MORE outstanding loans will be left unpaid and written off as the economic downturn wrought by the coronavirus disease 2019 (Covid-19) pandemic continues to induce financial stress, a report by Moody’s Investors Service noted.
Moody’s said the global default rate as of February was 3.1 percent, but this could increase significantly in the next 12 months depending on what would happen during the pandemic.
“Actual default rates over the next year will depend on, in addition to length and severity of the coronavirus-driven downturn, its sector and firm level impact,” the credit-rating agency said.
Should the world see recovery in the latter part of the year, the default rate would climb to 6.5 percent by end-2020 and increase to as much as 6.8 percent by February 2021.
The debt watcher noted that, in this scenario, a “severe disruption in economic activity” occurred in the first half as the world ground to a halt in containing the virus. This, as monetary and fiscal stimuli cushion the adverse financial impact of the pandemic.
The default rate could spike to 16.1 percent in February 2020 from the projected 14.2 percent by yearend should the economic conditions reflect the 2008-2009 global financial crisis. These figures are higher than the 13.4-percent default rate notched during the economic turmoil over a decade ago.
“This scenario assumes that as the virus continues to spread and restrictions on movement are extended, economic disruption and financial market turmoil combine to create recessionary dynamics that persist for a 12-month period,” Moody’s said.
But the credit-rating agency warned that the default rates could even be higher if “containing the virus proves to be extremely challenging, economic activity is severely curtailed and business and consumer confidence collapse.” Moody’s said this was a scenario even worse than the global financial crisis in 2008.
Default rate, in this extreme case, would hike to 18.3 percent by yearend and ascend further to 20.8 percent by February 2021.
Fitch Solutions earlier said that central banks should employ coordinated policy measures to mitigate the adverse economic impact of the pandemic, especially now as the world faces recession.
“As regards central banks’ conventional responses, we expect further rate cuts in the coming months with an increasing number of central banks hitting the zero bound,” the Fitch unit said, noting that slashing interest rates and reserve requirement could provide some boost.
The International Monetary Fund earlier declared a global recession as the pandemic continues to drag the economy, but noted that a recovery is seen next year should countries succeed in containing the virus.
Image credits: Nonoy Lacza and Bernard Testa