Sovereign debt is the amount of money, that a government has borrowed typically issued as bonds, then when a country is unable to get a low interest rate from lenders to pay its bills, a sovereign debt crisis occurs. Credit rating agencies construct the creditworthiness of financial institutions and countries by classification of them into the particular rating system. Thomas Friedman (1995) published a report about a two-superpower world that is the U.S and Credit Rating Agencies, first can vanish a country by leveling it with bombs and second destroy a country by downgrading its bounds. Therefore, economic prosperity, public debt and stable policy of a country, form the rating system of the agencies.
Fitch credit rating relevant to issuers is an ability of an entity to meet financial obligations. Credit ratings are used by investors as indicators of the likelihood of receiving the money owed to them on which they invested. However, in current time, the crippling influence of the coronavirus crisis has pushed governments and corporate finances towards debt soaring. Marc Jones [1] had a report in business news about the statistics of downgrades that have been already made by three biggest credit rating agencies so far this year. Further to backwards of a pandemic, downgrades might be a considerable threat to economies and doubtful questions about up-coming ratings.
![](https://myfiles.space/user_files/58677_ec8811c6b4185256/58677_custom_files/img1612875839.png)
Credit ratings are categorized into two main groups: investment grade and speculative grade.
AAA to BBBM (BBB-) is involved into “Investment grade” whereas “BBP” to “D” is called “High Yield” or “speculative grade”. “AAA” ratings denote the lowest expectation of default risk. They are assigned to the strong capacity for payment of financial commitments. In contrast, from the view point of Credit agencies, below BBBM is not worth consideration. Meanwhile, without the acceptable rating, how countries will be successful to access in the financial market to deal with heavy debts that is a main way to fall off the amount of bills and survive from governmental debt After Covid-19. In crisis times Downgrades may indeed have a severe impression on sovereigns and corporate finances.
1.1 Impact of the Pandemic
As rating agencies evaluate the COVID-19 effect, they assess what the long-term impact of the coronavirus crisis will be. The rating agencies need to determine whether the consequences of the short-term credit rating conduct to long-term, or is a different rate structure required to express risks to investors that are connected to temporary ratings? [2]. Looking at the Fitch Rating response since the coronavirus crisis broke out, it seems that high yield or junk rated countries have been affected more, forcing them deeper into junk zone (Table 1) that it has been proved in our study also. From investment grade, the most notable country was Canada, which downgraded from AAA to AAP (AA+) by Fitch on June 24. To better understand the negative effect of the pandemic on credit ratings, we listed up-graded, kept-stable and down-graded countries by each credit rating agency below (Figure 1).
Country
|
2019
|
2020
|
|
Country
|
2019
|
2020
|
Cape Verde
|
B
|
BM
|
|
Morocco
|
BBBM
|
BBP
|
Cameroon
|
BM
|
B
|
|
Sri Lanka
|
B
|
CCC
|
Canada
|
AAA
|
AAP
|
|
Tunisia
|
BP
|
B
|
Chile
|
A
|
AM
|
|
Armenia
|
BBM
|
BP
|
Colombia
|
BBB
|
BBBM
|
|
Bahrain
|
BBM
|
BP
|
Gabon
|
B
|
CCC
|
|
Bolivia
|
BP
|
B
|
Guatemala
|
BBB
|
BBM
|
|
Costa Rica
|
BP
|
B
|
Mexico
|
BBB
|
BBBM
|
|
Nigeria
|
BP
|
B
|
Table 1: some down-graded countries by Fitch Rating Agency in 2020
We were not likely to be a witness of a lot of immediate downgrades during the first waves of the pandemic, but the reality was a little bit different. Moreover, this is a question if more countries` credit ratings will be downgraded during this crisis in the coming months.
There was an deep observation on the economic and social factors with strong and robust attributes for rating system which nowadays hit by pandemic, what extent of pre-explored factors have been affected by the crisis and whether is any other effective element to be added to the structure of rating to be able to rate the countries in the optimum way during pandemic, that will likely continue as a main driver of credit risk. Consequently, finding out the modified patterns will be the main contribution of this research.
