Fitch Ratings has changed its global sovereign sector outlook to ‘neutral’ from ‘deteriorating’ due to the impact of lower European energy prices and China’s reopening.

Sector outlooks – our forward-looking assessments of underlying sovereign credit conditions versus the prior calendar year – have improved somewhat since end-2022, and have been revised upwards in four regions. Most European economies will avoid recession and inflation will fall. Lifting Covid-19 restrictions boosted Greater China’s economic prospects. Commodity prices remain supportive for many emerging markets (EMs).

Nevertheless, developed-market (DM) growth will be weak and core inflation sticky, pushing policy rates higher in 2H23. Fiscal consolidation will largely stall on higher interest costs, lagged inflation effects and social spending pressures. Further defaults by weaker EMs are likely.

Greater China’s is the only ‘improving’ regional sovereign sector outlook, following the end of zero-Covid policies. In APAC, our sector outlook is ‘neutral’ (changed from ‘deteriorating’). Resilient growth in several economies, declining inflation, improving current accounts and rebuilding of external buffers underpin the change.

Western and emerging Europe’s sector outlooks have moved to ‘neutral’. The winter passed without major energy supply issues, so effects on growth and support costs were less than expected.

Mena’s ‘neutral’ and sub-Saharan Africa’s (SSA) ‘deteriorating’ sector outlooks are unchanged. SSA sovereigns face higher interest rates and external financing and exchange-rate pressures. IMF support remains strong, but may involve debt restructuring in some cases.

Some Mena sovereigns face external financing strains, but our ‘neutral’ sector outlook reflects the GCC’s weighting in the region, as hydrocarbon prices support most exporters’ credit metrics.

North America is the second region with a ‘deteriorating’ outlook. We expect Federal Reserve tightening to cause a mild US recession in 4Q23-1Q24, while higher interest rates are pressuring fiscal deficits, most notably in the US.

Latin America remains ‘neutral’ on slowing but resilient growth, prudent monetary policy and favourable fiscal starting points. Political developments have impaired these trends in a few cases. 

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