Moody's Investors Service lowered its global sovereign outlook for 2020 to ‘negative’ from ‘stable’ - Photo: Privacy

JAKARTA (TheInsiderStories) – Global ratings major Moody’s Investors Service lowered its global sovereign outlook for 2020 to ‘negative’ from ‘stable’, it says in a report released today (11/11), as the disruptive and unpredictable domestic and geopolitical environment is exacerbating the gradual slowdown in trend GDP growth.

Overall, the global environment is becoming less predictable for the 142 sovereigns Moody’s rates, encompassing US$63.2 trillion in debt outstanding.

“The starkest manifestation of geopolitical tensions in the US-China trade war. Notwithstanding the latest pause, broader disruption to trade is aggravating long-standing structural bottlenecks and damaging the outlook for growth,” says Alastair Wilson, Managing Director of Moody’s Sovereign Risk Group.

The antagonistic political environment is also weakening the shock-absorption capacity of sovereigns with high debt levels and low fiscal buffers. For some, it is also weighing on institutional strength, with policymakers increasingly constrained, added Jaime Reusche, Moody’s Vice President and co-author of the report.

While the starkest example remains the US-China trade spat, tensions that diminish growth have also risen in the Gulf, between Japan and Korea, India and Pakistan, the US and the Europa, and the Europa and Britain.

The first-order effect of these strains – for example, the impact of tariff increases on trade volumes – is not always severe, but the knock-on impact on investment and capital flows is likely to damage both near- and medium-term growth prospects across all regions.

Across the G-20, Moody’s estimates that growth has fallen to 2.6 percent in 2019 from 3 percent in 2018. While recovery from weak or negative growth in a number of emerging markets may sustain that level overall in 2020, global growth will remain below potential.

The slowdown partly reflects cyclical factors and structural drivers including demographic trends. However, the impact of the increasingly antagonistic global political environment has been pervasive, particularly on global trade and investment, the report said.

Unpredictable politics create an unpredictable economic and financial environment, prone to volatility in financial and commodities markets and sharp shifts in sentiment. The two largest trading economies, the US and China, are slowing down and, beyond the latest apparent thawing in their relationship, seemingly locked in an unwinnable trade war, with repercussions for other countries.

Countries embedded in global supply chains that rely on trade for growth – such as Hong Kong (Aa2 negative), Singapore (Aaa stable), Ireland (A2 stable), Vietnam (Ba3 rating under review for a downgrade), Belgium (Aa3 stable), Czech Republic (Aa3 stable) and Malaysia (A3 stable) – face a slowdown in their economies.

Others with large current account deficits and most reliant on external capital – Lebanon (Caa2 RUR-), Mongolia (B3 stable), Tunisia (B2 negative), Pakistan (B3 negative), Sri Lanka (B2 stable), Argentina (Caa2 RUR-), Turkey (B1 negative), and to a lesser extent Indonesia (Baa2 stable) and South Africa (Baa3 negative) – are most exposed to financing shocks meanwhile.

“Recent years offer ample evidence of the scope for reversals in capital flows, which, if sustained, can profoundly damage recipient country fundamentals,” the report said.

Around the world, an increasingly populist tone is undermining domestic policy effectiveness, weakening institutional strength and compounding social and governance risks. The erosion in the geopolitical consensus has been mirrored by rising domestic political tensions, particularly in western democracies.

Those tensions, and the unorthodox policies or policy inertia to which they give rise, have in common their damaging implications for the effectiveness of policymaking institutions, the report concluded.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com