Dagong Global Credit Rating Co., Ltd.
January 16, 2016
Dagong Global Credit Rating Co., Ltd. (“Dagong”) today released its Global Sovereign Credit Outlook for 2017. This report analyses the development and prospects of sovereign credit risks around the globe in 2017 as impacted by the United States’ accelerated interest rate increases and China’s deepening economic transition. It marks the seventh time that Dagong has released its Global Sovereign Credit Outlook since 2010.
The US’s accelerated interest rate increase and China’s deepening economic transition are two main factors influencing the development of the global sovereign crisis in 2017. Against the backdrop of China’s economic transition, the Federal Reserve’s interest rate hikes, increasing trade barriers and each countries' own weakened resilience in 2017, the sovereign credit risks in emerging markets and developing countries will rise rapidly, and the breakout of debt crises in Latin America, Central Asia and some African countries will increase in likelihood. While the sovereign credit crises faced by highly-indebted countries continue to accumulate, increasingly varying features are manifested amongst them: Germany and Ireland will see their debt burdens diminish in response to effective fiscal consolidation; the US’ return to fiscal expansion will drive its already high federal debt burden to increase even further; government solvency may deteriorate in Japan, Italy, France and a few other countries.
The development of global sovereign credit risks in 2017 demonstrates the following trends:
1. Since the US has recommenced fiscal expansion, the already high federal debt burden will rise to an even higher degree, and the government will continue to utilize monetary easing in order to sustain its sovereign credit strength.
In the medium-term, the widening fiscal deficit and weakening fiscal balancing capacity of the US government will maintain the federal government debt upon an upward track. While the country's fixed fiscal expenditures such as interest payments and pension funds are increasing, and heated political competition between domestic parties has eroded the political foundation of fiscal consolidation, it becomes highly uncertain whether Trump’s administration will repeal Obamacare and strengthen fiscal austerity. Further considering that massive tax cuts provided for corporations and individuals will additionally limit growth in fiscal revenues, the federal fiscal deficit is expected to continue to expand in the medium term. The federal government’s debt burden is anticipated to reach 105.4% of GDP in 2017, and rise steadily to 111.2% in 2021. Although the Federal Reserve is expected to hike up the interest rate two times by 50 base points in 2017, it will adopt a cautious attitude throughout this process due to a high debt burden. Therefore, in the medium-term, the federal funds rate will remain at a historically low level, and the US will continue to employ monetary easing to sustain its credit strength.
2. In the medium term, China’s general government debt burden will continue to increase, although improvement in national strength will support its sovereign credit profile.
To make material progress in its supply-side reform, the Chinese government has implemented proactive fiscal policies which will drive China’s government debt to increase rapidly in the medium term. Throughout 2017-2019, China’s structural reform will further be deepened. Now that China's central bank is adopting an increasingly prudent attitude towards monetary policies, the government will employ fiscal policies mainly as “economic stabilizers” and “reform propulsion” in order to create favorable conditions for reform amongst key sectors. It is estimated that China’s general government debt will rise to 49.1% of GDP in 2017, and rise further to 54.8% in 2020.
China’s improved fiscal efficiency and national strength will stabilize its government solvency. Over the coming years, China’s fiscal policies will be increasingly focused on improving people’s livelihood and establishing a social security network, which will improve the resilience of the Chinese economy. The local-government debt swamp and increasingly stringent debt management will create fiscal space for structural reform in the medium-term. Over the long run, with adjustments to its economic structure completed, China’s fiscal policy will gradually turn prudently neutral, and its improved national strength will shore up China’s sovereign credit strength.
3. The unfavorable external environment and vulnerability of specific countries will elevate the sovereign credit risks faced by emerging markets and developing economies. The space available for structural reform will be further constricted.
In 2017, China’s deepening supply-side reform and the US’ rate rise will influence international trade and capital flows, thereby exerting pressure upon emerging markets and developing countries. Due to China’s de-capacity, the US’ increasing shale oil production and strengthening US dollar, commodity prices will fluctuate and slowly come to increase from a low level. The economy, as well as government finances of exporters of energy and base minerals, will bear some pressure, thus threatening their sovereign credit strength. For exporters of other commodities, China’s economic transition and rising trade protectionism across the globe will make them increasingly reliant upon fiscal policies. Some emerging market economies, due to their yet-to-be-resolved property bubble and external debt risks in 2016, will face additional pressures from capital outflows, lowering asset prices, and rising costs of external financing in 2017. On behalf of their decreasing fiscal and foreign exchange resilience, emerging markets and developing countries will see their sovereign credit risks increasing sharply, while those in Latin America, Africa and Central Asia will face the risk of a possible debt crisis breakout.
4. With a high sovereign debt level, euro-zone countries and Japan will continue to rely upon extremely accommodative monetary policies to sustain government solvency.
Euro-zone countries will maintain high sovereign debt levels in 2017, despite manifesting varying features. The United Kingdom’s exit from the European Union and its rising political alienation will increase uncertainty within the euro-zone economy and thereby weaken the momentum for member countries to implement economic and fiscal reform. It is estimated that the general government fiscal deficit of the euro zone will decrease slightly to 2.6% in 2017, while the general government debt will remain above 90%. France and Italy will face high government debt levels due to sluggish structural reform, insufficient momentum for fiscal consolidation, and outstanding banking or contingent liability risks.
Japan’s increasing reliance upon fiscal expansion for economic growth will force its government debt to hover at a high level. Considering its aging population, dualisation of the labor market, the hollowing-out of various industries, and other impending issues continuing to constrain Japan’s economic growth momentum, the country's fiscal expansion-driven economic growth model will continue to exert pressure upon public finances. Therefore, Japan's general government fiscal deficit is estimated to reach 5.3%, while its debt burden will increase to 253.6% of GDP. The Japanese government will be more dependent upon monetizing debt in order to prevent the sovereign credit bubble from bursting, and so its sovereign credit strength will face great challenges.