The outlook picture for global sovereigns is brightening, supported by economic resilience in the developed world (see table 1), the reopening of China, strong commodities prices, and many emerging markets' ability to start some fiscal consolidation. Indeed, as we enter the second half of 2024, the global balance of outlooks for sovereign ratings (positive minus negative) is 10, in contrast with -8 in June 2023 (see chart 1).

However, it is still early to say how sustainable the positive momentum is. While we observe a stronger improvement across emerging markets, ratings on developed sovereigns are not following the same path and, in some cases, are deteriorating.

In addition, although outlooks are improving, the overall credit quality of sovereigns remains, on average, two notches below the levels before the global financial crisis (see chart 2). The number of sovereigns rated 'AAA' has also declined by roughly 50% since before the global financial crisis, with the U.S., the U.K., France, Spain, Ireland, and Austria no longer rated at that level.

Chart 1

Chart 2

Chart 3

Table 1

Progress on fiscal consolidation continues, though at a slow pace.   So far, evidence shows that primarily frontier sovereigns are moving toward deficits below those before the pandemic. In most cases, they have limited access to market financing, they recently defaulted, or both.

For large emerging market economies and G7 countries, the encouraging news is that deficits are easing this year--after rising in 2023--and we expect they'll continue to decline toward pre-pandemic levels (see chart 4).

Chart 4

While deficits have improved from the pandemic-era peaks, stocks of debt remain higher than before the pandemic, and we do not expect this to change over the next few years.   While inflation helped debt ratios, boosting nominal GDP and revenues, debt accumulation has continued at a strong pace (see chart 5). This heavy debt burden, at a time when the cost of servicing this debt is elevated, remains one of the main risks to our outlook.

Chart 5

Geopolitical risk is at its worst in decades, posing destabilizing threats.  The protracted Russia-Ukraine war presents many uncertainties and risks. In response, European nations are ramping up defense spending, adding a structural long-term burden to an already tight fiscal situation.

In Asia, tensions between China and its neighbors remain high, especially with the Philippines and Taiwan. While fortunately this is nowhere close to the situation in Eastern Europe, any potential escalation would have massive risks.

Lastly, Israel and Hamas remain engaged in a full-on military conflict. This has already dragged in Iran, though so far further escalation has been contained. If any of these conflicts and points of tension deteriorate further, we could quickly see destabilizing effects to the world economy.

2024 is a big elections year globally.  More than 60 sovereigns are holding general elections this year, which presents serious risks of policy swings and uncertainty. So far, we have seen a mix of continuity (Mexico, India, Indonesia, El Salvador, and South Africa) and some important changes, most notably so far in the EU and the U.K.

Lastly, we still have seven sovereigns rated in the 'CCC' category.  This highlights the high risk of more defaults coming in 2025 (see table 2). In addition, five rated sovereign remain in default: Ghana, Lebanon, Sri Lanka, Suriname, and Zambia.

Table 2

Regional Outlooks

European developed markets

We rate 30 developed sovereigns in Europe, including four members of the G7. Despite a series of downgrades since the global financial crisis, Europe remains home to eight 'AAA' rated sovereigns--more than anywhere else in the world. Nevertheless, that figure is down from 15 in 2008, before the onset of the global financial crisis.

Since the start of the global pandemic in early 2020, ratings on smaller European developed economies have, on the whole, improved. Ratings on larger European economies have, on the other hand, deteriorated, including the May 2024 downgrade of France.

A key issue is the fiscal trajectory--specifically in larger European sovereigns where gross debt is close to or above 100% of GDP. Decisions on public finances by new or yet-to-be-formed governments in economies that have seen a large increase in government debt--notably Belgium, France, and the U.K.--will be pertinent to their ratings performance.

On the other hand, some smaller and faster-growing economies that have larger services sectors (especially tourism) and have experienced strong fiscal tightening have seen improvements in credit quality. These sovereigns including Portugal, Cyprus, and Greece.

