The uncertain outlook for the economy in 2023 amplifies risks across sectors, says Moody’s Analytics.
A global debt report entitled “A Threat to Government Fiscal Stability” said a weaker economy with higher inflation and interest rates would threaten government fiscal space and revenue streams.
“Household finances could deteriorate as rising interest rates make adjustable-rate debt more expensive, threaten home values and weaken real income growth.
“Companies could face lower margins and lower asset valuations as they face higher costs and weaker demand,” it said.
The primary challenge in short-term debt management lies in the government’s fiscal policy.
“The ability to manage the high debt burden and the potential for rapid fiscal consolidation in the coming years point to ongoing tensions in the pace of global growth in the years ahead,” it said.
Emerging markets, which are already struggling to repay debt, are at greatest risk, particularly where revenue generation, foreign exchange holdings and trade balances are at stake.
“Household debt poses the greatest risk in some emerging markets, particularly China, where mortgage and consumer debt have been rising rapidly.
“However, less so in the US and Europe, where strains have come down in recent years, and in Latin America, where household credit markets are not yet fully developed,” it said.
Moody’s Analytics also said corporate debt burdens raised few alarm bells, except in China, where rapidly rising corporate debt overlaps with national debt via local government financial vehicles and state-owned companies.
Regarding debt, it is said that global debt has not fallen significantly in any region of the world and has continued to rise in China.
Persistently high debt burdens, whether in advanced economies, in China or in emerging markets around the world, remained the main source of pressure on fiscal conditions in the global economy.
“High government debt at least increases the risk of rapid budget consolidation and, in the worst case, a possible default.
“Indeed, this worst-case scenario played out in Sri Lanka in mid-May when its government failed to make a planned debt payment.
“Sri Lanka is an extreme case where the government has cut taxes, increased spending and frozen the exchange rate, among other things, while carrying a heavy debt burden,” it said.
Moody’s Analytics said the combination of poor governance and high debt burdens, at least in emerging markets, has created risks that could have spillovers elsewhere in the near term.
Debt-to-Gross Domestic Product (GDP) ratios in emerging markets, while lower than in advanced economies, have been more difficult since the pandemic.
“Since peaking in the first quarter of 2021 at 252.9% of GDP, the aggregate ratio has only fallen about five percentage points to the year-end value of 247.8%,” it said.
Meanwhile, many countries, particularly in emerging markets, were said to still have accommodative fiscal policies burned into their 2022 budgets.
“However, it is likely that 2023 will be a period of rapid fiscal consolidation as fiscal deficits are trimmed back towards long-term targets.
“This will add headwinds to the global economy, which is already being plagued by rising inflation, shortages of some foodstuffs and supply chain disruptions from Russia’s invasion of Ukraine and China’s zero-Covid policy,” she added.
Source: The Edge
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