Global macroeconomic forecasts have shifted dramatically amidst the rapid spread of the Coronavirus
Disease (COVID-19) and associated responses from governments, corporations and households. The IMF
forecast for global growth in 2020, updated earlier this week, deteriorated from (positive) 3.3% in
January to -3.0% in April. On a quarter-over-quarter basis, the second quarter of 2020 is widely expected
to be the worst on record for most major economy sovereigns, as the impact of widespread business and
school closures, idled workforces, and social distancing ripples across the globe.

Globally, credit ratings have already come under some pressure due to the significant drop in economic activity. In some specific cases, arrears on debt payments appear to be a virtual certainty, either due to a catastrophic drop in cash inflows or due to government-mandated maturity extensions. In other sectors, financial losses may still be broadly in line with previous DBRS Morningstar stress scenarios, including in cases where government measures have helped to ease cash constraints on households and businesses. However, given continued uncertainty around the depth and duration of the downturn, further downgrades are likely over the course of coming months.

DBRS Morningstar does not publish in-house macroeconomic forecasts, preferring to use a range of published forecasts from reputable private and public sector entities. This approach promotes increased attention to risks around the baseline, and encourages sector teams to evaluate a range of scenarios within their credit analysis. The current environment has nonetheless created an unusually high degree of uncertainty, reflected in the wide dispersion in available forecasts. At present, some available forecasts (particularly those published more than a few weeks ago) now appear wildly optimistic. Each successive week has brought out increasingly gloomy forecasts. However, at some point in the not-too- distant future (and likely even now), some of those forecasts will inevitably overshoot on the downside.

In the context of this highly uncertain environment and for the sake of transparency, DBRS Morningstar is releasing with this commentary a simplified set of macroeconomic scenarios for select economies (see exhibits on page 3). The moderate and the adverse scenarios are being used in the context of our rating analysis, with the moderate scenario serving as the primary anchor for current ratings, and the adverse scenario serving as a benchmark for sensitivity analysis for the same ratings. Both scenarios are subject to revisions. This is particularly true of the moderate scenario, which, unless the situation stabilizes in coming weeks, may shift gradually lower. The adverse scenario, which is intended to reflect a significantly more bearish (albeit not necessarily worst case) scenario, is less likely to be revised, unless conditions over the next several months prove to be significantly better or worse than expected.

Specific sector teams will provide additional details in their rating reports and related research regarding the impact of these scenarios on industries, sectors, asset classes and individual ratings. As noted above, this crisis and the resulting government responses will have very different implications for specific sectors. Furthermore, the headline macroeconomic and unemployment data may in some cases dramatically overstate or understate the underlying stresses. Some sectors are seeing a far larger collapse in revenue than others. Differing government policy responses also imply that overall unemployment figures may not accurately reflect the loss of household income. DBRS Morningstar will provide additional insights into the macroeconomic developments, government policy responses, and implications for various sectors in the weeks and months ahead.

DBRS Morningstar sovereign rating reports typically reference official government and IMF forecasts rather than private forecasts. The DBRS Morningstar sovereign scorecard is typically compiled based on the IMF World Economic Outlook forecasts, which were released earlier this week but with several notable exclusions (for example, debt/GDP forecasts were not included, given heightened uncertainty). This further complicates the baseline outlook in the near term, and heightens the importance of our internal scenario analysis. The sovereign methodology was nonetheless designed to allow rating committees to incorporate that analysis through qualitative factors. Similar to other groups, rating decisions will generally be anchored to the moderate scenario - as well as an analysis of the policy framework and the government's commitment and ability to absorb this shock over the medium-term. The adverse scenario will also be considered as a benchmark for sensitivity analysis and, as appropriate, reflected in rating Trends.


Press release by DBRS Morniningstar

Publié le 21 avril 2020