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DEBT BURDEN STAYS HIGH

Global economy set to grow by 3pc in 2018-19

NEW YORK, July 27, 2018

The global economy is expected to grow by around 3 per cent in 2018-19, with non-investment grade sovereigns seeing the largest improvements, Moody's Investors Service said in a report.
 
However, public debt burdens will remain high by historical standards, it said.
 
Six sovereigns from Sub-Saharan Africa (SSA) and four from the Asia Pacific (APAC) region account for the 10 fastest-growing economies in 2018-19. Four SSA sovereigns are in the top five: Ethiopia (B1 stable), Cote d'Ivoire (Ba3 stable), Rwanda (B2 stable) and Ghana (B3 stable).
 
Eight of the slowest-growing economies are in either the Americas (Venezuela - C stable; Sint Maarten - Baa2 negative, Barbados  -Caa3 stable; and Cuba - Caa2 stable) or Europe (Italy - Baa2 on review for downgrade, UK - Aa2 stable, Switzerland - Aaa stable, and Russia  -Ba1 positive).
 
"Real growth will accelerate slightly across most sovereign rating categories in 2018-19, except for Aaa-rated and A-rated sovereigns where growth will be broadly stable," said Gabriel Torres, a Vice 
President-Senior Credit Officer in the sovereign risk group and co-author of the report. 
 
"The largest acceleration in GDP growth among all sovereign rating groups will be at the Caa rating level, which is bouncing back from the contraction of 2016-17."
 
Iraq (Caa1 stable) and Ukraine (Caa2 positive) will drive growth trends at the Caa level. Most other rating groups are expected to achieve slightly higher growth than in 2016-17 on average.
 
The favourable economic environment Moody's expect in 2018-19 will in  turn support an improvement in fiscal positions in most rating categories. The largest improvements in fiscal positions (relative to GDP) will occur at the bottom of the rating scale, partly reflecting rebounding commodity prices. 
 
Moody's projects that slightly looser fiscal stances at the top of the rating scale, the Aaa-rated sovereigns, will lead to narrower surpluses or wider deficits relative to the past two years.
 
However, "despite robust growth, public debt burdens will stabilise at a high level by historical standards or decrease only slightly for most rating categories," adds Torres.
 
If low interest rates until now have mitigated the impact on debt affordability of relatively high levels of debt by historical standards, the increase in interest rates that Moody's generally expects and more volatile funding conditions will weigh on sovereign debt service, particularly for those with elevated borrowing requirements.
 
Moody's expect sovereigns in the B and Caa-C rating categories to experience a sharp deterioration in debt affordability. A deterioration in debt affordability is also expected among some higher rated sovereigns, such as Oman (Baa3 negative).
 
Moreover, high and rising external debt burdens will pose credit challenges to the sovereigns most reliant on external financing.
 
The institutional gap (as measured by the Worldwide Governance Indicators on government effectiveness) between highly- and lowly-rated sovereigns remains large, with a marked deterioration in government effectiveness for the Caa-C category between 2008-2016. Ba and A-rated sovereigns recorded some institutional improvements though still with a large gap to the next rating group.
 
Between the May 2018 issue of Moody's Country Credit Statistical Handbook and the previous edition last November, rating actions were broadly balanced, with seven one-notch downgrades and six upgrades, five by one notch and one by two notches. The vast majority of the upgrades and downgrades occurred at the B rating level. Four of the six upgrades reflect a migration to the B rating level from the Caa rating level.
 
The report, "Sovereigns -- Global: Robust economic prospects for most rating categories, but debt remains high," is available on www.moodys.com.  - TradeArabia News Service
 



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