Moody’s Investor Services recently updated their 2020 sovereign outlook. They wrote that a disruptive and unpredictable domestic political and geopolitical environment is exacerbating the gradual slowdown in trend GDP growth, aggravating long-standing structural bottlenecks and increasing the risk of economic or financial shocks. No surprise that they suggest the starkest manifestation of geopolitical tensions results from the standoff between the US and China.
However, from a trade and / or political perspective let’s not forget the wider picture, with Japan vs Korea, India vs Pakistan, the Middle East, EU vs the UK and the US vs EU all leading to a potentially lower growth cycle too.
Away from that hot topic, in Europe & Central Asia they highlight Turkeys’ (B1) fall from grace (they were rated investment grade only 3 years ago) while Russia (Baa3) was upgraded back into investment grade given its strengthened fiscal strength earlier in the year.
In Asia Pacific they changed the outlook on Hong Kong (Aa2) to negative to reflect the rising risks associated with the ongoing protests, and India (Baa2) as a lower economic growth path is feared.
Sovereigns in the Middle East and Africa recorded the majority of the negative rating actions in 2019 with South Africa (Baa3), Oman (Ba1), and Lebanon (Caa2) all affected.
In Latin America, Moody’s highlights that increased social demands against a backdrop of slowing growth and high income inequality are constraining policymakers' room to adopt reforms and fiscal measures to support growth and public finances. Chile (A1, stable) and Ecuador (B3, negative) have seen waves of protests. In Argentina, the default triggered by the surge in support for the victorious populist candidate has laid bare once again the weakness of the country’s policymaking institutions.
Demographics will also continue to play a major role in all economies going forward.
Interestingly, for those economies embedded in global supply chains that rely on trade for growth, Moody’s state that those with large current account deficits and most reliant on external capital (“NFA” anyone?), are most exposed to financing shocks. They highlight Turkey and to a lesser extent, Indonesia and South Africa as more open to a shock. In the case of the first two nations, not only do these countries face growth and credit risk headwinds, they also screen as expensive on our Relative Value Model as long dated Turkey trades nearly 2 credit notches expensive with Indonesia not that far off. After a near 10-point decline in price, South Africa now only trades close to “fair value”; we are not buyers of that name with better risk adjusted opportunities available to us in our view.