Following the approval of several COVID-19 vaccines and the beginning stages of immunization throughout most developed markets, the recovery picture is coming into focus. As the view becomes clearer, variations by country and region are also developing based on case counts, mitigation efforts, the availability of vaccines, and timing until widespread vaccination. There are hurdles to still overcome as new strains of the virus and logistical impediments to vaccine roll out may delay containment of the virus as well as a return to normalcy that is key for a full recovery. Following several quarters of largely accommodative debt capital markets and massive amounts of borrowing, it could take several years for credit metrics to return to pre-COVID-19 levels. Downward pressure on ratings has subsided with upgrades and downgrades roughly equal over the last month. Slightly more than one-third of S&P rated nonfinancial corporations is on CreditWatch with negative implications or has a negative rating outlook. This remains above the historical average of 21% but has declined from a peak of 40% in the second quarter of last year. In this article, we share our updated regional estimates of when credit metrics might reach a run-rate recovery back to 2019 levels, which were initially published last June and updated in September.

The divergence in the shape of the recovery remains pronounced, as the travel and leisure sectors continue to struggle with low demand and higher debt balances. Conversely, consumer staples, technology, health care, and homebuilders have fared well and, in some cases, better than we initially expected. Based on the degree of fiscal and monetary support, as well as the path to widespread immunization, has led to different recovery time frames by region, with developed markets recovering sooner than emerging markets. The seemingly later recovery in rated sectors in APAC (see chart above) is largely due to the sector composition of the rated universe in the region, rather than a later economic recovery for the region. That composition is more tilted toward "late recovering sectors" (industrials and capital goods, discretionary consumer and retail, gaming and leisure, oil and gas, autos), with fewer "early recovering" sectors represented with the exception of telecom, consumer products and essential retailing.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Looking beyond the ongoing near-term impact of the pandemic, shifts in behavior that the pandemic created or accelerated will be factors in the timing of recovery, as will corporations' ability to adapt to new norms. We are seeing an acceleration in secular declines that were underway prior to the pandemic, for instance many mall-based retailers are under distress as shoppers shifted to online from in-store shopping. Risks emerging from shifts in corporate, consumer, and government spending could take longer to fully understand but will factor into the recovery picture. For sectors exposed to higher risk of longer-term changes in consumption patterns or accelerated secular change, we have indicated this risk in the regional heat map tables below. Corporations that have been nimble in the new environment--by successfully transitioning to a remote workforce or responding to a shifting demand landscape, for instance--are faring better than peers that were slow to react.

Fiscal and monetary stimulus throughout most developed markets supported consumers through the pandemic. Additionally, financing conditions for corporations remains accommodative and we expect central banks will maintain policies that keep interest rates lower for longer. With low interest rates, it is unclear how long financial policies for the hardest hit sectors will remain conservative and focused on reducing elevated debt loads accumulated over the past year. With the massive amounts of borrowing throughout the pandemic, a delay in recovery could be most problematic for the lowest rated credits. Nearly one quarter of nonfinancial corporations are rated 'B-' or lower and these entities could continue to face the risk of insufficient liquidity or insolvency, especially in 2021.

Fueled by low interest rates, merger and acquisition (M&A) volumes and shareholder returns could reach or exceed pre-COVID-19 levels as soon as 2021. Debt-financed M&A brings credit risks and could delay a post-pandemic recovery of credit quality for issuers undertaking a transaction. We expect pre-pandemic levels of M&A could occur in 2021, especially in sectors that remain well positioned to take advantage of the market (for example, technology and hardware), as well as for weaker sectors, like energy, looking to rationalize costs or grow scale.

Regional Heat Maps

For each region, we have assessed the following based on the rated universe of credits:

• 2020 assessment of average impact on revenue and EBITDA for the rated universe in the region. Incremental borrowings are a directional estimate of additional debt the sector carried into 2021.
• 2021 and 2022 estimates of revenue and EBITDA shortfalls relative to 2019. For sectors where we expect revenue and/or EBITDA to be at or better than 2019 levels next year, we use the descriptor '=>2019'.
• Longer term industry disruption/acceleration of pre-existing shifts. We have noted where sectors are exposed to higher risk of longer-term changes in consumer, government, or corporate consumption patterns, or an acceleration of a secular change that could delay or disrupt a recovery of credit metrics.

