November, 20, 2019
Global sovereigns enter 2020 with the world economy slowing and policymakers debating what to do about it, says Fitch Ratings. Most countries are exposed to the trade dispute between China and the US, making it more difficult to calibrate domestic policy settings given the international uncertainties. Fitch expects the widespread monetary easing in 2H19 to be followed by varying degrees of fiscal easing in 2020.
Fitch does not believe fiscal or monetary stimulus will be able to fully counter the negative effects of trade disruptions on growth, raising the risk that policy is eased further to seek additional impact. Assuming global interest rates remain relatively low, government debt dynamics will be driven more by primary balances and economic growth, so the effectiveness of fiscal stimulus in supporting growth will be critical to whether debt ratios rise or fall. In addition to directional changes in debt, ratings could be affected by the degree to which sovereigns have - and draw upon - fiscal space.
Political risks will affect ratings in 2020, as several regional conflicts persist, and public discontent centred on economic issues is rising. Greater demand for income inequalities to be addressed along with more spending on environmental and other social issues will continue to shape the political agenda in 2020, with potential public finance and rating implications. The risk of social unrest with political consequences remains high. The widespread nature of such unrest in 2019 and its rapid development confirms the difficulty in predicting where it might arise in 2020.
Global capital flows are following global trade lower in the wake of rising trade protectionism. Fitch expects the trend that began in 2019 of declining foreign investment outflows from the largest developed countries will continue into 2020. When companies are investing less at home due to economic uncertainty, investing abroad can be even less compelling. This is a negative development for emerging markets due to the impact on growth, and also the subsequent reliance on more volatile types of capital inflows to finance current account deficits. Some sovereign ratings may be vulnerable depending on the fragility of countries' external finances.
Overall, Fitch's rating outlook for global sovereigns is stable heading into 2020. About 75% of sovereigns are on Stable Outlook, in line with the long-term average. However, there are notable differences by region, with Latin America accounting for a disproportionate share of those on Negative Outlook and Emerging Asia having none on Negative. Emerging Europe's upward rating momentum of recent years is likely to slow, while the Middle East and Africa has more Negative than Positive Outlooks, but by a smaller margin than at any time since 2014. Outlooks in developed markets are about evenly split between Positive and Negative.
The 'B' rating category is now the largest and this will not reverse in 2020. Many of the sovereigns downgraded from the 'BB' category during and after the correction in commodity prices in 2014 have yet to establish a path to a stronger credit profile consistent with an upgrade. In addition, new rating mandates continue to be at the lower end of the rating scale as first-time capital market borrowers take advantage of low interest rates and investor appetite for higher yields.
The 'AAA' category is likely to expand next year for the first time since 2011, as Austria (AA+) and Finland (AA+) have both been on Positive Outlook since 2018. They would be the first Fitch-rated sovereigns to regain their 'AAA' ratings.