with many not recovering to pre-crisis levels until 2022 at the earliest, pressuring their credit fundamentals, the Moody’s report warned. 

Economic recoveries will vary across regions, and commodity and tourism-reliant economies will face a further drag on growth. In particular, economies in Latin America, Africa and the Middle East are forecast to grow at markedly slower rates than in the last decade.

“Globally, we expect non-investment-grade sovereigns’ debt-to-GDP ratios to jump by an average of 13% points by the end of 2020 and remain at record-high levels. Only about 30% will record a decline in their debt burdens in 2021, reflecting both weaker growth dynamics and increased fiscal pressures,” adds Higgins.

Moody’s conclusions are summarised in the third edition of a bi-annual chartbook that highlights key rating trends for non-investment-grade sovereigns across the globe.