COVID-19 Triggered National Credit Rating Instability to Persist Next Year... Moody's Forecasts 'Negative' Outlook for Next Year

Economic, Fiscal, and Social Shocks Persist... Recent Resurgence and Difficult Situations
Significant Increase in Negative National Credit Rating Actions This Year... "Government Debt to Reach Record High Next Year"

[Image source=EPA Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The resurgence of the novel coronavirus infection (COVID-19) has cast a red light on next year's economic outlook. Initially, optimistic forecasts prevailed, assuming the COVID-19 situation would subside and the economy would recover to pre-2019 levels starting next year. However, with the virus spreading at an accelerated pace, countries are now facing the prospect of multiple credit rating downgrades.

International credit rating agency Moody's stated in its country credit rating outlook report released on the 11th (local time) that the outlook for next year is "negative." This evaluation is based on fundamentals expected to impact national credit ratings over the next 12 to 18 months. It anticipates that macroeconomic, fiscal, and social shocks caused by the pandemic will continue beyond next year.

This outlook is due to the recent rapid acceleration in the resurgence of COVID-19. According to Worldometer, as of 12:06 AM GMT on the day, the cumulative number of COVID-19 cases reached 52,406,399. In the United States, new cases exceeded 130,000, setting another record high, while cases and deaths are rapidly increasing in European countries such as Italy and the United Kingdom.

Even with vaccine development, economic activities will not immediately return to normal, and the recovery patterns are expected to vary by country, which is also considered a negative factor for credit ratings. Moody's forecasts delayed economic recovery in Germany and the United States, and a slowdown in economic growth in emerging countries like China and Vietnam, which have recently shown rapid recovery. Countries structurally experiencing economic slowdown even before the COVID-19 crisis, such as the United Kingdom, Japan, and Argentina, are expected to continue facing economic damage for the time being.

Credit ratings worldwide have already been impacted by the COVID-19 fallout this year. As of November 9, Moody's took a total of 108 actions related to national credit ratings this year, with 65 of those (60%) being negative actions such as downgrades. This proportion is significantly higher compared to 30% in 2018 and 20% in 2019.

Among the negative actions, 43 were directly influenced by the pandemic. Typical cases include countries facing liquidity crunches or those heavily dependent on tourism suffering economic growth setbacks. Additionally, credit ratings were affected by surging debt and declines in oil or other commodity prices. Structural issues such as expanding government debt led to downgrades in countries like the United Kingdom, Mexico, India, and South Africa.

Above all, government debt, which has significantly increased this year, is expected to grow to an all-time high next year due to large fiscal deficits. Given the slow economic recovery caused by the resurgence and the inevitable need for additional stimulus measures, Moody's predicts that government debt levels in most countries will reach their highest since World War II. The United States' government debt is expected to reach 116% of its Gross Domestic Product (GDP) next year.

With governments expected to struggle to manage fiscal deficits for the time being, the European Union (EU) is considering extending the relaxation period of the "3% fiscal deficit limit" from next year to the year after next.

This content was produced with the assistance of AI translation services.