May 19, 2022 (MLN): The global fiscal recovery in 2021 that followed the Covid-19 shock of 2020 has slowed sharply, affected by higher commodity prices, rising inflation more generally, increased borrowing costs, slowing real GDP growth and the war in Ukraine, says Fitch Ratings.
In its latest report, the rating agency said that higher inflation accompanied by slowing economic growth does not represent the same policy dilemma to the fiscal authorities as it does to central banks.
In its March Global Economic Outlook, Fitch highlighted the pick-up in US services inflation and rising wage inflation. Additionally, there is a
growing risk of inflation expectations becoming unanchored from the Federal Reserve’s 2% inflation target. These considerations speak to the possibility of higher inflation lasting for an extended period.
Monetary policy is typically associated with the official sector’s response to higher inflation, but there is also fiscal policy to consider. As of March, 66 of 120 Fitch-rated sovereigns have already introduced fiscal support measures to help households and businesses cope with accelerating prices, and more such policies are expected if prices remain elevated.
“With inflation continuing to exceed expectations in many countries, we expect additional fiscal measures to be introduced and the fiscal burden of inflation to grow.”
The rating agency noted that Policy interest rates are rising, and this marks an end to the era of very low government borrowing costs, which have primarily benefitted developed-market sovereigns.
“Even so, it is real interest rates that matter for growth, and real rates relative to real GDP growth that matter for government debt dynamics. Long debt maturities imply rising interest-service burdens will materialize only gradually,” Fitch said.
The rating agency stated that emerging-market fiscal positions are more divergent than they were pre-pandemic. This is due in part to the surge in commodity prices that is supporting government revenue and nominal GDP growth in commodity-exporting regions, including the Gulf Cooperation Council and Latin America.
With greater fiscal divergence has come greater rating divergence. The number of sovereigns rated ‘CCC’ or lower has been at or near a historical high since late-2020.
Current global credit conditions and those expected by Fitch for the next year suggest continued fiscal and rating stresses ahead, it added.
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