Economy
Outlook for $63 Trillion in Sovereign Debt Turns Negative: Moody's
Published:
Last Updated:
Global gross domestic product (GDP) growth has lost ground this year, and the outlook for next year is no better. Moody’s Investors Service issued a new report Monday morning calling the outlook for sovereign indebtedness negative for 2020.
The outlook is based on what Moody’s calls an “increasingly antagonistic political environment” and “trade wars [that] will weaken open economies by lowering investment and economic activity.” Some $63.2 trillion in global sovereign debt is “becoming less predictable.”
GDP growth across the G-20 developed nations has dropped from 3.0% in 2018 to 2.6% in 2019. According to Moody’s, global recovery from “weak or negative growth” in several emerging markets will do no better than maintain the lowered level of growth next year.
The firm sums up its outlook this way:
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. Those embedded in global supply chains that rely on trade for growth, such as Hong Kong, Singapore, Ireland, Vietnam, Belgium, the Czech Republic and Malaysia face the greatest risk of slowing economic activity.
Jaime Reusche, Moody’s vice president and co-author of the report, noted, “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.”
Rising global and regional tensions exacerbate the risk of financial or economic shocks and limits policymakers’ ability to respond to such shocks. Already high debt levels leave little room for affected nations to spend their way out of a severe shock. Or, as Moody’s puts it, “Event risk is rising, raising the specter of reversals in capital flows that would crystallize vulnerabilities facing the weakest sovereigns.”
The softer global economy, for example, kept a lid on crude oil prices, even following the drone attack in October on Saudi Arabian oil processing facilities. Priced spiked nearly 20% on the first trading day after the attack, but within two weeks had given back all the gain plus an extra $2 a barrel. In that case, “event risk” was mitigated by a quick return to essentially full operation and falling demand for crude oil.
But how would a blowup of tensions between the United States and China affect the global economy? What would be the knock-on effects of a confrontation in the South China Sea, for example? The United States has backed Vietnam’s claims to areas overlapped by Chinese claims. China and Vietnam have come close to a military conflict over these claims in the past few years and they remain a significant flashpoint.
Even though there hasn’t been much but tough talk among China, Vietnam and the United States, tensions remain high in the South China Sea. Elevated tensions defy prediction, and that’s what worries Moody’s. Along with Brexit, “populist” politics and widening trade disputes, there are plenty of unpredictable events just bubbling beneath the surface and, with that, uncertainty about their impact on the global economy. Moody’s does not expect that impact, if it comes, to have a happy ending.
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.