While sovereign ratings around the world will likely remain broadly stable, risks to global growth and capital flows could negatively influence credit quality in 2016, says Moody’s InvestorsService in its annual Global Sovereign Outlook, published today.
Moody’s report, “Sovereigns — Global: Stable Outlook Despite Low Growth,Jittery Markets and Uneven Reforms”, is available on www.moodys.com.Moody’s subscribers can access this report via the link provided at theend of this press release. The rating agency’s report is an update to themarkets and does not constitute a rating action.
“Going into 2016, our credit outlook for global sovereigns is stableoverall, but there is more scope for negative surprises than for positiveones,” says Alastair Wilson, Managing Director of Global Sovereign Riskat Moody’s.
The proportion of Moody’s-rated sovereigns with a stable outlook (75%)has slightly reduced compared with a year ago (almost 80%), and the shareof negative outlooks has risen (to 17% from 13%).
“We expect that the two engines of global growth — the US and China –will continue to perform reasonably well. However, we could see anegative effect on sovereigns around the world if the global economicslowdown is sharper than expected,” says Mr. Wilson.
One trigger for such a sharper slowdown would be lower than expectedgrowth in China. China’s slowdown also contributed to the fall incommodities prices, which has undermined growth in various regions,leaving sovereigns in those regions more exposed to further economic or
financial shocks.
Exposure to slower growth in China including through trade links andreliance on commodities exports is greatest in Latin America and AsiaPacific, though sovereigns in these regions are generally well-insulated from shocks. Sub-Saharan African commodity exporters are also heavilyexposed, and with smaller buffers.
The wider European region and North America have limited exposure as Chinadoes not represent the main export market for these countries, thoughthey have some indirect exposure through trade links with regions thathave been affected.
Another important risk is the potential for event-driven shocks tocapital flows.
“Events such as the eventual tightening of US monetary policy may lead topotential shocks that would reverberate globally, should they affectcapital flows and investor sentiment.” said Wilson.
However, a broad-based emerging markets crisis is unlikely, according toMoody’s. If such a shock were to occur, it would primarily affectcountries which have large external debt positions, large current accountdeficits and low FDI coverage.
More generally, the impact of broader shocks on individual sovereignswill reflect country-specific factors, says Moody’s. It notes thatunderperformance on government reform targets can render sovereigns morevulnerable to economic and fiscal shocks as well as diminish investor
confidence.
While some governments are making progress, others have been relativelyslow to develop economic and fiscal reform, or measures have not been assuccessful as targeted. In some countries, governments have beenunwilling or unable to implement reforms.
Finally, domestic and geopolitical risks, primarily related to the MiddleEast, East Asia, and Greece, also remain an underlying threat inparticular regions, especially the Middle East, East Asia, and Greece.