Economies set for highest government debt since 2000: Fitch

The highest levels of government debt as a share of gross domestic product (GDP) will be hit by one-in-five countries this year, predicts Fitch Ratings.

This estimate is based on 2000-2017 data, but it rises to 40% when using data from 2015-2017.

Fitch predicts that most countries will see deteriorations in their primary fiscal balances (excluding interest rates) in 2017 following four consecutive years of general improvements.

Indeed, the first half of this year has seen a dramatic improvement in sovereign credit has been reported by Fitch Ratings as sovereigns with positive outlooks rose from five in 2016 to nine this year.

There were 17 sovereigns on negative outlook and nine on positive outlook at the end of June 2017.

“The biggest constraint on ratings is high and still-rising government debt levels”

At the end of 2016, a record year for sovereign downgrades was reported with 26 having a negative outlook and only five being positive.

“Factors that support the improvement in sovereign credit fundamentals include a synchronised pick-up in world GDP growth forecast for 2017 and 2018, a recovery in cross-border trade volumes, the stabilisation of commodity 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.

“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.

External finances saw the most notable improvement in emerging market sovereign credit profile, Fitch found in its mid-year Sovereign Review and Outlook.

The median emerging market current account deficit is forecast to slightly improve to 2.9% of GDP this year, compared to 3.3% in 2016.

“Unlike the 2013 ‘taper tantrum’, there has been no sign of disruption to emerging market capital flows associated with the Federal Reserve tightening.”

Following strong capital inflows, foreign exchange reserves are predicted to increase by about $110bn, excluding China. This is the highest figure since 2012.

“Unlike the 2013 ‘taper tantrum’, there has been no sign of disruption to emerging market capital flows associated with the Federal Reserve tightening, and Fitch does not expect any such disruption in the immediate term,” says the report.

“A notable difference between 2013 and 2017 is the direction of change of 10-year US Treasury yields, which moved higher in 2013 and are currently on a slow downward trajectory. An eventual reversal in US yields, which is expected by Fitch as the relationship between real yields and real GDP growth normalises, would represent a risk to emerging markets’ external funding conditions,” argues Fitch.

In developed markets, the rating outlook trend has become positive mainly because of country-specific developments rather than any common cross-regional improvement in sovereign creditworthiness.

The European political environment is more settled than it was in January. The short-term outlook is also more benign as existential questions surrounding the eurozone have become less urgent.

Policy uncertainty remains higher than usual in developed markets. It is still unclear whether Europe’s political setting will see the much-needed structural reforms needed to support growth. Brexit negotiations have started and represent a material risk to the UK and, to a lesser degree, remaining EU member states, and changes to US tax and trade policies remain uncertain and their implications for US trade partners.

“Despite clear upward global growth momentum, most sovereigns are forecast to see deteriorations in their primary fiscal balances (excluding interest rates) in 2017 following four consecutive years of general improvements.

“This is attributed largely to waning political support for additional fiscal tightening in developed markets, and policymakers in several emerging market nations are still struggling to cope with the downward adjustment in commodity prices,” Fitch comments.

It is for this reason that one-in-five sovereigns will reach their highest level of government debt as a share of GDP this year.

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Mark Carney Bank of England

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