G20 and Mass Credit Rating Downgrades

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Charles Robertson

The virus is now sweeping into emerging and frontier markets. Any hope that the virus does not spread in hotter climes is looking misplaced. The bigger problem for EM and frontier is that many cannot afford lockdown – or this is what Pakistan’s PM Imran Khan said a few days ago. We are nonetheless seeing some measures introduced there, as cases reached 776 yesterday (53 a week ago).

This makes the G20 summit due later this week of considerable importance. The G7 need to fund mass testing around the world if they are to contain a global problem (perhaps lending money at G7 interest rates – ie close to zero). I assume simply shutting off the borders to the rest of the world is not a viable solution on a 12-month horizon. You will have seen the massive downward GDP revisions for the US (double digit second quarter 2020 declines on a Quarter-on-Quarter basis) – the talk of millions being added to the unemployment figures this week, and the Fed’s Bullard saying 30 per cent unemployment would show the lockdown is working.
There is clamour for the US to pass a big fiscal stimulus package – but the G7 need to look up for a second and see the crisis that is now spreading to the rest of the world. That took about 6 months in 2008/09 – but needs to be less than six weeks, preferably less than six days.

What we only just recognised today (!) is that credit ratings should be downgraded globally. Debt ratios are obviously going to soar, budget deficits will widen out, growth will be smacked, and no country warrants a sovereign rating upgrade in this environment. The question is only whether there is any way that some countries might keep their current ratings (China and Russia perhaps?), whether DM gets cut less than EM (perhaps), and how badly Frontier markets are downgraded. At a guess, we should see 2-3 (?) notch downgrades for single B rated credits, 2 notches for BB, and at least one rating taken off most investment grade countries. This is back of the envelope stuff. We will do some work on this today. Again only very significant G7 and IMF support would justify a better outlook for ratings.

Nigeria – good news on the multiple exchange rates collapsing. Obviously the foreign exchange needs to be much weaker than 380/$ but this shift helps (particularly the official rate moving from 307 towards 360-380 … which is the rate at which oil revenues are converted to naira). Kenya – rate cut possible this week

Conclusion
Yes, one day of Italy data is encouraging and in line with our forecasts, but we need more than a day, and the global economic shock suggests plenty of bad news to come. US fiscal package and unemployment figures will be major this week. G20 I don’t have high hopes for – but they need to pull their finger out – otherwise significant global sovereign rating downgrades are inevitable and the virus will be hard to contain.
Robertson is the Global Chief Economist at Renaissance Capital