Countries around the world are less creditworthy than what they once were thanks to lingering effects of the global financial crisis such as slower economic growth and, in response, a sharp increase in government debt.
And, on current trends, the perceived deterioration in sovereign credit quality may continue for some time yet.
That’s the view of Fitch Ratings who note that “the proportion of ‘A-‘ and higher ratings in Fitch’s global portfolio of sovereigns remains well below the pre-financial-crisis level and could fall further over the next couple of years as the balance of ratings outlooks has deteriorated.”
This chart from Fitch shows the trend in sovereign ratings over the past decade, based on the group’s assessment.
Investment grade ratings are deemed to be anything BBB- or higher and, as the chart shows, the proportion in this grouping has grown smaller over the past decade, particularly for AAA-rated sovereigns, deemed to be the most creditworthy by Fitch.
Indeed, they’ve never been rarer.
“Our sovereign portfolio has recorded some of the biggest moves, with the proportion of ‘AAA’ sovereigns dropping to 10% at the end of 2016, its lowest-ever level,” says Fitch.
“Around 36% of the portfolio is rated in the ‘A’ to ‘AAA’ categories, down from 48% at the end of 2006 while 27% is rated ‘B+’ or below, compared to 20% in 2006.”
Australia currently holds a AAA rating with Fitch, and that’s unlikely to change anytime soon given the group currently has a stable view on the ratings outlook.
However, given many nation’s are currently on ratings watch negative — implying that a downgrade could arrive should fiscal conditions not improve — the shift lower in perceived creditworthiness over the past decade may not be finished yet, despite some recent promising signs for the global economy.
“Our sovereign ratings also have the greatest share of negative outlooks on a net basis, at 21%,” says Fitch. “This suggests downgrades could outnumber upgrades by a wide margin.”
The group says downward pressures on ratings are stemming from a “stronger US dollar which is challenging for many emerging-market borrowers”.
It also says that rising trade protectionism and economic nationalism could also hurt growth and boost inflation.
Something to consider as Donald Trump prepares to address the US Congress for the first time to outline his legislative agenda and national priorities for the year ahead.