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Global Sovereign Rating Trends 2023: We‘re Not Over The Hump Yet

This report does not constitute a rating action.

Led by an expected recession in the U.S. and null growth in the eurozone, S&P Global Ratings expects the world economy to slow down to 2.2% in 2023 and 3% in 2024 (see table ).   That said, the rapid reopening of China presents some positive upside to our outlook. It's still early to determine if growing demand in China will outweigh the effects thus far on commodities and overall global inflation. But we believe there's good reasons to be optimistic as this large world growth engine's activities resume.

Table 1

GDP Growth Forecasts
2022 2023 2024 2025
World 3.4 2.2 3.1 3.3
U.S. 1.8 -0.1 1.4 1.8
Eurozone 3.3 0 1.4 1.5
China 3.2 4.8 4.7 4.6
Asia-Pacific 4.1 4.3 4.6 4.5
Latin America 3.4 0.7 2.2 2.4
Source: S&P Global Ratings.

While there are signals that inflation might be reaching a peak across most markets, evolving dynamics will likely keep interest rates relatively high until 2024, increasing the risk of recession.  Most central banks are continuing to tighten monetary policies, though inflation might have peaked sometime in the fourth quarter of 2022. That said, the drivers behind global inflation are several and not all are behaving the same or can be influenced by monetary policy.

For example, there are reasons to be optimistic about energy because a benign winter in Europe decreased energy price pressures, though they'll likely remain high. Elevated prices generally prompt governments to provide subsidies and other type of assistance to cushion the impact on consumers. The reopening of China also will likely benefit supply chains, which were disrupted during the pandemic, and could alleviate price pressures. On the other hand, stronger growth in China could stress commodities like food, metals, and energy, pushing overall prices higher. In addition, labor markets remained quite resilient during 2022, and wage constraints, albeit lower than this period last year, are still strong in advance economies.

Geopolitical uncertainty also weighs on inflationary expectations and growth prospects.   Since Feb. 24, 2022, when Russian armed forces invaded Ukraine, energy and food prices increased exponentially, which highlighted the strong dependency some countries in the eurozone, like Germany and Italy, had on Russian hydrocarbon imports. The conflict is far from over or reaching a point of resolution, and while developments have slowed during the winter, we expect heavier fighting could resume in spring.

The three sovereigns (Ukraine, Belarus, and Russia) more directly involved in the conflict have defaulted since the beginning of the military invasion. Only Ukraine has been able to restructure its debt and cure the default. We withdrew the rating and no longer rate The Russian Federation. Belarus remains in default. In addition, risks of spillover to neighboring countries have increased market tension in the Baltics, where we changed to negative our rating outlooks on Latvia, Estonia, and Lithuania. Hungary also carries a negative outlook.

Most commodity producers experienced an uplift.   The boost helped sovereigns that are commodity producers, including many emerging markets, improve their overall external and fiscal positions, as well as creditworthiness. During 2022, we raised the ratings or revised outlooks to positive on Bahrain, Angola, Qatar, Saudi Arabia, Oman, Malaysia, South Africa, and Mexico, among others.

Rating Trends

S&P Global Ratings rates 137 sovereigns globally. Since the global financial crisis in 2008, governments have been the backstop of the world economy for several consecutive events. As a result, there's been a sharp increase in the overall stock of debt, which was made possible by unprecedented accommodative monetary policies that made financing costs very low. After more than a decade, which included the COVID-19 pandemic, sovereign credit quality has continued to deteriorate. During this period, the proportion of investment-grade sovereign ratings (as a proportion of total sovereign ratings) dropped by almost five percentage points to 51.8% as of December 2022 (see chart 1). In addition, the average rating is now 'BBB-', one notch lower than in 2011, a trend that accelerated during the pandemic (see chart 2).

Chart 1

image

Chart 2

image

As of Dec. 31, 2022, 18 sovereigns had negative outlooks and five had positive outlooks. Most of the negative outlooks are in emerging or frontier market economies (see chart 3 and table 2), though the consequences of fiscal consolidation delays are starting to show on developed markets as well. In 2022, we revised the rating outlook on Italy to stable from positive and the rating outlooks on the U.K. and France to negative from stable.

