Economies Face Dilemma Over COVID-19 Fight

Rating firm DBRS Morningstar believes that most advanced economy sovereigns have adequate fiscal space to implement temporary measures to mitigate the adverse impact of Coronavirus Disease (COVID-19).

It has issued new research on the impact that found the response to Coronavirus puts sovereigns in a difficult dilemma. The battle to stem the spread of the disease continues to impact on global economies as millions are urged to isolate. However, the steps are impacting the ability to maintain economies.

It said support measures will have a cost and government financial balances look set to deteriorate across global sovereigns. Thus far, however, the measures appear sufficiently targeted and temporary to avoid any adverse rating implications for most advanced economies.

“Compared to the years preceding the last global downturn, economic fundamentals are stronger across most of the major economies,” notes Thomas R. Torgerson, Managing Director and Co-Head of Sovereign Ratings at DBRS Morningstar. “There is still tremendous uncertainty around the timing of a recovery, but we expect the costs of fiscal support to remain manageable for most advanced economies.”

The commentary said there was concerns around the impact of the measures countries have taken to combat the spread of the disease.

“Efforts to slow the spread of the virus are needed to avoid overwhelming health care systems,” it stated. “However, the immediate economic impact of aggressive social distancing and widespread travel restrictions cannot be fully offset in the near term, even with sizeable fiscal stimulus programs.

“The timing and vigour of economic recoveries will hinge on two considerations: (1) governments gradually easing travel and other restrictions while health care experts and providers come to the rescue with effective prevention and treatment options; and (2) effective monetary and fiscal stimulus measures.”

The company said the measures already taken in the economy appear sufficiently targeted and temporary to avoid any adverse rating implications.

“The positive effects of these measures on prospects for an economic recovery combined with negative real interest rates across most of the major economies suggest the costs will be manageable,” stated the commentary. “Nonetheless, a few of these sovereign ratings will necessarily rely on policies that preserve economic resilience and a medium-term commitment to fiscal consolidation.”

It added: “The primary downside risk is that of an uncontainable outbreak with relatively ineffective treatment options, prolonged restrictions on travel and group gatherings, and a sustained rise in risk aversion and global savings. DBRS Morningstar considers this outcome unlikely, given past patterns associated with disease outbreaks. Nonetheless, a more prolonged shock would create increased risks of policy missteps or policy paralysis, which could yet pose risks to some sovereign ratings.”