‘There are reasons to expect downgrades in hard-currency sovereign ratings,’ says Argonov. ‘Very few countries fared well during the pandemic. Eleven of these countries are expected to see public debt increase by more than 10 percentage points of GDP.’ As most countries react to the pandemic with expansionary budgets, fiscal balances deteriorated sharply, resulting in build-up of public debt and sometimes, twin deficits.
Argonov has made some grim predictions for South American economies – Brazil, Argentina and Peru are all suffering from the adversities of the pandemic, with each country currently experiencing sharp recessions and financial instability. Argonov told Bloomberg: ‘Brazil’s fiscal metrics are worrying. In the absence of further reform, we can expect a downgrade to B+ by Fitch, and changes in the S&P’s outlook are certainly on the cards in the coming months.’
Perceiving Argentina as more of an outlier, Argonov outlined how the country was experiencing a debt crisis prior to the beginning of the pandemic, but noted that the government had only agreed to the terms of its debt restructuring as recently as August. ‘Consequently, markets have remained turbulent, and the economy has not shown signs of stabilisation yet.’ As for Peru, sound policies pursued by the authorities in the past are working in the country’s favour. According to Argonov, ‘Peru’s political Instability persists, and this may begin to affect policies when the rating agencies start to take note.’
As for the other countries analysed in his research, Argonov has also paid attention to Mexico, Turkey and South Africa. When appraising the Mexican situation, Argonov discussed the ways in which ratings agencies have responded negatively to the country’s economic approach, but says that ‘Mexico can avoid downgrades if green shoots of economic recovery appear soon enough.’ Argonov has taken a much more pessimistic view when it comes to Turkey and South Africa, delineating the former as ‘teetering on the brink of a new balance-of-payments crisis’ and the latter ‘descending into a sub-investment grade category’ due to COVID and its subsequent knock-on effects.
Read the full article on Bloomberg.