As world economies have gone into lockdown because of the coronavirus pandemic, S&P Global Ratings has been monitoring the pandemic's impact on its sovereign ratings. Since March 10, we've reviewed over two-thirds of the sovereigns we rate (see chart 1). Out of the 90 sovereigns reviewed by May 11, 2020, 51 sovereigns were from EMEA (Europe, the Middle East, and Africa), where, in some instances, we deviated from our previously published calendar (see "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates"). In the Americas, we reviewed 29 ratings, including on the U.S. (AA+/Stable/A-1+), and in Asia-Pacific, we reviewed 10.

Of the sovereigns we've reviewed, we downgraded over one-fifth--and five of those ratings currently have negative outlooks--and we revised the outlooks on 15% of the reviewed sovereigns to negative from stable. Although we forecast that the majority of sovereigns we rate will face economic contractions, widening fiscal deficits, and rising government debt stocks, we affirmed ratings on more than half of the sovereigns reviewed.

Chart 1

We continue to monitor the economic and financial fallout from COVID-19 and will review our sovereign ratings where necessary, including through potential deviations from our EMEA publication calendar.

Table 1

Our Global Macroeconomic Baseline Scenario Informs Our Rating Actions

We forecast a significant contraction of economic activity around the world (see "COVID-19 Deals A Larger, Longer Hit To Global GDP"), with real GDP globally declining by 2.4% in 2020. We then expect global growth to rebound to 5.9% in 2021.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications.

Chart 2

Governments around the world have been swift in their fiscal response to the pandemic. On average, we expect the sovereigns we rate to run deficits to the tune of 6.3%. While this number may get revised higher as lockdown measures are extended and governments try to cushion the economic and financial impact on households and businesses, we mostly view this increase in general government deficits as transitory. To the extent that an economic recovery takes hold in the second half this year and firms over 2021, we expect government deficits will more than halve to around 3% on average. (For more, see our Sovereign Risk Indicators: https://www.spratings.com/sri/.)

Negative Rating Actions Were Primarily On Sovereigns With Weaker Fundamentals

The majority of negative rating actions affected speculative-grade sovereigns, with the average rating of downgraded sovereigns at 'BB-'. In addition, there were three selective defaults: Lebanon, Ecuador, and Argentina. In all three instance, the ratings were already in the 'CC'/'CCC' range prior to the defaults.

We see the impact of the crisis as quite severe and, for many sovereigns, will have long-lasting effects. However, we also think, in cases where we affirmed ratings, that the defense mechanisms the sovereigns put in place will help them--at least in the short term--to contain the destruction of their economic base by keeping workers tied to their employers and businesses afloat, which should aid the recovery once economies reopen.

Over the medium to long term, we could see negative rating pressure build up, even for some of the ratings we affirmed, if we see the effects of the pandemic becoming structural and likely to have longer-term negative implications that would make recovery of fiscal profiles slower than expected.

The majority of our rating actions have been on emerging market sovereigns. We see distinct differences among the sovereigns in this group, as well as important vulnerabilities for some. Emerging market sovereigns have implemented stimulus to support their economies, but the reach and effectiveness are more limited than those implemented by developed economies.

In some cases, particularly in Latin America and Africa, the economic and fiscal outlook prior to COVID-19 was already quite weak. For some of these economies, the erosion of credit quality stemming from the effects of the pandemic will be structural and long lasting. That said, as the world comes out of the pandemic and investors start looking for opportunities to get better yields, emerging markets are likely to see an increase in flows returning to the asset class, which will help the financing requirements of these sovereigns.

Chart 3

Table 2

Negative Outlook Balance Means More Downgrades Might Be Coming

The outlook balance--the difference between positive and negative outlooks--turned negative again in April 2020 (see chart 4). With a total negative outlook count of 25, versus six sovereigns with positive outlooks, we think more negative rating actions are likely. That said, the majority of sovereign ratings, 104 at the moment, carry stable outlooks, indicating that currently we do not expect those ratings will change over the next one to two years.

Chart 4

Geographically, the outlook balance is most negative in the Americas, where we no longer have any positive outlooks (see chart 5). In EMEA, the outlook balance also turned sharply negative following the outbreak of the pandemic.

Chart 5

Table 3