Downside risks will dominate the ratings landscape in 2021, according to a note released today by Canadian financial ratings agency DBRS Morningstar.
Stating that “downside risks dominate the outlook for sovereign ratings”, DBRS Morningstar believes that “conditions are in place for a gradual global recovery as long as group immunity is not too far away”.
“Still, should the pandemic shock prove more persistent than anticipated, even greater downside pressure on ratings could emerge. Even if the pandemic is eventually contained, recovery is likely to be slower in Europe and some other countries,” today’s note can read.
DBRS points out that the pandemic recession “may have accelerated structural changes, which could leave unemployment persistently high in some countries”.
Despite the fiscal support undertaken by states, which “will accelerate economic recovery and some should be directed to productive investments”, the Canadian agency notes that “risks to debt sustainability may increase over the medium term”.
“For now, low interest rates mitigate this risk, but past crises have taught us that an increase in inflation or risk premiums can still occur. Increasing risk aversion could affect emerging markets and high interest rate borrowers,” according to DBRS.
The agency says support measures “will be dismantled and automatic stabilisers will help rebalance fiscal accounts”, but further down the road “stabilising credit bases will require fiscal rebalancing plans and implementation”.
In other risks, DBRS notes that “social tensions may also intensify on the way out of the pandemic” as the recession “has disproportionately impacted many personal service occupations, many of which are low-income jobs”.
“Pandemic death rates were also higher in lower-income or minority populations. As in the last global crisis, governments’ policies can be perceived to have benefited large, well-influenced companies, leaving small businesses and lower-income households at a considerable disadvantage,” DBRS understands.
The agency warns that persistent inequality, perceptions of economic injustice and lack of opportunity “could cause lasting damage to political institutions and social cohesion” after “social frustrations have intensified during the pandemic” due to the imposition of measures such as physical distancing.
The DBRS also cites protectionism, with the pandemic “generating additional concerns about reliance on value chains from abroad for critical medical resources”.
“If governments increase barriers to travel, trade and investment, this could have significant negative effects on productivity and production costs,” DBRS warns.
On the other hand, “policy changes may lend additional support to recovery, to the extent that governments use the pandemic as an impetus to increase investment and accelerate structural reforms.”
Still, “for some countries, pressures to reduce the deficit may gravitate against increasing investment and be a deterrent to investment.”