Asia-Pacific (APAC)

Our economists anticipate a widespread macroeconomic recovery across APAC in 2021, with GDP growing to 6.8% in 2021 after a contraction of about 1.8% in 2020. Under that macroeconomic base-case scenario, we forecast (1) a median profit growth for rated nonfinancial issuers in APAC in the mid- to high-single digits in 2021; (2) higher profits at nearly 90% of rated entities in 2021; and (3) average credit ratios revert to pre-COVID-19 levels in the second half of 2022 for the majority of sectors. Those broad assumptions are consistent with the recovery timeline we anticipated in July 2020.

Still, significant downside rating risk persisted regionally heading into 2021 despite the gradual recovery in revenues and profits because debt in 2020 kept rising. Nearly one-fourth of our ratings on investment-grade issuers and almost one-third of our ratings on speculative-grade issuers still have a negative outlook or are on CreditWatch with negative implications as of Jan. 28, 2021.

The essential retail, consumer staples and the telecom sectors were generally resilient in 2020, with a likely recovery to pre-COVID 19 levels in 2021 as we earlier anticipated. At the other end of the spectrum, we still expect a long recovery toward the second half of 2022 or 2023 for the cyclical transportation sectors (especially airlines), tourism-led sectors such as lodging and gaming, and automobiles given the sharp revenue and profit contraction that took place in 2020. The late recovering sectors remain airports and oil and gas (beyond 2023). Airports are unlikely to recover because restrictions on cross-border travel and border controls will likely remain in place until there is a comprehensive global vaccine roll out. The late recovery of the oil and gas sector follows our price deck assumption of mostly of the significant are the latest to recover to pre-COVID 19 levels.

From a regional standpoint, we now project the tech hardware/semiconductors, utilities, metals and mining, and automobile sectors will recover 6-12 months earlier than we anticipated six months ago.

Utilities:   We now anticipate average credit metrics will recover to pre-COVID-19 levels in the second half of 2021 (compared with 2022). Demand has picked up in most countries in APAC since the third quarter of 2020, and run rate demand growth is already at or slightly higher than pre-COVID-19 in countries such as India.

Technology hardware and semiconductors:   We now anticipate credit metrics will recover to pre-COVID-19 levels in the second half of 2021 (compared with 2022). The tech hardware sector is likely to rebound faster than previously expected with solid demand for remote working and remote learnings and the aggressive rollout of 5G smartphones and infrastructure supporting revenues and margins in 2021. A recovering global economy could also lift consumer electronics demand and corporate IT spending. we now forecast global IT spending to grow 4% annually in 2021 after a 1.7% decline in 2020. Semiconductor demand will grow stronger at 5% in 2021 with still robust demand from 5G mobile communications, cloud computing, and auto applications.

Metals and mining:   We now anticipate average credit metrics in the sector to recover to pre-COVID-19 levels in the second half of 2021 (compared with 2022), amid an improving outlook for metals and mining for 2021. Prices for most metals have shot up since mid-2020 even as China's stimulus-led reopening resulted in full-year domestic steel output reaching a record 1.05 billion tons in 2020 and a robust domestic demand. We expect momentum to carry over as the ongoing economic recovery in APAC and the release of COVID-19 vaccines has further fueled optimism for a fast market recovery, barring further widespread and extended lockdowns. This would provide underlying support for global commodity prices and accelerate the recovery path for the metals and mining sector.

Autos:   We still anticipate this sector to be among the last to recover (both in terms of revenues and profits but also in terms of credit metrics) though we now see recovery in 2023, 6 to 12 months earlier than our July 2020 forecast. There are early signs of a moderately more positive consumer sentiment in key markets such as China, where we now project a 4%-6% growth in auto sales in 2021 (from a low-single-digit earlier) and a recovery to 2019 levels in 2022. The recovery in other large markets in the region will likely remain slow, with a recovery to 2019 unit sales likely in 2023.

