2020 Transition and Default Study shows spike in sovereign downgrades

Sovereign rating activity in 2020 was overwhelmingly negative, according to a new Fitch Ratings Transition and Default Study. 

The global economic contraction of 3.4% in 2020 due to the COVID-19 pandemic was the largest in the post-war period, compared with 2.6% growth in 2019. It was far below the five-year average for 2015-2019 of 3%, highlighting the scale of the pandemic’s impact. 

Combined with the severe negative impact on public finances, this deep economic contraction contributed to a downgrade to upgrade ratio of 16 to 1, compared with a moderate 0.8 to 1 in 2019.

Sovereign downgrades increased nearly three-fold in 2020, to a record 32 from 11 a year earlier. Upgrades declined to just two from 13 in 2019. 

Emerging market (EM) sovereigns saw 26 downgrades and no upgrades during the year. Developed market rating activity included six downgrades, set against two pre-pandemic upgrades.

Fitch registered five sovereign Issuer Default Rating defaults in 2020, all EM, including Argentina, Ecuador, Lebanon, Suriname and Zambia. As a result, the annual Fitch sovereign issuer-based default rate peaked at 4.2%, up sharply from 0.9% in 2019.

This study provides data and analysis on the performance of Fitch’s sovereign ratings in 2020 and over the long-term period of 1995-2020 and includes summary statistics on key sovereign rating trends.