Moody’s offers bleak outlook for government debt amid political instability

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In a report published Monday, Moody’s said political and geopolitical turbulence is exacerbating a gradual slowdown in trend GDP growth, aggravating structural bottlenecks and increasing the risk of economic or financial shocks.
Moody’s identified the emergence of influential “populist” movements and suggested this is undermining the effectiveness of domestic policy, weakening institutional strength and compounding social and governance risks.
“Overall, the global environment is becoming less predictable for the 142 sovereigns we rate, encompassing $63.2 trillion in debt outstanding,” the report said

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 trend GDP (gross domestic product) 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 U.S.-China trade war as the starkest manifestation of the impact of geopolitical tensions.

“The antagonistic political environment is also weakening global and national institutions, lowering 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 the 142 sovereigns we rate, encompassing $63.2 trillion in debt outstanding. Event risk is rising, raising the specter of reversals in capital flows that would crystallize vulnerabilities facing the weakest sovereigns.”

Moody’s identified the emergence of influential “populist” movements in many advanced and some emerging economies, and suggested this tone is undermining the effectiveness of domestic policy, weakening institutional strength and compounding social and governance risks.

“Many reject policy orthodoxy and multilateralism, aiming to disrupt the established consensus or to supplant it,” the report said.

“Often, the policies espoused create frictions felt beyond a country’s borders, 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 to this, the report highlighted, escalating global and regional trade tensions heighten the risk of financial or economic shocks, and the weakening of multilateral institutions dents policymakers’ ability to deal with those shocks.

With institutional strength deteriorating and growth projected to continue slowing, populist policy agendas are likely to receive further fuel and social pressures will intensify, the report suggested.
Last week, Moody’s downgraded the U.K.’s outlook to “negative” from “stable” due to ongoing Brexit uncertainty, meaning the country’s Aa2 rating could be cut for the third time since 2013. The agency projected that the social and political ruptures exposed by the Brexit process would be long-lasting, 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 earlier this year downgraded Turkey for a third time after two downgrades in 2018, which it attributed to the “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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