Credit rater Moody’s Investors Service provided a negative outlook for sovereign ratings globally for the coming 12 to 18 months, reflecting its assessment of the direction of fundamental credit conditions for sovereigns for 2017.
Moody’s latest analysis is included in its Global Sovereign Outlook report, which is an annual update to the markets and does not constitute a rating action.
In the report, it said the key drivers of the negative outlook are a combination of continued low growth, a shift toward fiscal stimulus that will increase already high public sector debt, and rising political and geopolitical risks.
“Many emerging markets remain exposed to the risk of a reversal in capital flows,” it said.
“One of the key credit constraints for most rated sovereigns is the persistently low growth environment,” said Alastair Wilson, Moody’s managing director for Sovereign Risk.
“Monetary policy’s ability to support growth in advanced economies is diminishing, and in many emerging markets it is constrained by above-target inflation and exchange-rate pressures. So we are seeing a gradual but broad-based shift in policy towards loosening fiscal policy in order to lift growth,” he said.
Fiscal stimulus, for example in the form of higher public investment funded by historically cheap debt, can support growth in the near-term and also have positive longer-term effects if investment raises productivity growth, the debt watcher said.
However, a shift toward looser fiscal policy carries risks for the creditworthiness of many sovereigns, given
generally already elevated debt levels. Any increase in debt to finance current spending that has little lasting benefit to economic growth prospects would be negative, it pointed out.
Moody’s also noted that political dynamics complicate the outlook for many sovereigns, saying there are increasing risks of policy inertia and reversal, including of policies that have brought large benefits to the global economy, such as those that expanded global trade. Geopolitical risks are rising in many regions as well.
It said country- and region-specific risks include the uncertain impact of the US (Aaa stable) election outcome on the US’ medium-term fiscal strength, and of its future trade and security policies on the rest of the world.
“Many commodity-exporting countries have to adjust their growth expectations and public finances to less favorable external conditions,” it suggested.
Another factor is the possibility of a significant and sustained reversal of global capital flows away from emerging market economies with a high dependence on foreign capital, it added.
Moody’s said elevated volatility in financial markets and sharp movements in exchange rates could exacerbate already weak economic fundamentals and existing political risks, in particular in countries dependent on external capital inflows.
The implications of the US election outcome for the direction of global capital flows are hard to predict at this stage, it added.