Nearly six months into the “Great Lockdown” and with no clear end in sight, signs are indicating that a return to pre-COVID-19 economic activity globally may be further afield than initially anticipated. Governments are still working to find the right balance, walking the tightrope of locking down their economies, while trying to support their recoveries.
Some appear to have found solid footing. For certain markets such as Germany, Chile, Australia and South Korea, the return to some measure of economic normalcy doesn’t appear too far off. For others, the combination of policy incoherence, inaction and perhaps bad luck, has them struggling to both contain the virus and mitigate economic pain.
Assuming the Draconian shutdowns of March and April are a thing of the past, and that more targeted shutdowns are the way forward, Q2/Q3 2020 could be the high-water mark for the ongoing global recession. As the outbreak drags on, we seem to have arrived at a new normal globally: the worst may be behind us, but there are still plenty of challenges ahead.
Even getting to this point has come with a significant cost—especially to government balance sheets. The 2020 economic downturn has not only devastated economic growth and reduced tax revenues, but it has also forced most governments to borrow and spend unprecedented volumes of money to contain the virus and keep their economies afloat.
In 2020, we’ve seen the steepest year-over-year rise in public debt-to-GDP ratios in recent history. Worldwide, there has been a 15% increase in global debt levels, with developed markets responsible for most of it. By comparison, the current rate of global borrowing since the end of 2019 has already outpaced the depth of the financial crisis by more than 40%.
For developed markets, some have the luxury of viewing today’s borrowing, in part, as refinancing at lower costs. Rock-bottom interest rates and ample access to credit—with much of it issued in their own currencies—will keep future debt servicing costs minimal. But for many emerging markets—especially those exposed to commodity prices, tourism and remittances—the cost of borrowing is significantly higher as investors look for safety elsewhere. The result has been even higher budget deficits in the short term, with serious questions about debt sustainability and access to credit in the long term.
So far in 2020, a number of sovereign debt restructurings have already occurred or appear imminent, including in Argentina, Ecuador, Zambia, Lebanon and Suriname. In these markets, pre-existing weaknesses, like unsustainable borrowing, were already ringing alarm bells before COVID-19, and, for some, the virus’ outbreak simply facilitated a smoother inevitability.
As the pandemic drags on, however, several emerging market governments that are facing liquidity crises could confront solvency crises. Since the outbreak of the virus, Export Development Canada (EDC) has downgraded scores of sovereign ratings due to rising debt risks and other related factors: in Q2/Q3 2020, we’ve seen 60 sovereign downgrades, compared to only 16 in 2019.
The implications from elevated government debt distress go beyond the creditworthiness of sovereign governments. The spectre of government’s defaulting on their existing loans also spills over to their respective business environments, with companies seeing their own elevated borrowing costs or even worse: a loss of access to financing and capital markets. This has deep impacts on a market’s ability to development and, of course, with the interconnectedness of the global economy, depressed growth in one market will have spillover effects, like a decrease in trade, economic activity and non-performing assets in another.
The bottom line?
2020 will be a year for the history books, particularly for the myriad implications that COVID-19 will have on the economic fortunes of individuals, businesses and sovereign governments alike. It can be overwhelming trying to syphon through the risks and opportunities going forward. But the resources at EDC, including the Country Risk Quarterly, an interactive tool that offers timely information on 50 countries, are here to help you make sense of it all.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.