S&P forecasts uneven and unequal recovery in global credit

The Covid-19-led recession will likely weigh on credit metrics well into 2023 from the combination of lost output and debt overhang, threatening corporate solvency, says S&P Global Ratings. The firm also believes the shape of recovery will differ from previous crises, with a wide range of outcomes across industries and geographies, and accelerating some secular industry shifts.

The pandemic will likely leave profound scars on the world economy. Amid a deeper hit than initially anticipated in emerging markets, S&P now forecasts a full-year contraction in global GDP of 3.8 per cent. The dire effect of extended lockdowns on employment and consumer confidence also means that recovery will take longer than expected, from 2021 through 2023.

Economic recovery will likely be very uneven across geographies depending on authorities' ability to contain the outbreak and preserve employment and the economic fabric. Countries it has deemed "early exiters", led by China, have been hurt less, and S&P expects them to recover most of their previous trend growth. Meanwhile "late exiters", including most of Latin America, will likely incur more significant losses in output and subpar growth trends.

"While we estimate the global economy will begin to rebound in the second half of the year, the risk that this won't materialize, and that the drag on consumer demand and business activity will persist, is high," says Alexandra Dimitrijevic, global head of research at S&P Global Ratings said in the global Credit Conditions report. "At the same time, any premature pullback in fiscal and monetary stimulus would not only hurt consumers and small businesses, but could roil financial markets, which have taken a more optimistic tone than suggested by economic and credit fundamentals.”

To be sure, financing conditions have improved markedly in recent months, supported by the speed and magnitude of the monetary and fiscal responses across the world, which have restored market confidence and driven record debt issuance. However, sizeable risks remain.

Pressure on credit metrics will come from depressed income levels and rising debt burdens, as many companies are borrowing heavily to cover for liquidity shortfalls or shore up precautionary reserves. Because it might take years for some industries to recover, defaults could stay high for a longer period than in previous crises and weigh on financial institutions' balance sheets through nonperforming loans in the next few years.

The trillions of dollars that central banks and governments have injected into the global economy will undoubtedly lead to an increase in public-sector debt. The surge of debt in the system will make it very difficult for central banks to increase interest rates, while governments will have to balance the fiscal cost of extraordinary support with the risk to employment of a premature withdrawal.

Top risks to global credit conditions include:

  • Extended containment measures deepen economic costs and fuel more market volatility
  • Corporate solvency risk and new highs in government debt harm long-term growth
  • High debt burdens and less economic resilience to sustain lockdowns leave emerging markets struggling to recover
  • Economic nationalism rises
  • Post-pandemic climate transition falters and social risks increase

"On a positive note, the crisis could represent an opportunity for governments to support the recovery through infrastructure investment and support a green, digital, and more sustainable economy," says Dimitrijevic. "Overall, the shape of recovery will be uneven, unequal, and uncharted - but one thing is certain: global debt will likely take another step up."

S&P Global Ratings acknowledges a high degree of uncertainty but notes the consensus among health experts that the pandemic may now be near its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021.