Uncertain outlook for global economy in 2023 magnifies risks in all sectors – Moody’s Analytics

The uncertain outlook for the economy in 2023 magnifies risks across all sectors, says Moody’s Analytics.

In a report on the global debt themed “A threat to government fiscal stability”, it said a weaker economy with higher inflation and interest rates would jeopardise government fiscal space and revenue sources.

“Household financial conditions could weaken as rising rates make adjustable-rate debt more expensive, jeopardise the value of housing assets and weaken real income growth.

“Corporates could face narrower margins and diminished asset valuations as they face higher costs and weaker demand,” it said.

It said the primary challenge to manage debt in the near term lies within government fiscal policy.

“The ability to manage the high debt loads and the potential for rapid consolidation of fiscal policy in the years ahead point towards lasting friction on the pace of global growth in coming years,” it said.

It said emerging-market economies already struggling with debt repayment faced the highest risk, particularly where revenue generation, foreign exchange holdings and trade balances are at issue.

“Household leverage poses the greatest risk in some emerging markets and particularly in China, where mortgage and consumer debt has risen quickly.

“But less so in the US and Europe, where burdens have fallen in recent years, and in Latin America, where the household credit markets are not fully developed,” it said.

Moody’s Analytics also said that the corporate debt loads raised few alarm bells, except in China, where the rapidly rising corporate debt overlaps with government debt via Local Government Financial Vehicles and state-owned enterprises.

On debt, it said the global debt has yet to significantly fall in any region of the world and it continued to rise in China.

The lingering high debt loads, whether they be in the advanced economies, China or emerging markets around the world, remained the greatest source of pressure on fiscal conditions in the global economy.

“High government debt burdens raise the risk of rapid budget consolidation at the very least and potential default at the worst.

“Indeed, that worst-case scenario played out in Sri Lanka in mid-May when its government could not meet a scheduled debt payment.

“Sri Lanka is an extreme case in which government lowered taxes, raised expenditures and froze the exchange rate, among other policies, all while carrying a high debt burden,” it said.

Moody’s Analytics said the combination of poor governance and high debt loads, at least among emerging-market economies, created risks that could play out elsewhere in the near term.

It said while debt-to-gross domestic product (GDP) ratios in emerging markets are lower than in advanced economies, they have been stickier since the pandemic.

“Since the peak in the first quarter of 2021 at 252.9 per cent of GDP, the aggregate ratio has fallen only about five percentage points to the year-end figure of 247.8 per cent,” it said.

Meanwhile, it said many countries, particularly in emerging markets, still have accommodative fiscal policy baked into their 2022 budgets.

“It is likely, however, that 2023 will be a period of rapid fiscal consolidation as budget deficits are brought back in within long-term targets.

“This will add a headwind to the global economy that is already buffeted by rising inflation, shortages of some food commodities and supply-chain disruptions caused by Russia’s invasion of Ukraine and China’s zero-COVID policy,” it added.