The heightened policy uncertainty posed by the incoming U.S. administration is the chief risk to an otherwise-balanced sovereign credit outlook, said Fitch Ratings.
In a new report, the rating agency said that credit conditions for global sovereigns are neutral heading into 2025, with the global economy expected to undergo a mild slowdown and monetary policy to continue easing. Fitch also noted growing pressure on government finances and ongoing geopolitical risks.
“The policy agenda of the new U.S. administration will have meaningful implications for the global economic and credit outlook,” Fitch said.
“We expect tax cuts, a marked increase in tariffs, particularly on China, and a slowdown in immigration; while foreign policy will become more unpredictable,” it said — adding that the impact of the tariffs will depend on their actual implementation and the extent of retaliation by other countries.
“There is a risk of a renewed pick-up in U.S. inflation and rise in bond yields if there is fiscal loosening in the context of limited labour market spare capacity, lower immigration and [an] increase in tariffs,” it said.
In particular, emerging markets could be hit by higher U.S. bond yields, a stronger U.S. dollar and heightened market volatility.
Additionally, sharply higher tariffs, “will add to China’s challenges,” Fitch said, noting that it expects added stimulus as the Chinese government seeks to, “boost growth and prevent deflation becoming entrenched.”
Globally, government finances “will remain under pressure in 2025 from rising interest costs, demographic trends, defence spending, industrial policies and social pressures,” it said — and that these factors will particularly impact developed markets.
Finally, geopolitical risks will remain elevated in 2025, Fitch noted — with the ongoing wars in Ukraine and the Middle East, accompanied by an intensifying strategic rivalry between the U.S. and China, along with, “rising protectionism, social discontent and potential flux in U.S. foreign policy.”