Sovereign creditworthiness outlook negative due to unpredictable political environment: Moody's

Moody's Investors Service said on Monday its outlook for sovereign creditworthiness in 2020 is negative, reflecting expectations for the fundamental conditions that will drive sovereign credit over the next 12 to 18 months.

"A disruptive and unpredictable domestic political and geopolitical environment is exacerbating the gradual slowdown in trend GDP growth, aggravating long-standing structural bottlenecks and increasing the risk of economic or financial shocks," it said in a research report.

The starkest manifestation of the impact of geopolitical tensions is the disruption to trade, mainly resulting from the standoff between the United States and China. The antagonistic political environment is also weakening global and national institutions, lowering the shock-absorption capacity of sovereigns with high debt burdens and low fiscal buffers.

"Overall, the global environment is becoming less predictable for the 142 sovereigns we rate, encompassing 63.2 trillion dollars in debt outstanding. Event risk is rising, raising the spectre of reversals in capital flows that will crystallise vulnerabilities facing the weakest sovereigns," said Moody's.

Domestic political and geopolitical instability, and in particular its detrimental impact on policymaking and in some cases growth, informed some of Moody's key rating and outlook changes in 2019 across all regions as well as its research commentaries during the year.

In Europe and Central Asia, the negative outlook change for the United Kingdom was driven by the continued decline in institutional strength resulting from the ongoing uncertainty surrounding Britain's exit from the European Union.

The downgrade of Turkey, after two earlier downgrades in 2018, reflected the continued erosion in the government's institutional strength and policy effectiveness.

However, Russia was upgraded back into investment grade given its strengthened fiscal and external debt positions, which bolster its resilience to external shocks.

In Latin America and the Caribbean, the negative outlook change for Mexico was the result of the government's increasingly unpredictable policymaking and the growing dependence of PEMEX, the state-owned oil company, on government support.

Argentina's default, which was the result of weak institutions, unpredictable politics and rapidly diminishing fiscal strength, drove the three-notch downgrade and ongoing review for further downgrade.

In Asia Pacific, Moody's changed the outlook on Hong Kong to negative to reflect the rising risk that ongoing protests are eroding government and policy effectiveness and damaging the territory's attractiveness as a trade and financial hub.

The negative outlook change for India reflects the rising risk that economic growth will remain lower than it was in the past, partly due to lower government and policy effectiveness, leading to a gradual rise in the government's already high debt burden.

Sovereigns in the Middle East and Africa recorded the majority of negative rating actions in 2019. The negative outlook change for South Africa reflected the risk that the government will not reverse the deterioration in its finances and growth prospects, largely due to social and political obstacles to reform efforts.

The weakening of Oman's external and fiscal accounts linked to a high reliance on the oil and gas sector led to its downgrade into speculative grade. Lebanon's dwindling external financing options, growing fiscal imbalances and policy paralysis resulted in two downgrades in 2019.

However, Egypt was upgraded further to fiscal and economic reforms that will support its fiscal metrics and GDP growth.