Sovereign Defaults Set to Hit Record in 2020

Fitch Ratings believes further sovereign defaults are probable this year. Argentina, Ecuador and Lebanon already have defaulted on sovereign debt in 2020, equalling the record high of three defaults by Fitch-rated sovereigns in 2017. The severe shock from the coronavirus pandemic and plunge in oil prices exacerbate the risks.

The sovereigns most exposed are those with generally weak credit fundamentals, such as high debt and weak policy credibility; and those reliant on commodity exports or tourism, or with large external financing requirements, foreign-currency debt, hot-money inflows and low reserve buffers.

Strong Downward Pressure on Ratings
In only four months of 2020, there were a record 29 sovereign downgrades (of which 8 have been within the ‘CCC/CC/C/RD’ range). There has also been a sharp change in Outlooks to a net negative balance of 28 (despite the downgrades) from four at end-2019, the joint highest.

This amplifies the longer-term trend of declining average emerging-market (EM) ratings. Some 29% of all ratings are now in the ‘B/C/D’ categories. Few ‘CCC’/‘CC’ Sovereigns Avoid Default Fitch rates five sovereigns at ‘CCC’ or below (excluding those in default): Gabon, Mozambique, Republic of Congo and Suriname at ‘CCC’ and Zambia at ‘CC’. The average annual default rate over 1995-2019 for ‘CCC/CC/C’ sovereigns was 26.5% and the cumulative five-year default rate was 38.5%.
Source: Fitch Ratings