(Editor's Note: For more detail on sovereign ratings performance in 2021, please see "2021 Annual Global Sovereign Default And Rating Transition Study," published May 4, 2022.)
Key Takeaways
- Sovereign credit quality largely stabilized in 2021, with downgrades and defaults falling steeply from 2020.
- Even with ratings stabilizing, sovereign credit quality remains weaker than before the pandemic, with more sovereigns rated 'CCC+' or lower.
- Emerging and frontier markets accounted for all of the downgrades. Many of these were tourism-dependent economies that face a protracted impact from COVID-19.
- Sovereign ratings performed well in 2021--the only two defaults were from issuers rated 'CCC+' or lower at the beginning of the year.
Sovereign ratings were much more stable in 2021 after the onset of the COVID-19 pandemic led to a sharp rise in defaults and downgrades in 2020. But with the growing number of speculative-grade ratings and the sharp fiscal and economic shocks that countries are facing as a result of the pandemic, the number of 'CCC'/'CC' category sovereigns remains higher than before the pandemic, with eight issuers at the beginning of 2022. This pool of issuers in the highest-risk rating category suggests that defaults could remain elevated in coming years.
Following 2020's record seven foreign currency defaults, the sole foreign currency default last year was Belize, which defaulted for the fifth time. Belize entered 2021 already at the low end of the credit spectrum, with a rating of 'CCC+', and its default stemmed from its economic and fiscal position, which was severely weakened by the pandemic.
The distribution of sovereign ratings has been slowly drifting lower over the past 20 years as more emerging and frontier market sovereigns have sought to raise funding through international capital markets.
As we've found across our default and transition studies, those issuers rated in the lowest rating levels exhibit the highest default risk. In addition to Belize's foreign currency default, there was one default among local currency ratings in 2021--Suriname, which was rated even lower ('CC') at the start of 2021.
Chart 1
Chart 2
Sovereign Credit Began Stabilizing In 2021
While the economic recovery lifted credit quality broadly, credit quality in the developed market fared better than in emerging and frontier markets, many of which had less fiscal flexibility, less supportive financing conditions, and delayed access to COVID-19 vaccines. Furthermore, the pandemic has exacerbated social unrest and rising inflation, which continue to compound governments' challenges.
Chart 3
Downgrades and defaults during the year were entirely among emerging and frontier market countries, particularly from Latin America, the Middle East, and Africa. Many of the downgrades were of countries that rely heavily on international tourism as variants of COVID-19 slowed the recovery of international travel. More of the upgrades were of countries in the developed market.
Within emerging markets, Central Europe and the Commonwealth of Independent States showed relatively higher stability in 2021, with no upgrades and a single downgrade (Montenegro). However, the relatively benign credit conditions in the region came to an abrupt end with the Russian invasion of Ukraine in February 2022. This report covers the period through Dec. 31, 2021. For the latest updates on rating actions and research related to the conflict in Ukraine, please see "Russia-Ukraine Military Conflict: Key Takeaways From Our Articles," April 19, 2022.
Ratings Continue To Provide An Effective Measure Of Credit Quality
As in prior years, defaults were concentrated among the lowest-rated sovereigns, and sovereign rating performance continued to show that lower-rated entities exhibit higher rates of default.
One metric of ratings performance, the Gini ratio, measures the rank-ordering power of ratings over a given time horizon. With only sovereigns rated 'CCC+' or lower defaulting in 2021, sovereign ratings performance exceeded its long-term average and one-year weighted average Gini ratio. For 2021, the one-year Gini ratio was 94.9% for foreign-currency ratings, up from 91.4% in 2020 and above the one-year average of 89.5%.
Chart 4
This report does not constitute a rating action.
| Ratings Performance Analytics: | Nick W Kraemer, FRM, New York + 1 (212) 438 1698; nick.kraemer@spglobal.com |
| Evan M Gunter, New York + 1 (212) 438 6412; evan.gunter@spglobal.com | |
| Vincent R Conti, Singapore + 65 6216 1188; vincent.conti@spglobal.com | |
| Research Contributor: | Tanya Dias, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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