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July 17 (The following statement was released by the rating agency)
Fitch Ratings says in its 2014 Mid-year Sovereign Review and Outlook report that a stabilisation in the eurozone has supported an improving trend in global sovereign rating actions and a rebalancing towards fewer Negative Outlooks in 1H14, indicating that downward pressure on sovereign creditworthiness has reduced.
This improving trend reflects principally the stabilisation and improvement of sovereign ratings and Outlooks in the developed market (DM) economies, in particular the eurozone. 1H14 saw upgrades for both Spain (to BBB+/Stable) and Greece (to B/Stable), reflecting improvements in the fiscal positions and macroeconomic performance of the peripheral eurozone countries as they continue to recover from deep recessions. Positive Outlook revisions on the ratings of Italy, Cyprus and Portugal (the latter from Negative to Positive at BB+) and very recently on the Netherlands underscore the stabilisation of eurozone sovereign creditworthiness over the past six months. For the first time since 2009, no eurozone countries are on Negative Outlook.
In contrast, the net upward momentum in emerging market (EM) sovereign ratings since 2010 has stalled, extending a trend observed in 2013, as many face more challenging growth conditions, difficult policy trade-offs and political or geopolitical pressures. This represents further evidence that the secular trend of convergence in the ratings of DM and EM sovereigns is starting to reverse. The balance of DM and EM Outlooks suggests this reversal will continue in 2H14 and 2015. Negative Outlooks on DM sovereigns are now outnumbered by those on Positive (three to two), while EMs exhibit a heavily negative balance, with 12 on Negative Outlook and only five on Positive.
Fitch forecasts global economic growth to accelerate gradually to 2.7% in 2014 and 3.1% in 2015 and 2016, from 2.4% in 2013. Growth will largely result from a firmer and more balanced recovery across DMs, although weak world trade and higher oil prices add to risks. We forecast growth in EMs at 4.3% in 2014, 4.8% in 2015 and 4.9% in 2016, down from 4.7% in 2013, reflecting constraints from infrastructure bottlenecks, weak business environments and unbalanced growth that have reduced medium-term growth potential in many countries.
Fitch expects the Fed and the Bank of England to start gradually tightening policy over the next 12 months. Normalising monetary conditions after over five years of virtually zero interest rates and unwinding inflated central bank balance sheets is historically unprecedented and may trigger some increase in financial market volatility, albeit from very low levels. This will also create divergence with the ECB and the Bank of Japan, which are still loosening policy and are likely to keep interest rates unchanged until at least 2016.
Following the incorporation of Crimea into the Russian Federation in 1Q14, the Russia/Ukraine crisis remains unresolved, although the near-term macroeconomic implications are manageable for the global economy. More recently, intensifying insurgency in Iraq has potentially widespread but uncertain implications throughout the region and beyond, due to the impact on Sunni/Shia tensions and the role of key players such as Saudi Arabia, Iran and the US.
Although macroeconomic volatility has reduced since the global financial crisis, medium- to long-term growth rates are likely to come under downward pressure from a combination of weaker productivity growth and negative demographics stemming from ageing populations. These trends are likely to affect both DMs and EMs, although if current trends are maintained, the impact will be felt more acutely in DMs.
The report, '2014 Mid-Year Sovereign Review and Outlook' is available at www.fitchratings.com or by clicking the link above.