With recession likely on the horizon for both the U.S. and Europe, credit conditions for global sovereigns will deteriorate in the year ahead, says Fitch Ratings in a new report.
The rating agency said rising government funding costs, attributable to higher interest rates and strong inflation, will weigh on sovereign credit quality in 2023.
“The fiscal benefits of higher inflation were evident in 2022 with revenue outperformance for many sovereigns and lower-than-expected government debt/GDP ratios,” Fitch said; however, it’s not clear whether these revenue gains will continue in 2023. Also, governments’ efforts to shield households and businesses from higher energy and food prices will weigh on their balance sheets.
“The fiscal costs of higher interest rates will be increasingly evident,” Fitch said.
On the economic front, China won’t provide meaningful support for global growth given its approach to containing the pandemic and ongoing stresses in the property sector, Fitch said.
Additionally, “geopolitical risks remain high,” it noted.
“There is as yet no clear path towards reconciliation for Russia and Ukraine, and similarly for China-U.S. relations,” Fitch said. “Supply chains of traded goods effectively transmit the risks and consequences of these conflicts globally, extending their reach well beyond the principals involved and neighbouring countries.”