BCRA’s statement on COVID-19

Date created: 20-Mar-2020

Business continuity

The COVID-19 emergency has created serious business turmoil for many industries worldwide. In this regard, we would like to inform you that BCRA is adopting a pragmatic and flexible approach to the analytical and operational challenges we face, and our working processes are already aligned with the guidance of the relevant authorities. As events unfold on a daily basis, markets are currently characterized by high volatility and uncertainty, which is why our ratings and forecasts will evolve over time in line with the information available. We guarantee that we will continue to serve our customers during this period and will timely publish rating updates and latest analyses, adhering to our customary high standards of quality.


Expected global economy impact

The rapid spread of COVID-19 deteriorates the global economic outlook. BCRA is on the opinion that the drastic efforts to contain the virus, combined with the oil prices collapse and high capital markets volatility, will inevitably generate a massive shock in many sectors, regions, and markets, which would escalate into a global recession. The combined effects are unprecedented, and their magnitude is difficult to measure currently.

The risk varies across sectors. Services, in general, will be widely affected by the social exclusion measures and the closure of state borders, with a significant drop in tourism and transport services expected. Car manufacturers, for example, are also at high risk because of their dependence on international supply chains, many of which are currently interrupted. We expect sustainable development in the pharmaceutical sector, trade and production of food, online retail, defence, and health services. On the other hand, we see growth potential in telecommunications and online technology services.

The leading central banks will once again play a crucial role in ensuring adequate liquidity and alleviating market turmoil, but we believe that the impact mechanism of monetary policy on the real sector is already restrained. The Federal Reserve has held a series of emergency interventions in recent weeks, with the European Central Bank announcing a new EUR 750 billion Pandemic Emergency Purchase Program (PEPP) aimed specifically at addressing the effects of the COVID-19 pandemic.

The Council of the EU has announced that Member States will receive assistance to combat the pandemic from EU funds, with EUR 37 billion allocated from the Cohesion Fund and EUR 29 billion from the structural funds. The new measures will support SMEs to alleviate serious liquidity shortages as a result of the pandemic, as well as strengthen investment in products and services necessary to bolster the crisis response of health services. In this context, the EIB is also planning to mobilize EUR 40 billion in funding.


Impact on our sovereign ratings

BCRA-rated sovereigns are currently not among the most affected by the contagion, but they are characterized by a high degree of economic openness and, accordingly, are highly exposed to global trade and business cycles. In this regard, we will closely monitor a number of indicators and evaluate both the cyclical and structural-economic effects. If necessary, the sovereign ratings would be updated in a timely manner, in accordance with ESMA regulation

The pandemic may put a serious strain on sovereigns' fiscal balances. The effects of targeted urgent fiscal spending, combined with the expected decline in revenue, will depend on the scale of the infection and the duration of measures for its containment. The public finance sustainability of individual countries will depend on their fiscal buffers available and their government debt levels.

With regard to the cyclical downturn, our analysts will pay particular attention to the business results in the most affected sectors, the dynamics of private debt and non-performing bank loans.