Sovereign default at record high as global macroeconomic environment remains challenging: Fitch 

THE number of defaults by Fitch-rated sovereigns has increased significantly since 2020, with 14 recorded across nine different countries.

In comparison, between 2000 and 2019, there were only 19 defaults affecting 13 countries, said the credit ratings agency on Thursday (Mar 30). 

Fitch Ratings offers sovereign credit ratings that assess each nation’s ability to meet its debt obligations. 

Sovereigns are assigned both a local currency issuer default rating which reflects the likelihood of default on debt issued in the currency of the sovereign, while the foreign currency issuer default rating assesses the credit risk associated with debt issued in foreign currencies. 

Five countries – Belarus, Lebanon, Ghana, Sri Lanka and Zambia – are in default currently.

Argentina was given a rating of “C”, meaning that it is near default, while El Salvador and Ukraine have a rating of “CC” implying that default is probable. 

Fitch rated Ethiopia, Pakistan, Mozambique, the Republic of Congo and Tunisia at “CCC+” or “CCC-” which means that default is a possibility. 

Fitch said that more defaults are likely as global macroeconomic shocks follow years of debt accumulation by countries. 

The median general government debt/gross domestic product ratio of Fitch-rated sovereigns rose steadily from 31 per cent in 2008 to 48 per cent before the Covid-19 pandemic.

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This was facilitated by frontier markets’ easier access to the eurobond market and borrowing from China, the credit ratings agency said. 

It added: “A strong US dollar compounded the impact on weaker emerging markets with significant foreign currency debt.”

Faced with the severe shock of the Covid-19 pandemic and the impact of Russia’s invasion of Ukraine, these countries’ debts worsened due to inflationary pressures and the abrupt tightening of monetary policy.

Fitch warned that defaults may be taking longer to resolve despite the introduction of the Common Framework by the G20 and the Paris Club to facilitate sovereign debt restructuring for lower-income countries. 

Reports suggested that a key reason for delays is weak coordination among Chinese stakeholders stemming from China’s demands that multilateral debt be included in debt restructuring.

Data from the Bank of Canada and Bank of England show that, at end-2021, 25 sovereigns were in default or arrears to China, up from an average of four a year between 2008 and 2015.

Fitch said: “A slow and inefficient debt-restructuring framework with limited cooperation between creditors will tend to mean that sovereigns languish longer in default.

“That would not appear to serve the interests of either debtors or creditors, and would add to the cost of financing and potentially lead to weaker economic outcomes.”