After a global contraction in 2020, Scope Ratings agency forecasts in its report a year of recovery in 2021 led by China (9.9% growth). In addition, 2021 recoveries are foreseen in the United States (2021 growth of 4%), the euro area (5.6%), Japan (3%) and the UK (6.6%). In line with expectations, a new wave of SARS-CoV-2 infection has sent recovery in many cases into temporary reversal in the 2H-2020. The recovery is likely to gain a firmer foothold by early spring 2021 as reopenings restart, although full economic normalization in 2021 and beyond will remain vulnerable to setbacks. There are both upside and downside risks to the 2021 global outlook.
The global economy will rebound by around 5.4% next year after the sharpest contraction of the post-war era in 2020 when output will have fallen by about 4.0%, but the recovery will prove uneven amid an overhang of global debt, says Scope Ratings.
“We continue to expect recovery to gain a firmer foothold by the early spring of 2021 as vaccines are made available to at-risk segments of the population, better weather slows virus transmission and governments ease social and economic restrictions,” says Giacomo Barisone, head of sovereign ratings at Scope. “Full economic normalization in 2021 and beyond will remain vulnerable to setbacks, however — partly from the risk of another wave of infection in countries that ease restrictions too speedily — such as in advance of the coming holidays.”
“Global government debt is close to a record 100% of GDP, while public debt trajectories are unlikely to reverse significantly post-crisis in the case of many government borrowers,” he say. “This represents a constraint for the sovereign rating outlook. Rising household and corporate debt levels, in addition, hold implications for financial stability. Non-performing loans and defaults could rise as extraordinary support provided to protect households, jobs and business tapers as the crisis moderates next year.”
Central banks have mitigated immediate sovereign liquidity risks in advanced economies. Due to central bank action, financing rates for governments in advanced economies have fallen compared with pre-crisis levels despite much higher debt. However, any normalization steps of central bank policies could lead to a repricing of risk. In emerging economies, financing constraints are more significant as increased debt has escalated currency and debt crises.
Scope currently rates 10 sovereign governments of a portfolio of 36 rated countries with a Negative Outlook, including the UK and Japan, while Ireland, Greece and Lithuania hold Positive Outlooks. Rating actions in 2021 will depend on the impact of the crisis and expected speed of recovery; the efficacy of monetary and fiscal policy responses; as well as sovereign credit profiles at a given rating level.
The budgetary strategies of governments post-crisis will concentrate on maintaining pro-growth policies to achieve fiscal consolidation rather than relying on austerity as they did after the global financial crisis. “This carries its own long-term risks,” says Barisone. “If sustainably higher growth does not materialize after investment spending over the coming years, large deficits could translate to unsustainable debt dynamics, forcing more permanent central bank interventions.”
Monetary policy will remain highly accommodative. Revisions to central banks’ policies in the context of asset purchases and ambitions to support green transitions could transform global central banking in the years ahead.
The dollar remains the dominant global currency, with the euro still far behind. Still, recent developments — notably the enlarged pool of euro area safe assets as the EU issues debt to finance recovery — could enhance the euro’s global reserve currency role to challenge the dollar’s dominance long term, with positive rating implications for euro area sovereign issuers over time. “EU issuance to finance the Recovery Fund as well as ECB asset purchases mark a fundamental transition in EU fiscal and monetary frameworks towards closer implicit fiscal and monetary union. This is credit positive even though the landing zone for an EU architecture post-crisis remains unclear.” “We also expect governments, regulators and investors to pay increasing attention to the interplay of credit and environmental, social and governance risks, partly as a consequence of the disruption caused by COVID-19,” says Barisone.
Scope’s sovereign rating methodology accounts for environmental credit risks via three factors: transition risks, natural disaster risk and ecological wealth.
Inward-looking policies of the outgoing US administration, as evidenced by protectionist actions and greater use of sanctions, have incentivized diversifications from the US dollar. For example, both the Russian and Chinese central banks sold part of their US-dollar-denominated reserves over 2018-2019. While the incoming Joe Biden administration will strengthen transatlantic cooperation, sanctions on Russia are likely to be reinforced.
With emerging markets anticipated to also see rebounds next year, Russia may demonstrate a 2.5% growth in 2021 (against 1.3% in 2019) after a comparatively soft contraction of about 4.5% this year. Unemployment rate of 4.6% in 2019 reached 6% in 2020 and is likely to be at 5.5% next year. Despite synchronized shocks, Russia’s 2020 GDP performance is expected to be less adverse than that of advanced economy peers. This is largely due to the Russian economy’s structure, including a smaller role for services sectors and small and medium-sized enterprises, as well as a more substantive role for the state sector, the latter requiring less policy support. Russia’s credit ratings are supported by conservative fiscal and economic management policies, an enhanced degree of economic self-reliance and lower exposures to disruptions in global supply chains. 2021 growth will be anchored by the expected recovery in oil prices. Nonetheless, the uncertainty in regard to the oil sector outlook could weigh upon economic recovery, especially amid the pandemic’s second wave and a global oil supply glut, the latter made worse by OPEC+ agreement on a rise in supplies from January onward. Russia’s economic outlook is supported by a flexible exchange rate regime, which anchors budget revenues as well as mitigates the negative impact on foreign exchange reserves during bouts of currency depreciation. However, the absence of more significant structural reforms to address low growth potential, alongside weak private consumption and investment, and geopolitical risks, will constrain recovery. International sanctions on Russia are likely to remain in place under the forthcoming US administration if not be strengthened. At the same time, geopolitical risks related to the Ukraine conflict, exposure to political instability in Belarus, and the possibility of intensified sanctions weigh upon the country’s external financing flexibility, investment flows and growth prospects. Policy continuity with regards to prudent fiscal, monetary and FX policies are expected.