REUTERS: Credit rating agency Fitch downgraded its sovereign debt rating on Thursday amid concerns over rising global borrowing costs and the potential for a wave of new defaults.
Fitch, which monitors more than 100 countries, said the Ukraine-Russia war is fueling problems such as higher inflation, trade disruptions and weaker economies that are now hurting sovereign credit conditions.
“Rising interest rates are increasing the cost of servicing government debt,” said James McCormack, Fitch’s global head of sovereign instruments, downgrading the firm’s view on the sovereign sector to “neutral” from “upgrade.” “Emerging market (EM) government bonds are most exposed, but some heavily indebted developed markets are also at risk, including in the eurozone.”
The number of countries downgraded has started to rise again this year as pressure has increased.
Most of the governments Fitch covers have introduced subsidies or reduced tax breaks to try to cushion the impact of rising inflation. But it comes at a cost.
“While modest fiscal deteriorations may be absorbed by the positive effects that inflation has on government debt dynamics, such effects depend on the maintenance of low interest rates, which are now less certain,” McCormack said.
While commodity exporters will benefit from higher prices, those who must import most of their energy or food will suffer.
Gross external financing needs will be highest this year both in nominal terms and relative to foreign exchange reserves for EM countries that are net importers of goods, McCormack added.
“They now face tighter global funding conditions, and with a record high share of sovereigns rated ‘B’ or below, further defaults are likely.”
The list of countries that are either in default, or whose bond yields in financial markets suggest they will, currently stands at a record 17.
These 17 are Pakistan, Sri Lanka, Zambia, Lebanon, Tunisia, Ghana, Ethiopia, Ukraine, Tajikistan, El Salvador, Suriname, Ecuador, Belize, Argentina, Russia, Belarus and Venezuela.