Chart 3

image

Table 2

Sovereigns With Positive Or Negative Outlooks Or CreditWatch Placement Dec. 31, 2022
Positive Negative
EMEA

Bahrain

Estonia

Ireland

Ethiopia

Saudi Arabia

France

South Africa

Guernsey
Hungary
Kazakhstan
Latvia
Lithuania
Rwanda
Sharjah
Slovakia
Uganda
U.K.
Americas

Guatemala

Argentina
El Salvador
Honduras
Panama
Peru
Asia-Pacific
None
Source: S&P Global Ratings.

Default risks are rising and will likely remain high well into 2024.   The number of rated sovereigns in default have increased to six: Lebanon, Belarus, Suriname, Sri Lanka, Zambia, and Ghana. In addition, Ukraine defaulted and restructured its foreign currency debt in August. Russia also defaulted in April, but we have since withdrawn the ratings. In addition, the number of rated sovereigns in the 'CCC+', 'CCC', or 'CC' categories also increased to eight (see table 3)--three with negative outlooks, amid more difficult financing conditions.

Table 3

Sovereigns In The 'CCC' Rating Category
Net GG debt/GDP(%) CA Balance/CAR (%) GG Interests GG revenues (%)
2022e 2023f 2022e 2023f 2022e 2023f
CCC+

Burkina Faso

49.6 52.0 (10.0) (6.0) 11.1 12.8

Congo-Brazzaville

88.2 87.5 41.0 32.0 8.7 13.3

Mozambique

79.5 79.4 (81.7) (44.8) 14.0 12.4

Pakistan

68.1 69.5 (23.8) (17.2) 39.6 46.0

Ukraine

97.9 105.8 11.3 (6.2) 11.9 8.5

Argentina

68.7 63.0 (7.5) (7.0) 6.3 6.7

El Salvador

74.8 75.5 (14.7) (11.1) 17.8 18.5
CCC

Ethiopia

30.4 30.7 (35.7) (34.7) 9.3 10.4
GG--General government. CA--Current account. e--Estimate.f--Forecast. Source: S&P Global Ratings.

Regional Outlooks

Chart 4

image

Europe, Middle East, and Africa (EMEA)

Table 4

Sovereign Ratings And Outlooks Actions--EMEA
From To
EMEA Rating Outlook Action Rating Outlook

Andorra

BBB Stable Upgrade BBB+ Stable

Angola

CCC+ Stable Upgrade B- Stable

Armenia

B+ Positive Affirmation* B+ Stable

Austria (1)

AA+ Stable Affirmation* AA+ Positve
Austria (2) AA+ Positive Affirmation* AA+ Stable

Bahrain

B+ Stable Affirmation* B+ Positive

Belarus

B Negative Downgrade SD --

Burkina Faso

B Stable Downgrade CCC+ Stable

Congo, D.R.

CCC+ Positive Upgrade B- Stable

Croatia

BBB- Stable Upgrade BBB+ Stable

Cyprus

BBB- Positive Upgrade BBB Stable

Estonia (1)

AA- Positive Affirmation* AA- Stable
Estonia (2) AA- Stable Affirmation* AA- Negative

France

AA Stable Affirmation* AA Negative

Georgia

BB Negative Affirmation* BB Stable

Ghana (1)

B- Stable Downgrade CCC+ Negative
Ghana (2) CCC+ Negative Downgrade CC Negative
Ghana (3) CC Negative Downgrade SD

Greece

BB Positive Upgrade BB+ Stable

Hungary

BBB Stable Affirmation* BBB Negative

Ireland

AA- Stable Affirmation* AA- Positive

Italy

BBB Positive Affirmation* BBB Stable

Kazakhstan

BBB- Stable Affirmation* BBB- Negative

Kuwait

A+ Negative Affirmation* A+ Stable

Latvia

A+ Stable Affirmation* A+ Negative

Lithuania

A+ Stable Affirmation* A+ Negative

Madagascar

B- Positive Affirmation* B- Stable

Oman (1)

B+ Positive Upgrade BB- Stable
Oman (2) BB- Stable Upgrade BB Stable

Portugal

BBB Stable Upgrade BBB+ Stable

Qatar

AA- Stable Upgrade AA Stable

Russia (1)

BBB- Stable Downgrade BB+ CW Negative
Russia (2) BB+ CW Negative Downgrade CCC- CW Negative
Russia (3) CCC- CW Negative Downgrade CC CW Negative
Russia (4) CC CW Negative Downgrade SD --

