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Fitch Ratings’ 2023 Outlook: Most sovereign sector outlooks deteriorating, global rating prospects more balanced

Fitch Ratings’ has indicated that the ‘deteriorating’ 2023 sector outlook for global sovereigns reflects weaker global economic growth, rising funding costs and pressures from high inflation.

The overall balance of sovereign rating outlooks is near to its long-term average, but further monetary policy tightening and elevated geopolitical tensions represent key challenges this year.

Five of eight sovereign regions have ‘deteriorating’ sector outlooks – North America, Western Europe, emerging Europe, sub-Saharan Africa (SSA) and Asian-Pacific Countries (APAC). These indicate that underlying sovereign credit conditions will be less supportive over the coming year than in 2022.

The rating agency explained that the fiscal benefit of inflation on government revenues and nominal growth will fade as spending pressures mount, with higher interest rates pushing up debt service costs and dragging on growth, adding, “Weaker growth in the US and the eurozone will weigh on other regions”.

Nevertheless, it said, the shares of our global sovereign portfolio on Negative and Positive Outlook are near their long-term averages of 15% and 10%, respectively. The net Outlook balance is negative at minus four, but has recovered since the onset of the Covid-19 pandemic triggered widespread sovereign rating pressures in half-year 2020.

“This is partly because several outlooks have been stabilised following the Covid-19 pandemic, often but not always below their pre-pandemic levels, and because the share of sovereigns rated ‘CCC+’ to ‘RD’, where Outlooks are not typically assigned, has risen”.

“The strong post-Covid rebound in economic growth and tax revenues persisted well into second-half of 2022, creating additional fiscal space for some policy measures to offset spillovers from Russia’s invasion of Ukraine”, it added.

Sovereigns have thus been urged to navigate challenging conditions in 2023.

“Still-high geopolitical risks mean policy decisions might be guided by non-economic considerations, leading to sub-optimal trade and investment outcomes. Tighter global monetary policy could expose risks that were hidden while central banks kept borrowing costs low”, it mentioned.

Going forward, accessing international bond markets will remain challenging for some smaller emerging markets (EMs), but this is reflected in already low sovereign ratings (2022 saw the second-highest number of EM downgrades in a single year behind 2020).

SSA’s positive net balance follows Kenya’s downgrade to ‘B’/Stable from ‘B+’/Negative last month, but the region has the highest proportion of sovereigns rated ‘CCC+’ to ‘RD’ (26%).

Middle East and North Africa is the only other region with a positive net Outlook balance and is one of three with ‘neutral’ sector outlooks, as hydrocarbon exporters should mostly benefit from another year of fiscal and external surpluses.

Greater China and Latin America also have ‘neutral’ sovereign sector outlooks, and both have net balances of zero.

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