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Multi-notch sovereign ratings downgrade likely in 2020, says Fitch

Fitch Ratings on Tuesday said multi-notch downgrades of sovereign ratings are likely during 2020 due to the coronavirus outbreak and sharp fall in oil prices.

Developed market sovereigns and those in Latin America have experienced the most multi-notch downgrades. For developed markets, 12 sovereigns have had 26 multi-notch downgrades, mostly clustered around the global financial crisis in 2008-2009 and the ensuing eurozone crisis (2011-12), it said in a statement.

Fitch said the most common rating category from which multi-notch downgrades have occurred is ”B”, confirming weaker sovereigns are more prone to crises.

“Even so, nearly 40 per cent of multi-notch downgrades started from an investment grade rating (”BBB” category or higher) with a number in the ”A” and ”AA” categories, consistent with the fact that highly rated eurozone sovereigns were subject to such downgrades during the eurozone crisis,” Fitch added.

In April 2019, Fitch had retained India”s sovereign rating at ”BBB-”, the lowest investment grade, with stable outlook, saying a weak fiscal position continues to constrain its rating.

This is the 13th year in a row that global rating agency Fitch has rated India at ”BBB-”. It had last upgraded India”s sovereign rating from ”BB ” to ”BBB-” with a stable outlook on August 1, 2006.

Fitch said multi-notch sovereign downgrades are more common during economic and financial crises of the type the global economy and credit markets are now entering.

“The rapid deterioration in the global sovereign rating outlook due to the coronavirus outbreak and sharp fall in oil prices makes additional multi-notch downgrades likely over the rest of this year,” Fitch Ratings said.

It said there have been 65 multi-notch sovereign rating downgrades since 1995 involving 33 different sovereigns, representing 22 per cent of all sovereign downgrades.

Fitch said for developed market sovereigns, multi-notch downgrades have taken place historically amid large and sudden increases in government debt and this looks to be a certainty in many countries in 2020.

“In emerging markets (EMs), multi-notch downgrades have been more common during exogenous shocks that cause abrupt changes in external financing conditions. This is a feature of current EM sovereign credit conditions,” it added.

The rating agency said it will continue to assess sovereign creditworthiness case-by-case as the crisis and policy responses evolve, and this commentary does not identify specific sovereigns that might be vulnerable to multi-notch downgrades. “However, conditions that have typically formed the backdrop to such rating actions in the past are clearly coalescing again,” Fitch added.

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