Low Commodity Prices & Strong Dollar Destroying Sovereign Credit Ratings

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Low commodity prices & strong U.S. dollar destroying Sovereign Credit Ratings

Editor: Vladimir Bajic | Tactical Investor

Low Commodity Prices

The outlook for sovereign creditworthiness in 2020 is negative as the disruptive and unpredictable domestic and geopolitical environment is exacerbating the gradual slowdown in trend GDP growth, weakening global and national institutions and increasing the risk of economic or financial shocks, Moody’s Investors Service says in a report released today. Overall, the global environment is becoming less predictable for the 142 sovereigns Moody’s rates, encompassing $63.2 trillion in debt outstanding.

“The starkest manifestation of geopolitical tensions is 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.

Across the G-20, Moody’s estimates that growth has fallen to 2.6% in 2019 from 3% 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.

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.

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. Full Story

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