The emergence of the coronavirus and its uncertain impact on China’s economy is clouding what had been an improving outlook for global sovereign ratings, says DBRS Ltd. in a new report.
The outlook was brightening coming into 2020 as global trade tensions diminished and fears of a slowing global economy receded. But “the coronavirus has put a damper on this positive outlook,” DBRS said.
The outbreak, which originated in China, has sparked uncertainty about the impact on the world’s economy, DBRS noted. Additionally, some of the downside risks that loomed last year may resurface, further weighing on momentum, according to the report.
“Political and policy events, including negotiations around a UK-EU trade deal and the November U.S. elections, may continue to generate some uncertainty and adverse surprises,” the report read. “Trade tensions and investment disputes between the U.S. and China could also heat up again.”
The report added that “geopolitical conflicts could escalate and lead to commodity price shocks or other significant shifts in capital flows, posing significant challenges to vulnerable emerging markets.”
Most advanced economies are currently in a stronger position to weather oil price shocks than they have been recently, DBRS noted.
“Canada, the UK and U.S. would be affected, but negative effects on consumption would be offset by positive impact on energy producers,” the rating agency said. “Japan and Europe are in a relatively weaker position.”
While the outlook for sovereign ratings will be determined partly by the evolution of these risks, DBRS said that governments’ efforts to strengthen their balance sheets will also play a big part. For instance, recent positive rating action in Europe reflects progress in reducing deficits and debt burdens, DBRS said.
“Slowing economic growth would make further progress on fiscal and structural reforms more difficult to achieve,” the rating agency said.
There’s also limited room for monetary policy to help address the development of downside risks, but DBRS said that the “United States, Canada and the UK have some room to cut rates, if the adverse effects last longer than expected or if other shocks emerge.”