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Governments will see fiscal weakness, rating downgrades due to coronavirus: Fitch Ratings

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There will likely be a higher-than-average number of sovereign rating actions this year, due to the coronavirus outbreak’s economic impact combined with the policy responses, Fitch Ratings said on Wednesday.

THERE will likely be a higher-than-average number of sovereign rating actions this year, due to the coronavirus outbreak’s economic impact combined with the policy responses, Fitch Ratings said on Wednesday.

The credit rating agency also expects a downward bias in sovereign rating changes that is more pronounced than in any year since the aftermath of the 2009 global financial crisis.

Fiscal records of national governments will be one component of Fitch’s assessment 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 the coronavirus will have public finance implications that last through the medium term,” the agency said.

Amid the escalating Covid-19 crisis, global economic policymakers are facing an unprecedented combination of challenges, including a health crisis, economic disruption, several financial market dislocation, changes in investor sentiment, exchange-rate volatility and a commodity price shock.

One of the main economic consequences for regions and countries affected by the coronavirus is the “sudden stops” in activities, Fitch noted.

Although traditional macroeconomic policies will have a limited effect on such curtailments motivated by health concerns, they can help to soften the impact on household and corporate income streams. This will prevent a more marked and extended economic decline, Fitch said.

“Over time, fiscal policy responses will come to match those already underway on the monetary side, at least in terms of the number of countries engaged,” it added.

The agency measures and compares sovereign public finances, by considering: fiscal balances relative to gross domestic product (GDP), government debt stocks relative to GDP, interest payments as a share of government revenue and shares of government debt denominated in foreign currencies.

On this basis, Fitch creates individual sovereign scores. The total changes in these scores are strongly correlated with changes in global sovereign ratings, which implies that a period of fiscal weakness ahead will be accompanied by sovereign rating downgrades, according to Fitch.