An emerging credit trend for APAC is the divergence in the recovery path of the corporate sector among countries within the region. Operating conditions have improved faster than we earlier anticipated in China and India, with a smaller downside risk to ratings heading into 2021. About 20% of issuer ratings are on negative outlook in China and about 25% in India. Corporate Indonesia is at the other end of the spectrum, with about 55% of ratings on negative outlook. Recovery prospects in 2021 there are more elusive amid still rising COVID-19 cases, a slow vaccine roll out, subdued consumer sentiment, and selective funding by banks. Downside rating pressure remains close to multi-year highs in Japan and the Pacific.

Europe, The Middle East, Africa (EMEA)

In EMEA, the effects of the second wave of COVID-19 are proving to be more severe than initially expected. We expect the transportation (specifically airports and airlines) and leisure (including hospitality and touristic services) sectors to be the most severely hit sectors in 2021 because of the latest wave of lockdowns and uncertainty about future reopening. The organization of the vaccination campaign in the EU has proved to be more complex than initially assumed and according to our analyses, 70% of the adult population could be vaccinated no earlier than late July 2021 (in the U.K. a similar level should be achieved late June 2021, see: "EU Could Meet 70% Vaccination Target By Late July If Production Steps Up"). This is a factor in the drop in reservations in the high season during the second and third quarters. Some support is expected from domestic tourism as people vacation in their own countries because of restrictions on traveling abroad. However, the EMEA vaccination campaign is only part of the equation for transportation and hospitality and tourism. The global movement of people and the flow of tourists within Europe depend on a widespread immunization, which in the most developed economies could be achieved by the end of the third quarter, but will be later in some emerging markets.

Nonessential retailers and restaurants continue to face significant disruptions. Still, there is evidence that the effects of this wave of restrictions is less severe than last spring. The sector is better prepared, with help from strong e-commerce growth. Retailers have also repositioned their offerings and product mix to cater to the changes in consumer behavior and to take advantage of the nesting dynamic and elevated spending on home-related items. The sharp recovery in demand in the third quarter of 2020 indicates that some rebound is likely during the second part of 2021. We now expect this sector will return to 2019 levels in 2023, one year earlier than our previous forecasts. The forced change in consumer habits has led to a shift in spending— the desire to make houses more comfortable has boosted sales of home appliances and furniture, supporting the consumer durables segment. The negative impact on homebuilders and developers has been less than expected thanks to demand for private housing and the stronger-than-expected positive impact from governments' stimuli. Conversely, the demand for retail properties is structurally decreasing.

We have also revised our assumptions for the recovery path of the auto sector, which we now expect to recover in 2022 (earlier than our previous expectation of 2023) thanks to the combined effect of a boost to private mobility linked to COVID-19, the massive launch of new hybrid and electric vehicles in all segments to manage producers' CO2 strategies, the governments' support schemes in the transition to green mobility, and the producers' financial services offering more affordable financing and leasing terms. A positive revision has also occurred in the transportation via shipping sector where solid international exchanges have triggered higher container shipping volume and higher freight rates, and we now expect 2020 results returned to 2019 levels.

Latin America (LatAm)

While economic activity in LatAm has been showing some signs of recovery, this has been uneven across countries and sectors, and the broader pandemic picture has somewhat worsened. In recent weeks, countries like Brazil, Colombia, Argentina, and Mexico set new record highs of new daily COVID-19 cases, and some governments decided to impose new social distancing measures. While less restrictive than the lockdown measures last year, they could still have an important impact on growth in the early months of this year.

The highest risk exposure remains for sectors that induce close and direct human interaction. Restaurants, transportation (including airlines), gaming, and leisure continue to suffer from the abrupt decline in demand from a year ago, which wouldn't recover until immunization programs across the region and around the world restore safety conditions for socializing and mass interactions. We maintain our view that demand in these sectors will return to pre-pandemic levels after 2023.

