Downside risks to weigh on sovereign ratings in 2019, says Fitch

Latin America and MEA face the greatest macroeconomic challenges next year

A range of macroeconomic risks will present more downside than upside risks for sovereign credit ratings in 2019, according to Fitch Ratings.

“Trade policies are proving more disruptive than anticipated, while tightening market conditions could heap stress on financial markets, and geopolitical turmoil and forthcoming elections [in Argentina, India and Nigeria] next year, are added risks for 2019,” said Tony Stringer, the rating agency’s managing director of sovereign credit.

Of the 27 rating outlooks Fitch has assigned for next year, 15 are negative and 12 are positive, with Latin America and the Middle East and Africa set to perform the weakest out of all global regions in 2019, Mr Stringer told an event on Wednesday.

In the MEA region, Fitch has assigned four negative rating outlooks (Lesotho, Oman, Tunisia and Zambia) versus one positive one (Egypt).

“The bifurcation towards negative sovereign outlooks was due to a mix of factors, including continued market or currency volatility, macroeconomic weakness and/or fiscal or governance issues,” said Mr Stringer.

In Latin America, Fitch has assigned six negative outlooks – including for Argentina, which has been grappling with currency depreciation and fiscal instability, and Mexico – versus just two positive outlooks, for Jamaica and Paraguay.

Next year “could well be a fifth negative year" for Latin America and the MEA region, Mr Stringer added.

Global economic growth is slowing in the face of macroeconomic headwinds. The ongoing trade war between China and the US, other trade uncertainties like Brexit, friction between Italy and the EU and a continued rise in interest rates by the US Federal Reserve, will dampen growth, according to the rating agency’s outlook for 2019 presented in Dubai this week.

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In particular, the use of tariffs by Beijing and Washington on each country's products has been a “harmful intervention”, and the frontloading of exports by China in recent months suggests the likelihood of further tariffs in 2019, which pose additional downside risk, Mr Stringer noted.

The potential impact of Brexit uncertainty is “unequivocally negative for the UK economy, currently rated at AA”, he added, while Italy (BBB) faces risks in the form of its potentially unstable coalition with the EU and the challenges it faces in presenting next year’s budget. This could further unsettle markets next year.

Finally, global government debt levels are high in many regions, which could become a concern next year, according to Fitch. Global debt levels have risen each year since 2002 to reach $247 trillion in the first quarter of 2018, according to the Institute of International Finance.

“We have put the median global general government debt-to-GDP ratio [across all rated sovereigns] at 50 per cent, which is a record high since we’ve been producing this outlook,” Mr Stringer said.