Saudi Arabia

A- Stable Affirmation* A- Positive

Serbia

BB+ Positive Affirmation* BB+ Stable

Sharjah

BBB- Negative Affirmation* BBB- Stable

Slovakia

A+ Stable Affirmation* A+ Negative

South Africa

BB- Stable Affirmation* BB- Positive

Spain

A Negative Affirmation* A Stable

Turkiye

B+ Stable Downgrade B Stable

Uganda

B Stable Affirmation* B Negative

Ukraine (1)

B Stable Downgrade B- CW Negative
Ukraine (2) B- CW Negative Downgrade CCC+ Negative
Ukraine (3) CCC+ Negative Downgrade CC Negative
Ukraine (4) CC Negative Downgrade SD --
Ukraine (5) SD -- Downgrade CCC+ Stable
U.K. AA Stable Affirmation* AA Negative
*Ratings affirmed, outlook revised. Source: S&P Global Ratings.

Developed Europe.   Western Europe's proximity to the conflict between Russia and Ukraine, and its historical reliance on Russian gas to power households and companies, has pushed it to the brink of recession in 2023.

In addition, fiscal challenges remain. A series of shocks has considerably narrowed developed European sovereigns' fiscal flexibility, just as central banks are shifting toward quantitative tightening. Hence, real interest rates are climbing, while the EU's Stability and Growth Pact/Fiscal Rules are due to be reactivated (in 2024).

In this context, as of Dec. 31, 2022, seven of the 30 European developed sovereigns we rate have negative outlooks and only one--Ireland--has a positive outlook. The negative bias highlights the weakening balance sheet profiles of several large European governments.

We think capacity to implement pro-growth reforms to capitalize on the support from facilities like the Next Generation EU program will be key for creditworthiness. In turn, failure to address persistent structural weaknesses could strain investment and growth.

Emerging EMEA.   This past year saw the largest number of sovereign defaults in emerging EMEA this century. Four out of five foreign currency sovereign defaults that took place globally last year, occurred in emerging EMEA: that is, Ghana, Belarus, Ukraine, and Russia.

There is somewhat of an argument not to be too pessimistic. China's reopening from COVID lockdowns is positive news for global growth prospects, and EMEA exporters. At present, three EMEA emerging market commodity exporters have a positive outlook (i.e., Bahrain, Saudi, and South Africa).

That said, emerging market EMEA macro fundamentals remain strained. S&P Global Ratings' fiscal and external scores are at the lowest possible levels for 30% of rated emerging market EMEA sovereigns, with the majority of these in Sub-Saharan Africa. Interest to revenue ratios are near or above 30% for Egypt, Kenya, and Nigeria.

In addition, geopolitics remain a potential source of instability for the year ahead. The conflict continues, and the likelihood of a ceasefire anytime this year appears remote. EMEA is also facing a busy 2023 electoral calendar (e.g., Nigeria, Turkiye, Poland, and Congo) with most of these having major implications for policy settings, central bank independence, transparency of economic and public accounts, growth, balance of payments, and broader social stability.

Americas

Table 5

Sovereign Ratings And Outlook Actions--Americas
From TO
LATAM Rating Outlook Action Rating Outlook

Argentina

CCC+ Stable Affirmation* CCC+ Negative

Bolivia

B+ Negative Downgrade B Stable

Costa Rica

B Negative Affirmation* B Stable

Curacao

BBB- Negative Affirmation* BBB- Stable

Dominican Republic

BB- Stable Upgrade BB Stable

El Salvador

B- Negative Downgrade CCC+ Negative

Guatemala

BB- Stable Affirmation* BB- Positive

Honduras

BB- Stable Affirmation* BB- Negative

Mexico

BBB Negative Affirmation* BBB Stable

Nicaragua

B- Stable Upgrade B Stable

Peru (1)

BBB+ Negative Downgrade BBB Negative
Peru (2) BBB Stable Affirmation* BBB Negative

Trinidad and Tobago

BBB- Negative Affirmation* BBB- Stable
*Ratings affirmed, outlook revised. Source: S&P Global Ratings.

