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Bleak outlook for government debt amid political instability

Ratings agency Moody's has issued a negative outlook for sovereign creditworthiness in 2020, citing a "disruptive and unpredictable" political environment.

In a report published Monday, Moody's said political and geopolitical turbulence is exacerbating a gradual slowdown in GDP growth, aggravating structural bottlenecks and increasing the risk of economic or financial shocks. This is likely to further threaten the security of government debt around the world.

Moody's highlights the US-China trade war as the starkest manifestation of the impact of geopolitical tensions.

"The antagonistic political environment is also weakening global and national institutions, reducing the shock-absorption capacity of sovereigns with high debt burdens and low fiscal buffers," the report said.

"Overall, the global environment is becoming less predictable for our 142 sovereigns, encompassing $ 63.2 trillion in outstanding debt. Event risk is rising, raising the specter of reversals in capital flows that would crystallize vulnerabilities facing the weakest sovereigns."

Moody's has identified the emergence of influential "populist" movements in many advanced and some emerging economies, and suggests this tone undermines the effectiveness of domestic policy, weakening institutional strength and combining social and governance risks.

"Many reject policies of orthodoxy and multilateralism, aimed at disrupting or replacing the established consensus," the report said.

"Often, the policies espoused create frictions beyond a certain boundary, with domestic political risk morphing into geopolitical risk. Heightened domestic and geopolitical friction undermines policy predictability and effectiveness and, with it, institutional strength – particularly as growth slows."

In addition, the report highlighted, escalating global and regional trade tensions heightened the risk of financial or economic shocks, and weakened multilateral institutions 'dents' ability to deal with those shocks.

With institutional strength deteriorating and growth projected to continue slowing, populist policy agendas are likely to further fuel and social pressures to intensify, the report suggested.

Last week, Moody's downgraded the UK's outlook to "negative" from "stable" due to ongoing Brexit uncertainty, meaning the Aa2 rating could be cut for the third time since 2013. The agency projected that social and political ruptures were exposed by the the Brexit process would be a lengthy one, rendering a return to predictable policymaking unlikely for the foreseeable future.

The British economy avoided a technical recession to grow by 0.3% in the third quarter of 2019, official data revealed on Monday, after contracting by 0.2% in the second quarter.

Elsewhere in Europe, the agency downgraded Turkey earlier this year for a third time after two downgrades in 2018, which it attributed to "continued erosion of the government's institutional strength and policy effectiveness."

The European Union retains a stable AAA rating while Russia was upgraded back to investment grade on the back of "strengthened fiscal and external debt positions."

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