Global credit enters 2025 on a tightrope of risks, resilience

November 26, 2024 (MLN): Global sovereign credit conditions are neutral entering 2025, as only a mild slowdown in world economic growth and further cuts to policy interest rates are balanced against persistent pressures on public finances and elevated geopolitical risks, Fitch Ratings said in its Global Sovereigns Outlook for 2025.

It added that uncertainty over post-election US policies and their impact poses a risk to the outlook. 

The policy agenda of the new US administration will have meaningful implications for the global economic and credit outlook.

"We expect tax cuts, a marked increase in tariffs, particularly on China, and a slowdown in immigration; while foreign policy will become more unpredictable," it reads. 

The impact of tariffs will depend on their scale, coverage, pace of implementation and the extent of any retaliation.

There is a risk of a renewed pick-up in US inflation and a rise in bond yields if there is fiscal loosening in the context of limited labour market spare capacity, lower immigration and an increase in tariffs.

Potential higher US bond yields, appreciation of the US dollar and market volatility are risks for emerging markets.

US tariffs will add to China’s challenges, where we expect further policy stimulus as the authorities seek to boost growth and prevent deflation from becoming entrenched.

The report further noted that the public finances will remain under pressure in 2025 from rising interest costs, demographic trends, defence spending, industrial policies, and social pressures, particularly in developed markets.

Fitch Ratings expect median government debt/GDP to increase to 56.5% end-2025 from 55.4% at end-2024. 

It said that geopolitical risks will remain elevated in 2025 given the wars in Ukraine and the Middle East, US-China strategic rivalry, rising protectionism, social discontent, and potential flux in US foreign policy. 

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