Executive Summary
Our outlook for sovereign credit fundamentals in 2025 is stable. Growth is steadying and financing conditions look more certain. But governments will face hurdles to achieve ambitious economic agendas and reduce debt given geopolitical tensions, rigid budgets and high social risks. Tail risks will persist.
» Governments' policy focus shifts to longer-term objectives as economic growth stabilises. Growth will settle close to pre-pandemic rates, assuming no significant increase in trade tensions and protectionist policy actions. But government policies do not always match election growth promises. Higher interest rates and political economy considerations will limit efforts to raise living standards, including through government intervention.
» Credit conditions have stabilised thanks to gradual debt deleveraging, but room to respond to shocks is limited. Stable economic growth will help governments maintain or even slightly cut debt, with exceptions like the US (Aaa negative) where policy may become more expansionary under the new administration. Extra spending on non-discretionary items will make budgets more rigid. Most savings will come from capital expenditure, limiting the effectiveness of productivity-boosting measures.
» Interconnected geopolitical, social and environmental risks complicate policy strategies and expose sovereigns to tail shocks. A widening of the war in Ukraine (Ca stable) or the Middle East conflict could have significant credit repercussions, including rising commodity prices and broad increases in security risks. Increased competition between the US and China (A1 negative) will cause trade tensions and possibly more tit-for-tat protectionism. Low youth employment and persistent income inequality will spark social tensions, with credit implications for sovereigns less able to respond effectively.
» Liquidity risk will remain high for frontier markets with limited buffers. Monetary policy easing will support appetite for emerging-market (EM) sovereign debt. But low-rated frontier markets will still struggle to access debt at affordable cost, relying on financing from development partners. They will continue to face liquidity challenges in 2025 with potential new debt repayment defaults.
» What could change the outlook. We would change the outlook to negative if growth slowed significantly and/or fiscal positions did not consolidate. Materialising geopolitical tail risks, including a sharper-than-expected rise in trade tensions, could trigger a negative outlook. Better-than-expected economic prospects and/or greater ability to narrow deficits and reduce debt would change the outlook to positive. Durable easing of geopolitical tensions would also be positive.
CREDIT CONDITIONS - GLOBAL