Although the credit rating outlook for global sovereigns has improved this year, high debt levels continue to weigh on sovereign ratings, says a new report from Fitch Ratings Inc.
According to the credit-rating agency, the credit cycle for global sovereigns reached “an inflection point” at the end of 2016 — and the outlook has brightened in the first half of this year. The number of sovereigns with negative rating outlooks has declined notably so far this year.
“Factors that support the improvement in sovereign credit fundamentals include a synchronized pick-up in world GDP growth forecast for 2017 and 2018, a recovery in cross-border trade volumes, the stabilization of commodities prices, albeit at a lower level, and a global macroeconomic policy backdrop that remains broadly accommodative,” says James McCormack, global head of sovereign and supranational ratings at Fitch, in a statement.
In developed markets, the rating outlook trend has turned positive, the Fitch report says, based largely on country-specific developments rather than any common factor.
That said, the Fitch report notes that the European political environment, “is more settled than at the start of the year, and the short-term outlook is more benign, as existential questions surrounding the Eurozone have become less urgent.”
For emerging markets, external finance conditions have improved, boosting creditworthiness, the report notes. In addition, there haven’t been any signs of higher U.S. interest rates disrupting emerging-market capital flows, Fitch notes, which is also contributing to the brighter rating outlook.
Nevertheless, the report also notes that sovereign finances remain under pressure due to high debt levels and diminishing political support for fiscal tightening in developed markets.
“The biggest constraint on ratings is high and still-rising government debt levels, evident in both developed and emerging markets, leaving sovereigns exposed to a change in the global interest rate environment,” McCormack adds.