Despite record government debt levels, the outlook for sovereign credit conditions in 2022 is brightening, says Fitch Ratings.
In a new report, the rating agency said that global government debt is forecast to reach US$91 trillion by the end of 2022, representing about 92% of global GDP — and a record high.
Additionally, median debt to GDP ratios for both developed markets and emerging markets are projected to reach new highs in 2022.
Yet, those increases are “marginal” from 2021 levels, Fitch noted.
Moreover, the agency said that sovereign credit conditions will improve in 2022, “with fiscal balances forecast to strengthen for nearly 90% of rated sovereigns.”
“Economic recoveries remain subject to Covid-19 setbacks, but are becoming more entrenched, allowing for a tightening of policy as some support measures are unwound,” Fitch said.
While negative rating outlooks continue to heavily outnumber positive outlooks, the trend is improving.
That’s expected to continue in 2022, Fitch said, with an “ongoing gradual reduction in the number of negative outlooks in 2022, and the share of those reverting to stable may rise as the fiscal and economic effects of the pandemic recede.”
One challenge to the brighter outlook is elevated inflation, which is likely to drive higher interest rates in the year ahead.
“To the extent this raises governments’ interest service burdens, debt dynamics could be affected unfavourably,” Fitch said.
“The overall impact on debt trajectories depends on the comparative strength of nominal GDP growth as well as primary balance positions,” it added.
Rising rates may prove more of an issue in emerging markets, the report suggested.
In developed markets, governments “continue to face very low effective (or average) interest rates on their overall debt stocks, but interest service burdens have been rising steadily for [emerging market] sovereigns, commensurate with rising debt levels for several years,” Fitch said.