COVID-19 has caused rich-poor split in sovereign rating cuts, study shows

LONDON (Reuters) – New research has compared how the three main credit ratings agencies S&P Global, Moody’s and Fitch have reacted to the COVID-19 pandemic in terms of their sovereign downgrades.

Overall, the ‘big three’ lowered a fifth of the countries they rate between January last year and last month, topping the 16% they cut at the height of the financial crisis more than a decade ago.

There have been some crucial differences, however.

The study by found 48 countries had their ratings cut by at least one agency. Half of those also experienced more than one downgrade, although richer countries saw hardly any despite a far bigger rise in debt levels.

There were differences between agencies too. Fitch was the most active with 45 downgrades, or 26% of the sovereigns it rates. S&P was next with 37 cuts or 18% of its sovereign ratings, while Moody’s lowered 33, or 20% of the countries it assigns sovereign ratings to.

“Although the economic fallout from the virus was more severe in advanced economies they experienced only six notches of cumulative downgrades, or 4.6% of all downgrades,” the research by the’s chief economist Moritz Kraemer, a former top S&P sovereign analyst, showed. (Graphic: Sovereign rating downgrades during COVID, )

The analysis showed there had been little difference in the three firms’ ratings levels before the pandemic, although S&P had marginally higher ratings for advanced economies.

According to the International Monetary Fund, COVID-19 has seen debt in developed economies collectively surge 20 percentage points to 124% of GDP. Across emerging markets it has gone up 9 percentage points to a record 61% and is expected to hit 70% of GDP.

With the exception of Moody’s, which lowered Britain’s rating in October, all other developed country downgrades were by Fitch, which cut Canada, Italy, Britain, Slovakia and Hong Kong.

S&P has not lowered any advanced economy rating since 2017, the study found, although COVID-19 did see it put Australia, Slovakia and Spain on downgrade warnings, or ‘negative outlook’.

It also improved some. It raised New Zealand’s rating this year and lifted Italy’s outlook in October despite it being one of the countries hit hardest by the pandemic.

Overall, though, poorer countries have borne the brunt of cuts. Just over 40% of Sub-Saharan African countries suffered at least one downgrade the study found, while 35% did in Latin America and the Caribbean.

Fitch delivered the most cuts in most places although S&P led in Sub-Saharan Africa where it cut half the countries it rates. Both firms have said they expect downgrades to remain concentrated in emerging markets again this year.

Given the context of a twice as severe hit to growth and jump in debt in advanced economies “it is not at all clear why rich countries’ ratings remained largely untouched even as their poorer peers were subject to more extensive downgrades,” the study said.

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