Some commodity-driven industries have outperformed our previous expectations, as prices for many sectors have bounced back from the initial demand shock related to COVID-19 in the first half of 2020. The upward correction of iron ore and copper prices has improved growth prospects for several players, while currency depreciation will have a positive effect on operating costs and boost EBITDA margins. We also expect lower risk exposure for the agribusiness sector, mostly driven by the rebound in sugar prices in local currency terms, which has boosted top-line growth and profitability for Brazilian sugarcane producers.

For other commodities, like oil and gas, we don't see full recovery from the 2020 dip until 2023, even with the recent uptick in crude oil prices that are benefitting from improving global supply-demand fundamentals. Further upside potential for prices could be constrained in the medium term by the energy transition. Therefore, marginal increases in prices and production volumes would not bring material improvements to financial performance over the next 24 months.

For cement producers, volume sales have performed better than what we expected. Bagged cement demand related to informal housing has been a driver for recovery, as government social programs and steady remittances continue to support households in the low-income segment. We now expect a path to recovery to pre-COVID-19 levels in the second half of 2021 on average, a year earlier from what we had originally estimated, with Brazil potentially emerging faster than other markets if housing momentum remains.

North America

Some of the more notable updates to our recovery timeline since our September update include:

Restaurants:   We now expect the industry, on average, to recover sooner, in the first half of this year. The rated group of credits in the region is more concentrated in fast casual and quick serve restaurants, which continue to perform well with consumers in the current environment.

Travel and leisure:   A number of downward revisions to travel and leisure industries, including a longer expected recovery that is now moved out to 2023 for fitness companies, as a result of the bumpy vaccine roll out and uncertainty around COVID-19 case counts and variants.

Health care services:   Although demand has recovered well from the depths of the pandemic, it appears that an increase in telehealth and a lower number of ER visits could push a recovery of credit metrics for the industry into the second half of this year.

A late-year surge in COVID-19 cases that carried into January 2021 has kept the travel and leisure sectors under pressure, reflected in the downward revisions to our revenue and EBITDA expectations for 2021 and elevated credit metrics through 2023 or longer. Case counts have since subsided to levels seen last fall and we expect travel to resume gradually until we reach widespread vaccination later this year. (See: "The Health Care Credit Beat: U.S. Herd Immunity By Midyear Is Possible With Additional Vaccine Approvals") We expect consumers will lead the way, before more profitable group, corporate, and international travel resumes. A recovery in travel and leisure demand could take years and more permanent shifts in behavior that delay a recovery in corporate travel remain a risk for the sector.

Supply chain issues may hold back the recovery in some sectors even as end market demand stabilizes. For instance, we now anticipate the chemicals sector won't return to pre-pandemic credit metrics until 2023 based on supply constraints. A shortage in semiconductors will cause production shortfalls, in the first half of 2021, of up to 20% for some automakers. See "Global Semiconductor Shortages Could Chip Away At The Auto Sector’s Recovery In 2021" We could also see periodic shortages or higher input costs in building materials and metals and mining as producers respond to changes in demand while optimizing profitability.

On a brighter note, U.S. consumer spending has held up well and should continue to benefit from the expected third round of stimulus checks. Sectors that are best poised to benefit include consumer goods, technology hardware manufacturers, home improvement, and décor. However, apparel and cosmetics sales remain depressed, causing a delay in expected recovery until 2023. Regional or domestic travel and leisure companies could also begin to see some relief from pent-up demand as consumers get more comfortable with venturing out.

Disparities between companies and industries that have benefited from pandemic-accelerated digitalization and those suffering from structural shifts will likely widen as Americans' approach to work and leisure continues to evolve. For instance REITs exposed to malls are suffering from a high number of distressed tenants in the wake of an accelerated move to online shopping and office REITs are facing the possibility of an emerging, longer term risk if tenants reduce the space they occupy should working from home become more the norm.