Global Sovereign Credit Quality Seen Stabilising in 2014

After several tumultuous years, global sovereign creditworthiness is likely to continue stablising in 2014, says Moody's Investors Service in its just-published "2014 Outlook - Global Sovereigns: Credit Quality Stabilizing After Several Tumultuous Years."


As of 25 November, nearly three quarters (85) of the 124 Moody's-rated sovereigns carry stable rating outlooks, compared with fewer than two thirds (77/120) at the start of 2013. This stabilisation in rating outlooks over the course of 2013 reflects divergent trends between advanced and emerging economies.


Among advanced economies, many rating outlooks have moved to stable from negative, as in the case of the US and several euro area countries. Among emerging economies, some outlooks moved to stable from positive, as in the case of China and Brazil. Moody's expects these divergent trends to continue in 2014.


Moody's believes that credit trends among advanced economies will be driven by improving growth prospects, stabilizing debt dynamics, more resilient banking systems and receding region-specific contagion risks.


As growth recovers -- especially with the euro area emerging from recession and momentum strengthening in the US -- improved revenue generation and lower social welfare expenditures will support fiscal consolidation efforts.


Ongoing reforms in the euro area to address structural imbalances and institutional weaknesses will also reduce contagion risks and support investor confidence.


However, despite some stabilisation in the euro area, Moody's points out that the advanced economies whose outlooks remain negative are all in the monetary union.


Budget deficits, elevated indebtedness and contingent liabilities will continue to constrain some advanced economies' sovereign credit quality.


At the same time, Moody's expects that emerging economies will face a continuation of the less favourable shift in credit quality that began in 2013.


The rating agency believes that cyclical factors and emerging structural constraints in large emerging economies will continue to drive below-average-trend growth, weighing on commodities demand and government revenues.


Meanwhile, a tightening of monetary policy in response to the expected tapering of the US Federal Reserve's quantitative easing programme is likely to depress growth and exacerbate debt "inaffordability" for countries with large current account deficits and weak policy frameworks.


Overall, Moody's believes that sovereign creditworthiness will be more vulnerable in 2014 to common global risks than to region-specific exposures.


These common risks include a disorderly unwinding of monetary stimulus in the US, persistently elevated event risks in the euro area and uncertainty about commodity prices.


Moody's says that the interaction of these global risks with country-specific factors will determine credit implications.


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