1.2 Economic and Social variables during pandemic
The world policy to the deadly and costly Coronavirus Crisis made governments to have a high debt-to-GDP ratios. To pay for many of these programs, countries will require to have access to financial markets. This phenomenon shed light on the response of the credit rating agencies to the pandemic, how the countries and financial institutions will be rated. The negative outlook of sovereign downgrades at the outset of the pandemic has slowed-moved significantly since June and will continue to decelerate in the months ahead. Sovereign credits experience considerable stresses following of the negative view points about downgrades that may reach to below the historical average [3]. Accordingly, it is certain to follow the trend of the main variables of pre-explored patterns of the Fitch Rating system [4] to analyze its response to COVID-19.
GDP per Capita ($) & GDP Growth Rate (annual %);
GDP is the overall value of goods and services for last use, produced by inhabitant producers in an economy. GDP per capita and GDP per capita annual growth rate are extensively utilized by economists to recognize the health of an economy [5]. According to current reports, on average, GDP per capita is intended to decline in 2020 in comparison with 2019 internationally. Global statistics of GDP growth compared to previous years as follows;
2020* -3.03%
2019 2.9%
2018 3.58%
Whereas, Fitch Rating expected from GDP growth to fall to 1.3% in 2020 from 2.9% in 2019, lockdown affected the expectation dramatically to decrease to – 3.03%.
Inflation, Consumer Prices (annual %);
The pandemic and associated lockdown features might have an effect on supply chain and demand for particular products and following their prices. During the crisis, uncertainty can lead to a risk of de-anchoring wherein short-term prices can change long -term expectations [6]. Some do not believe inflation because many industries as hotels, gasoline or airfares pulled the index down. Actually, cheap, but the unwanted product basket does not show inflation. The Wall Street Journal reported that inflation is somewhere for the materials you really want to buy [7]. In spite of some beliefs about not being particular inflation during pandemic because of falling-off prices and discounts in most industries, the demand for certain crisis-related products will be increasing.
Unemployment Rate (%);
The Coronavirus disease crossed every territory and industries across the world, and lockdown changed workforce policy of nearly all institutions and companies [8]. Static says, the unemployment rate hit 5.42% in 2020 and remained 0.02 percentage points higher than 2019. Young or low-educated workers, women and part-time labors endured more proportion of the unemployment rate.
2020* 5.42%
2019 5.4%
2018 5.39%
Urban Population (% of the total population);
Overall, more people in the world prefer to live in urban than in rural areas since 2010. In 2020, 56.2 percent of the world population is urban, while, fast distribution of COVID-19 occurs in the crowded environments. Then, as social key factor was investigated among other variables also.
Government Debt (debt to % of GDP);
The COVID-19 shutdown, pushed emergency expenditure to societies that it caused government debt to balloon. Then, logically, governments have two ways to come back to pre-COVID debt level. They may cut spending or increasing taxes. In the current situation, it seems to be difficult to cut COVID-19-related costs, similarly, the second way will be concluded by hurting consumer spending, more bankruptcies and limited investments. Accordingly, as a tolerable mean, access to financial markets to diminish the amount of government debts is a necessity. Indeed, being rated in investment grade, by credit rating agencies during crisis, will be essential for countries.
Gross Saving (% of GDP);
The historic jump in saving in 2020 was a definite product of the COVID-19 pandemic response [9]. The household saving rate recorded its highest annual increase in the first season of 2020. In the short-term, it is natural. Since with the lockdown, the options for consumptions declined. Moreover, uncertainty for work and financial issues makes household saving, rising up in a pandemic to warranty themselves in facing with any unforeseen events. Spending may occur when consumption is safe.
Total COVID-19`s Infected Cases;
This element shows the whole confirmed coronavirus infected persons in each country till the end of July 2020 that WHO organization reported.
Total Deaths of COVID-19;
The number of persons who died since COVID-19 hit them in every country till the end of July 2020.
Credit Ratings of 2019 by Fitch (100-0);
Benmelech [10] studied to observe which variable might be mostly tied to spending, then Country`s pre-crisis sovereign credit rating as a strong determinant came out. Therefore, we valued this factor as the third part of variables based on Fitch rating measurement (Table 2).
Value
|
Credit Rating
|
100
|
AAA
|
95
|
AAP
|
90
|
AA
|
85
|
AAM
|
80
|
AP
|
75
|
A
|
70
|
AM
|
65
|
BBBP
|
60
|
BBB
|
55
|
BBBM
|
50
|
BBP
|
45
|
BB
|
40
|
BBM
|
35
|
BP
|
30
|
B
|
25
|
BM
|
Table 2: Credit Rating Values of Fitch