Fitch Ratings has revised its 2026 global sovereign sector outlook to “deteriorating” from “neutral”, citing the economic and geopolitical fallout from the ongoing US-Iran conflict.
The ratings agency said the war is expected to weaken global economic growth, fuel inflationary pressures, push bond yields higher and increase geopolitical risks across multiple regions, although resilient global economic conditions and relatively stable financing markets have helped contain the overall impact so far.
As part of the revision, Fitch downgraded the outlook for five regional sovereign sectors to “deteriorating”, reflecting the broader spillover effects of the conflict on energy markets, trade flows and investor sentiment.
In contrast, the outlook for Greater China was upgraded to “neutral” from “deteriorating”, supported by strong export performance and signs that deflationary pressures are beginning to ease.
Fitch noted that Greater China is relatively insulated from the energy shock due to ample crude oil inventories, substantial domestic refining capacity and diversified energy sources.
Asia Faces Energy Supply Risks
The agency said many sovereigns across the Asia-Pacific region continue to benefit from robust artificial intelligence-related exports and technology-driven demand.
However, it warned that the region remains vulnerable to rising energy costs because many economies are highly energy-intensive and depend heavily on oil and gas imports transported through the Strait of Hormuz.
Any prolonged disruption to shipping routes or energy supplies could place additional pressure on inflation, growth and fiscal balances across the region.
Gulf States Better Positioned
According to Fitch, most members of the Gulf Cooperation Council remain relatively resilient due to strong sovereign balance sheets, diversified export routes and access to financial support mechanisms.
Nevertheless, the agency cautioned that the conflict is likely to have lasting implications for the region’s security environment and business confidence.
In Eastern Europe, Fitch said geopolitical risks remain elevated due to the continuing war in Ukraine, increased Russian hybrid activities and tensions within the NATO alliance.
Developed Markets Face Fiscal Strains
The ratings agency also warned that higher energy prices are worsening economic and inflation prospects in developed economies, creating additional pressure on already stretched public finances.
It expects Western European governments to have less fiscal capacity to provide large-scale support measures compared with those implemented during the 2022-2023 energy crisis.
In the United States, Fitch said the recently enacted legislation known as the One Big Beautiful Bill Act is expected to reduce tax revenues and widen the federal government’s fiscal deficit.
The agency forecasts the US general government deficit will reach 7.9% of gross domestic product this year.
Latin America Remains Relatively Resilient
Fitch said most Latin American sovereigns appear comparatively well positioned to weather the current environment, benefiting from favourable macroeconomic conditions, policy flexibility and, in some cases, stronger commodity export revenues.
Despite the more negative sector outlook, the agency noted that sovereign rating actions have remained broadly positive so far in 2026.
Year-to-date, sovereign upgrades have outnumbered downgrades by nine to two, although the balance of rating outlooks has weakened to neutral from a net positive position before the outbreak of the conflict.
Fitch said a rapid resolution of the US-Iran war could allow the global sovereign sector outlook to return to “neutral”.
However, it warned that a prolonged conflict, sustained disruption to energy infrastructure or lasting damage to regional security conditions could trigger further negative rating actions and increase pressure on sovereign credit profiles worldwide.
