Real GDP growth and real interest rates are two macroeconomic factors critical for sovereign credit. Fitch Ratings forecasts a decline in global economic growth to near 2% in 2024 from about 3% in 2023. Fitch says it expects the US economy to slow sharply but to avoid recession, and growth in China is projected to dip below 5%. A mild recovery in the eurozone will only partially offset weakness in the US and China. Leading international trade indicators do not yet point to a strong recovery, suggesting the external backdrop for many emerging markets is mixed at best.
An active debate is underway on ‘equilibrium’ real interest rates in developed markets, particularly the US. Regardless of the debate, real 10-year Treasury yields (as measured by Treasury Inflation Protected Securities (TIPS)) have risen by more than 300bp since the start of 2022. Fitch said it was not convinced that low real yields in the 2010s and in the post-Covid-19 period would prove durable in the absence of central bank interventions, and the agency is now of the view that real rates will be persistently higher than during those periods even as policy rates move lower in 2024.
Rating Outlook Distribution
Rating Outlooks are roughly balanced going into 2024, and, unlike recent years, there is no category or region where this is not the case. This does not necessarily imply rating changes will be similarly balanced in the period ahead, as evidenced by the long history of Fitch Transition and Default studies that confirms greater ratings volatility in lower categories. Upgrades and downgrades were mostly sub-investment grade in 2023 and the same is likely to be the case in 2024.
Historically, Positive and Negative Outlooks have been in place for 12 months and 10 months before being upgraded and downgraded, respectively. Those that revert to Stable have taken a few months longer. As of end-2023, several sovereigns have been on Positive or Negative for more than 18 months – durations whereby reverting to Stable has historically been more likely.
James McCormack, Head of Sovereigns “The neutral outlook for sovereigns reflects moderately weaker global economic growth in 2024 and persistent strains on fiscal positions balanced against improvements in inflation dynamics and forecast reductions in most central bank policy rates. Political and geopolitical issues will be front and centre again in 2024.”
