Baseline Macroeconomic Scenarios For Rated Sovereigns

This commentary introduces an updated approach to monitoring macroeconomic conditions and their potential impact on DBRS Morningstar ratings. Although the COVID-19 pandemic remains a source of uncertainty, the most affected sectors (e.g., travel, hospitality, etc.) are already plainly evident. For other sectors, the future macroeconomic impact of the pandemic is no longer expected to exceed the parameters of a normal economic downturn. Consequently, with this commentary, we are retiring our moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020. Going forward, we plan to publish a single baseline scenario drawn from our calculated estimate of consensus based on external forecasts. With this baseline scenario, DBRS Morningstar will continue to provide insights into key risks to the baseline that could have implications for credit ratings. As conditions warrant, we may periodically reintroduce additional country-specific scenarios to provide transparency regarding the macroeconomic assumptions and risks embedded in DBRS Morningstar credit ratings.

Key highlights include:
• Although COVID-19 remains a risk to the outlook, uncertainty around the macroeconomic effects of the pandemic has gradually receded. Historical loss assumptions and past recessions are for most sectors likely to prove an adequate guide to the future effects of COVID-19.
• Some delayed emergence of credit stresses remains likely as support is gradually withdrawn. However, we now have greater visibility on the effects of macroeconomic stresses on various rated sectors, and these are in most cases unlikely to deviate significantly from historical norms.
• Current median forecasts appear to incorporate some risks associated with further outbreaks, but remain fairly positive on recovery prospects given expectations of continued fiscal and monetary policy support. The policy response to COVID-19 may nonetheless bring other risks to the forefront in coming months and years.

“The COVID-19 pandemic has proved a persistent drag on global activity, in spite of the relative successes of vaccine drives,” notes Thomas Torgerson, Co-Head of Sovereign Ratings at DBRS Morningstar. “Nonetheless, we expect the recovery to continue in the major economies of the world, aided by a strong policy response.”