12 December 2013

Fitch: Recovery taking hold but risks to global sovereign outlook remain

In its 2014 Outlook report for global sovereigns, Fitch says that a gradual, broad-based economic recovery is taking hold, supporting a more positive macro-economic outlook. However, despite an easing of downward pressure on developed market sovereigns, a number of key risks remain.

Although the eurozone crisis has eased, Fitch expects the recovery in the region to be weak, constrained by high public debt levels, the risk of stalling reform and policy momentum and concerns over deflation. The ratings of five eurozone sovereigns remain on Negative Outlook, but Fitch expects most ratings in the region to be unchanged in 2014.

The US fiscal crisis is unresolved, although the announcement of an agreement on 2014 and 2015 spending levels by the Co-Chairs of the Congressional Budgetary Committee is a positive first step. The US debt ceiling suspension in October was only a short-term fix until 7 February 2014, when the debt ceiling will need to be raised again. A repeat episode of political brinkmanship would create uncertainty and could damage US growth prospects, with a knock-on effect on the global economy. Fitch will aim to resolve its Rating Watch Negative (RWN) on the US sovereign rating in 1Q14, although the timing will depend on the resolution of the FY2014 budget and debt ceiling.

The impact of the tapering of the US Federal Reserve's quantitative easing programme is uncertain, although Fitch expects tapering to have a similar but more muted effect on global financial markets than the false start in mid-2013. Emerging markets (EMs) that attract sizeable portfolio flows - and are viewed as more risky, due to higher fiscal and/or external imbalances - are likely to experience more disruption, with possible equity, bond market and currency adjustments. DM interest rates may be affected but Fitch's base case is that sovereign ratings will not be.

China's ability to transform its economy away from investment-driven growth will be critical for its own credit profile and as a driver of EM growth. The longer investment and leverage remain on an unsustainable path, the greater the eventual costs of fixing the problem - costs that Fitch expects would fall partly on the sovereign, with potential negative rating implications. However, early signs from the policy debate after the Third Plenum suggest that the authorities are serious about rebalancing.

The downward pressure on DM sovereign ratings is easing. Following the 2013 downgrades of the UK and France, and the stabilisation of their Outlooks, the ratio of Stable to Negative Outlooks for DM sovereigns has improved during the past 12 months.

Fitch expects that world growth will accelerate in 2014 and 2015, driven by a more robust recovery in major advanced economies (MAE), while EM growth rates will improve only modestly. Fitch's latest forecasts for world GDP growth, weighted at market exchange rates, are 2.3 per cent in 2013, firming to 2.9 per cent in 2014 and 3.2 per cent in 2015.

Full press release

Fitch Ratings' Report: 2014 Outlook: Global Sovereigns (registration required)

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