Further Multi-Notch Sovereign Downgrades Are Probable in 2020


Wednesday, April 08, 2020 / 11:38 AM / By Fitch Ratings / Header Image Credit: Economic Times


The rapid deterioration in the global sovereign rating outlook due to the coronavirus outbreak and sharp fall in oil prices makes additional multi-notch downgrades likely over the rest of this year, Fitch Ratings says. While we endeavour to rate through economic cycles, multi-notch sovereign downgrades are more common during economic and financial crises of the type the global economy and credit markets are now entering.

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Our forecasts and expectations, for example regarding sovereigns' debt trajectories or their ability to access financing, can be dramatically altered by the nature and speed of the pandemic and government responses. The scope for multi-notch actions is highlighted by Fitch's downgrade of Gabon to 'CCC' from 'B' on 3 April, reflecting our view that risks to Gabon's sovereign debt repayment capacity have risen significantly due to liquidity pressure from the fall in oil prices.


We will continue to assess sovereign creditworthiness case-by-case as the crisis and policy responses evolve, and this commentary does not identify specific sovereigns that might be vulnerable to multi-notch downgrades. However, conditions that have typically formed the backdrop to such rating actions in the past are clearly coalescing again.


For developed market (DM) sovereigns, multi-notch downgrades have taken place historically amid large and sudden increases in government debt; this looks to be a certainty in many countries in 2020. In emerging markets (EM), multi-notch downgrades have been more common during exogenous shocks that cause abrupt changes in external financing conditions. This is a feature of current EM sovereign credit conditions.

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There have been 65 multi-notch sovereign rating downgrades since 1995 involving 33 different sovereigns, representing 22% of all sovereign downgrades. Two-thirds of multi-notch downgrades have been two-notch adjustments, with most of the remainder being three notches. For those sovereigns that have had more than one multi-notch downgrade, these have tended to come in close proximity, meaning ratings are shifting downward by a rating category or more, consistent with crisis conditions.


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Since sudden, large improvements in sovereign creditworthiness are relatively rare by comparison, multi-notch upgrades have been much less common. Since 1995, there have been 28 instances involving 21 sovereigns, representing only 9% of all upgrades.


DM sovereigns and those in Latin America have experienced the most multi-notch downgrades. For DMs, 12 sovereigns have had 26 multi-notch downgrades, mostly clustered around the global financial crisis in 2008-2009 and the ensuing eurozone crisis. With many eurozone members affected by the 2011-2012 crises, almost half of the 39 downgrades in those two years were multi-notch downgrades, and the eurozone accounted for most. Korea is the only non-European DM to have experienced multi-notch downgrades, with two episodes during the Asia financial crisis in late 1997.


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Latin America has seen 21 multi-notch downgrades involving nine sovereigns. Argentina alone accounts for six of these. For the region as a whole, multi-notch downgrades were most prevalent in the early 2000s and again since 2017.


The most common rating category from which multi-notch downgrades have occurred is 'B', confirming weaker sovereigns are more prone to crises. Even so, nearly 40% of multi-notch downgrades started from an investment grade rating ('BBB' category or higher) with a number in the 'A' and 'AA' categories, consistent with the fact that highly rated Eurozone sovereigns were subject to such downgrades during the eurozone crisis.


Sovereign ratings in the 'CCC' category and lower are not assigned Outlooks or placed on Rating Watch. All sovereigns rated above the 'CCC' category that were subject to multi-notch downgrades were on Negative Outlook or Rating Watch Negative prior to the downgrade, with the exception of Lebanon in 2001 and Gabon in 2020, which were on a Stable Outlook. The average time on Negative Outlook prior to a multi-notch downgrade has been six months, while Rating Watch Negatives were in place for an average of 2.3 months. About 40 percent of downgrades from Rating Watch Negative have been multi-notch downgrades.

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