Sovereign Defaults Hit Record in 2020; More Are Possible

• The sovereign issuer-based default rate rose to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the COVID-19 pandemic, according to Fitch Ratings. 
• Fitch’s recent Sovereign 2020 Transition and Default Study shows that five Fitch-rated sovereigns defaulted in 2020, up from only one in the previous year. As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017. 
• The scale and breadth of the pandemic’s economic impact and of governments’ policy responses put widespread pressure on sovereign ratings, with Fitch downgrading 32 sovereigns in 2020 compared with just two upgrades (both occurred before the pandemic). 
• The majority of last year’s downgrades occurred early in the pandemic, between late-March and mid-May. The resulting ratio of downgrades to upgrades was 16 to 1, whereas the ratio was 0.8 to 1 in 2019. By comparison, the 2009 ratio following the global financial crisis was 7 to 1. 
• Downgrade pressures have eased this year, but Fitch’s ratings indicate that more defaults are possible. Fitch has downgraded three sovereigns in 2021, with no upgrades, but its Outlook changes this year have had a positive bias. Fitch has revised the Outlooks on the ratings of six sovereigns to Stable from Negative, and three to Positive from Stable in 2021, while just one (Kuwait) has been assigned a Negative Outlook.

(Source: Fitch Ratings)