Moody's flagged a negative outlook for global sovereign creditworthiness in 2021, saying the economic, fiscal and social shock arising from the COVID-19 crisis will persist next year and beyond.

The gradual recovery of most economies is projected to begin next year as governments continue to phase out measures supporting households and companies, according to Lucie Villa, senior credit officer at Moody's.

"However, neither of these factors will do more than halt, and in some cases simply slow, the erosion in government finances, which will be far weaker after the crisis than they were before," Villa said.

Moody's said that in several countries, large fiscal deficits will push government debt to the highest levels since World War II, including in the U.S. where debt is forecast to hit 116% of GDP in 2021. The debt ratios of some of the poorest countries may also return to or even surpass the levels seen before the Highly Indebted Poor Country initiative, which was launched in 1996, according to the rating agency.

"Over the near term, sovereigns with low credit ratings will be most affected given their lower economic and institutional strength as well as more limited access to funding compared with sovereigns with stronger credit profiles," Moody's said in a report.

The debt watcher expects sovereigns across the rating spectrum to face "increasingly challenging policy trade-offs triggered or exacerbated by the crisis" over the medium term.

After a 4% contraction in 2020, the global economy is forecast to rebound in 2021 with growth of 5%, although the pace of expansion would vary across countries, according to Moody's. The rating agency warned that renewed lockdowns pose significant downside risks to the outlook, while shocks to confidence also threaten to derail the recovery.

"We expect most countries, including Germany and the U.S., to return to 2019 levels of economic activity in 2021 or 2022. Some will not contract at all in 2020 but will slow down from previously high growth rates," Moody's said.

Moody's said it has taken 108 sovereign rating actions so far this year, of which about 60% to 65% are negative actions, up from 20% and 30% negative actions in 2019 and 2018, respectively.

Thirty-three of the rating actions in 2020 are downgrades, the highest number since 2016. The pandemic is the main driver for 43 negative rating actions taken on 33 sovereigns, Moody's said.