The coronavirus outbreak and the related oil price shock will lower sovereigns' economic and fiscal strength, increase weaker sovereigns' vulnerability to shifts in sentiment and expose weaknesses in domestic and international institutions, Moody's Investors Service said recently.
As with other sectors, Moody's will adjust ratings to reflect changes in credit risks profiles that the rating agency considers to be unlikely to fully recover within the next few years, and those with higher default risk, the rating agency noted.
Moody's currently assumes that the crisis, however severe, will be relatively short-lived and that growth will resume in the second half of the year.
In that scenario, given their particular credit strengths, the rating implications of the crisis for global sovereigns are likely to be relatively limited, the firm said.
"Sovereigns can weather storms others cannot," said Sarah Carlson, a Moody's senior vice president. ”Generally speaking, they have deep pockets, wide sources of revenues and funding, often including supportive banking systems, and the unique ability to determine which expenditure obligations they meet without sanction."
Thus, for now at least, material credit and rating consequences are expected to be focused on weaker sovereigns or on those facing idiosyncratic challenges, probably relating to weak institutions or ineffective policymaking, Moody’s pointed out.
"That said, our assumptions about the impact of the crisis are dynamic and could change. If damage to growth were to be more severe and protracted, with debt rising rapidly and access to affordable financing reduced, the credit implications for sovereigns would be more profound,” Carlson said.