The uncertain outlook for the economy in 2023 amplifies risks across all sectors, according to Moody’s Analytics.
In a report on global debt titled “A Threat to Government Fiscal Stability”, he said a weaker economy with higher inflation and higher interest rates would jeopardize fiscal space and sources of government revenue.
“The financial situation of households could weaken, as rising rates make variable-rate debt more expensive, hurt the value of real estate assets and weaken real income growth.
“Companies could face tighter margins and lower asset valuations as they face higher costs and weaker demand,” he said.
He said the main challenge in managing short-term debt lies in the government’s fiscal policy.
“The ability to manage heavy debt loads and the potential for rapid consolidation of fiscal policy in the years ahead point to lasting frictions on the pace of global growth in the years ahead,” he said.
He said emerging market economies already grappling with debt repayment faced the greatest risk, particularly when income generation, currency holdings and trade balances are at stake.
“Household debt poses the greatest risk in some emerging markets and particularly in China, where mortgage debt and consumer debt have been rising rapidly.
“But less so in the United States and Europe, where charges have fallen in recent years, and in Latin America, where household credit markets are not fully developed,” he said.
Moody’s Analytics also said corporate indebtedness has raised few alarm bells except in China, where rapidly rising corporate debt is overlapping public debt through local government financial vehicles and state-owned enterprises.
Regarding debt, he said that global debt has not yet declined significantly in any region of the world and continues to rise in China.
Persistently heavy indebtedness, whether in advanced economies, China or emerging markets around the world, remained the main source of pressure on fiscal conditions in the global economy.
“The high public debt burden increases at least the risk of a rapid fiscal consolidation and, at worst, of a possible default.
“Indeed, this worst-case scenario occurred in Sri Lanka in mid-May, when its government failed to honor a scheduled debt payment.
“Sri Lanka is an extreme case where the government has cut taxes, increased spending and frozen the exchange rate, among other policies, while carrying a heavy debt burden,” he said.
Moody’s Analytics said the combination of poor governance and high debt, at least among emerging market economies, created risks that could manifest elsewhere in the near term.
He said while debt-to-gross domestic product (GDP) ratios in emerging markets are lower than those in advanced economies, they have been more rigid since the pandemic.
“Since the peak in the first quarter of 2021 at 252.9% of GDP, the aggregate ratio has only declined by about five percentage points to reach the year-end figure of 247.8%,” he said. -he declares.
Meanwhile, he said many countries, especially in emerging markets, still have accommodative fiscal policy built into their 2022 budgets.
“It is likely, however, that 2023 will be a period of rapid fiscal consolidation as fiscal deficits are brought back within long-term targets.
“It will add a headwind to the global economy which is already rocked by rising inflation, shortages of some food items and supply chain disruptions caused by Russia’s invasion of Ukraine. and China’s zero Covid policy,” he added.
Source: The Edge