World:Moody's sees negative global outlook for sovereigns in 2020

The outlook for sovereign creditworthiness in 2020 is negative, reflecting the global rating agency's expectations for the fundamental conditions that will drive sovereign credit over the next 12-18 months, says Moody's Investors Service.

A disruptive and unpredictable domestic political and geopolitical environment is exacerbating the gradual slowdown in trend GDP growth, aggravating longstanding structural bottlenecks and increasing the risk of economic or financial shocks, the global rating agency says in its Outlook report.

The starkest manifestation of the impact of geopolitical tensions is the disruption to trade, mainly resulting from the standoff between the US (Aaa stable) and China (A1 stable). The antagonistic political environment is also weakening global and national institutions, lowering the shock-absorption capacity of sovereigns with high debt burdens and low fiscal buffers. Overall, the global environment is becoming less predictable for the 142 sovereigns we rate, encompassing $63.2tn in debt outstanding. Event risk is rising, raising the spectre of reversals in capital flows that would crystallise vulnerabilities facing the weakest sovereigns.

2019

In an overview of developments in 2019, Moody's says that domestic political and geopolitical instability, and in particular its detrimental impact on policymaking and in some cases growth, informed some of its key rating and outlook changes in 2019 across all regions as well as its research commentaries during the year.

In Asia Pacific, Moody's changed the outlook on Hong Kong (Aa2 negative) to negative to reflect the rising risk that ongoing protests are eroding government and policy effectiveness and damaging the territory's attractiveness as a trade and financial hub.

The negative outlook change for India (Baa2 negative) reflects the rising risk that economic growth will remain lower than it was in the past, partly due to lower government and policy effectiveness, leading to a gradual rise in the government's already high debt burden.

Political environment

The increasingly antagonistic global political environment is exacerbating the slowdown in global growth, especially among the more trade-oriented economies. Across the G-20, Moody's estimates that growth has fallen to 2.6% in 2019 from 3% in 2018. While recovery from weak or negative growth in a number of emerging markets will sustain that level overall in 2020, global growth will remain below trend and any recovery will be shallow and fragile.

The slowdown partly reflects cyclical factors, partly structural drivers, including demographic trends. But the adverse impact of the increasingly antagonistic global political environment, particularly on global trade and investment, has been pervasive and will likely remain so. Unpredictable politics create an unpredictable economic and financial environment, prone to volatility in financial and commodities markets and sharp shifts in sentiment. That unpredictability, and the difficulty in envisaging positive shocks, are key drivers for the negative outlook for the sector.

Increasingly populist tone

Around the world, an increasingly populist tone is undermining domestic policy effectiveness, weakening institutional strength and compounding social and governance risks. In many advanced economies and some emerging markets (EMs), influential “populist” movements have emerged in recent years, either from the political fringe or from within established parties, often in reaction to years of stagnant incomes and rising income inequality.

Many reject policy orthodoxy and multilateralism, aiming to disrupt the established consensus or to supplant it. Often, the policies espoused create frictions felt beyond a country’s borders, with domestic political risk morphing into geopolitical risk.

Heightened domestic and geopolitical friction undermines policy predictability and effectiveness and, with it, institutional strength – particularly as growth slows. Escalating global and regional trade tensions increase the risk of financial or economic shocks, and the weakening of multilateral institutions dents policymakers' ability to deal with those shocks.

Asia

In Asia, policy challenges stem less from rising populist sentiment than from longstanding structural economic challenges facing policymakers in a less benign global environment.

In India, waning growth both reflects and exacerbates the vested interests that are barriers to reform and also the authorities' challenges with effective implementation of their original reform efforts to broaden the tax base, reduce fiscal deficits, strengthen the financial system and stimulate investment. In China, policymakers face increasing challenges as declining global growth and rising geopolitical tensions expose the challenge inherent in simultaneously maintaining growth, financial and economic stability and wide-ranging reform efforts.

In Sri Lanka, reforms and most policy decisions are on hold ahead of the presidential and parliamentary elections which could extend well into mid-2020. So far, the fiscal policy proposals by the main parties have failed to identify funding for significant expenditure measures.

Source: Asia Insurance review