Sovereign ratings in the Americas will largely remain stable in 2023, despite weak economic prospects, recently high inflation, and rising funding costs. However, we have negative rating outlooks on five regional sovereigns, indicating that further erosion in credit quality is possible. Economic performance in the Latin American and Caribbean subregion within the Americas will depend in large part on growth in the U.S. and Asia, and on the trajectory of global inflation.

U.S. and Canada.   The U.S. and Canada should sustain high sovereign ratings despite decelerating GDP growth and rising interest rates. Recent midterm elections in the U.S. led to a change in Congress, with Republicans holding a slight majority in the House and the Democrats in the Senate. The close results set the stage for more political disagreements on economic and other issues. However, the results aren't likely to undermine the Federal Reserve Bank's monetary policy nor result in a substantial change in fiscal policy. We expect that Congress will engage in brinksmanship with the government debt ceiling but will address it on time, either raising it, or suspending it.

Latin America and the Caribbean.   Shortcomings in governance and weak economic growth prospects could contribute to moderate deterioration of some ratings on countries in Latin America and the Caribbean in this year. Regional growth is likely to dip below 1% in 2023 from an impressive 3.4% last year due to weaker domestic demand and higher funding costs. Unemployment is generally back to pre-pandemic levels, although the labor force participation rate has not yet recovered to previous peaks in some countries. Governments face the challenge of slower growth while dealing with the pandemic's legacy, including a much higher net general government debt burden and, in many countries, a weaker and divided social and political environment.

Higher commodity prices, especially if China reopens quickly, could sustain exports and GDP growth in many South American countries but would have the opposite impact on most of the Caribbean and Central America, which are net commodity importers.

Asia-Pacific

Table 6

Sovereign Ratings And Outlook Actions--Asia Pacific
From To
APAC Rating Outlook Action Rating Outlook

Indonesia

BBB Negative Affirmation* BBB Stable

Malaysia

A- Negative Affirmation* A- Stable

Pakistan (1)

B- Stable Affirmation* B- Negative
Pakistan (2) B- Negative Downgrade CCC+ Stable

Papua New Guinea

B- Negative Affirmation* B- Stable

Sri Lanka

CCC+ Negative Downgrade SD --

Taiwan

AA Positive Upgrade AA+ Stable

Vietnam

BB Positive Upgrade BB+ Stable
*Ratings affirmed, outlook revised. Source: S&P Global Ratings.

Most of the Asia-Pacific sovereigns, except for Sri Lanka (SD/--/SD), started 2023 with a stable outlook. In addition, financing conditions, inflation, external imbalances, and geopolitical tensions are now less likely to worsen materially enough to trigger sovereign downgrades. And while slowdowns in the advanced economies could dent Asian exports, the expected rebound of the Chinese economy this year should provide some offset. The rebound of consumer activities in China could cushion the decline in exports elsewhere in the region. Later in 2023, when most expect outbound Chinese travel to pick up more strongly, some Asia-Pacific economies could also benefit from increased tourism receipts.

The current situation, however, remains one of unusually high uncertainty. Several potential developments could increase the drag on sovereign credit quality again.

The heightened state of tension in East Asia still presents high geopolitical risks, even if not growing. Apart from possible accidents involving military assets of the major powers operating in the region, there's also the potential provocations from the Democratic People's Republic of Korea (DPRK; North Korea). The regime has advanced its weapon development following a series of tests in 2022. It could soon ratchet up tensions markedly to force a negotiation to ease economic sanctions.

Another lingering risk is if the ongoing recovery of China's economy results in a much sharper rebound in commodity--especially energy--prices than what we've seen so far. This could add pressures on the external profile of several sovereigns in the regions that rely on commodity imports. In addition, if this reversal is met with increased government subsidies, some governments may face significantly greater budgetary pressures.

Primary Credit Analyst:Roberto H Sifon-arevalo, New York + 1 (212) 438 7358;
roberto.sifon-arevalo@spglobal.com
Secondary Contacts:KimEng Tan, Singapore + 65 6239 6350;
kimeng.tan@spglobal.com
Frank Gill, Madrid + 34 91 788 7213;
frank.gill@spglobal.com
Joydeep Mukherji, New York + 1 (212) 438 7351;
joydeep.mukherji@spglobal.com
Remy Carasse, Paris + 33 14 420 6741;
remy.carasse@spglobal.com
Nicole Schmidt, Mexico City +52 5550814451;
nicole.schmidt@spglobal.com

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