Moody's Investors Service, a global rating agency, has said that its outlook for sovereign creditworthiness in 2018 is stable overall, with the healthy growth and synchronized global economic expansion of 2017 likely to continue into 2018. "The benign state of the global sovereign credit environment is reflected in the fact that almost three-quarters of Moody's-rated sovereigns currently hold a stable rating outlook, while the increasingly solid momentum in growth balances against the continuing risks from high debt levels as well as from elevated geopolitical tensions," says Alastair Wilson, Moody's Managing Director for Global Sovereigns. In line with the credit environment that Moody's foresees for sovereigns in 2018, 102 (74%) of the 137 Moody's-rated sovereigns have a stable outlook, and a further 13 (10%) hold a positive outlook. Only 22 (16%) sovereigns have a negative outlook compared with 35 (26%) a year ago, pointing to the likelihood of fewer downward rating adjustments in 2018 compared with 2017.
"The macroeconomic environment for sovereigns is more favorable than it was a year ago," says Wilson. "Moody's expects global GDP growth in 2018 to remain over 3 per cent in 2018, similar to 2017. That benign economic backdrop allows governments a longer window in which to carry out economic and fiscal reforms." Unusually low inflation levels across both the advanced economies and many emerging markets will keep the pace of the normalization in monetary policy gradual. Moody's does not believe that the normalization process poses a broad threat to sovereign credit. However, Moody's report cites a number of challenges that forestall a greater improvement in global credit conditions despite the favorable global macroeconomic environment.
One is that domestic political uncertainty and social tensions weaken the commitment to economic and fiscal reform. Overall, slow progress on reforms leaves many sovereigns more vulnerable to a deterioration in their credit profiles in the event of a shock. A further challenge is that public debt levels will also remain high, although at generally stable levels.
This is because governments are likely to calibrate fiscal consolidation so as not to unsettle the ongoing economic recovery. As a result, Moody's expects nearly half of all sovereigns' debt burdens to remain within one percentage point of the level recorded in 2017. The third challenge is that heightened geopolitical risks have a higher profile than in recent years and could potentially undermine the stable outlook for sovereign credit. The probability of a military conflict in the Korean peninsula has risen, and tensions have escalated in the GCC region.