Global economic activity has rebounded quickly, but not completely, following the gradual lifting of severe restrictions on movements put in place across much of the world in March and April. We expect economic activity to continue to improve through 2021, according to Moody’s.
Development of a coronavirus vaccine, which has shown progress according to recent news, would support further improvement following wide distribution. There is, however, considerable downside risk to the growth outlook. The recent resurgence in coronavirus infection rates has pushed many countries to reintroduce some level of social restrictions, with potential for more in the near term. Once again economic activity will suffer.
Banks entered the crisis with strong credit fundamentals, but the resurgence in coronavirus cases means there is considerable and growing potential for a deteriorating scenario with extended disruption into 2021. This will itself be a material set-back for banks, as lower economic growth forecasts alone will lead to higher loss provisions, most particularly in regions with more severe social and business restrictions. Some governments are again
providing substantial support measures to affected businesses, but in some cases they will not be sufficient to prevent corporate failures and credit losses for banks.
The recovery will therefore be uneven. If the crisis materially worsens, banks’ standalone creditworthiness will suffer further, although any rating actions will continue to be guided by our view of the potential for banks to renew their capital over the medium term.
This in turn will likely be driven by more idiosyncratic qualities, notably regional and sectoral concentrations, which increase sensitivity to localised restrictions and, hence, the risk of large provisions and capital depletion.