Emerging EMEA

Sovereigns in emerging EMEA (Europe, the Middle East, and Africa) have had the largest share of positive actions across the sovereigns we rate. As of June 30, 10 sovereigns in this region have positive outlooks, versus only three with negative outlooks. Solid economic performance from strong tourism and service activity as well as robust performance of commodities, particularly hydrocarbons and mining, support the improvement.

In this context, many EMEA sovereigns are posting stronger fiscal outcomes because:

• Net government debt is below 50% of GDP (Bulgaria, Oman, Ras Al Khaimah, Serbia, and Turkiye);
• Underlying budgetary settings are tight or tightening (Cote d'Ivoire, Croatia, Egypt, Montenegro, and Morocco); or
• Both at the same time (Oman, Ras Al Khaimah, and Serbia).

In addition, many of these sovereigns have taken measures to improve the coordination of fiscal and monetary policy, often supported by IMF-sponsored programs.

That said, the average rating level in EMEA is still two notches below the pre-global financial crisis levels. The positive trend in the asset class is more of an indication of recovery than of an improving long-term trajectory.

The persistence of military conflicts and social tensions remains a point of pressure. A potential further deterioration of this is the top risk for this region. This is particularly true for Israel, Kenya, and Ukraine, all three with negative outlooks.

Table 3

Americas

The average sovereign rating in the Americas has returned to close to pre-pandemic levels. The number of positive outlooks is at its highest since 2011.

U.S. and Canada.   Politics remains highly polarized in the U.S. ahead of national elections in November. The Republican party has undergone several years of internal churning and conflict that have gradually resulted in the adoption of new policies and in shifts in its voter base. Although the Democratic party has been more stable, it is undergoing turmoil over its own political leadership, including its presidential candidate. Regardless of the outcome of the 2024 elections, the Democratic party is also likely to gradually shift its policy orientation and its voter base.

The new administration and Congress will face fiscal challenges immediately after the elections. The government's debt ceiling, which was suspended in June of last year, will be reinstated on Jan. 2, 2025. Negotiations to raise the ceiling, or suspend it again, are likely to again involve political brinksmanship.

Although less politically polarized, Canada is like to post GDP growth of only 1.1% in 2024, down from 1.3% in the previous year. We expect continuity in economic policies as Canada approaches national elections due by mid-2025. Canada's two dominant parties, Liberals and Conservatives, are together likely to again receive around two-thirds of the popular vote, as they have for many years.

Latin America and the Caribbean.   We expect moderate GDP growth (despite persistently high global interest rates) and subdued inflation in the major economies of Latin America, such as Brazil, Mexico, Colombia, Chile, and Peru. Sovereign debt burdens across much of the region will remain stable or increase slightly this year, despite the economic growth. Debt burdens remain higher today than they were before the pandemic, including in the U.S. and Canada.

Although GDP now exceeds its pre-pandemic level in most countries, GDP growth remains below pre-pandemic rates in many countries (especially in Colombia and Peru). Real wages have improved in many countries (especially in Chile and Mexico), and unemployment has generally declined to pre-pandemic levels.

We expect policy continuity after recent national elections in Mexico and the Dominican Republic, where the incumbent political party won, as well as in Panama. Similarly, economic policy is likely to be stable in Uruguay after national elections scheduled in October.

Table 4

Asia-Pacific

Strong economic growth prospects will continue to support Asia-Pacific sovereign credit quality. The IMF's economic outlook in July projected emerging and developing Asian growth rates in the next two years well above the global average.

In 2024 and 2025, the larger economies in the region are likely to see growth moderating from the rebound in 2023. Smaller and export-oriented economies, however, should see stronger growth owing to the recovery of exports this year.

The outlooks on most long-term foreign-currency sovereign ratings in the region are stable (18 out of 21 ratings in Asia-Pacific), reflecting sound economic and financial conditions. The stable outlooks suggest there will be few, if any, rating changes in the next year or so. (There is no outlook on Sri Lanka because it is in default.)

Notably, we revised the outlook on the ratings on India to positive in May as the government continues to make progress on infrastructure spending. This is underpinning strong growth amid a material improvement in the quality of fiscal expenses. Moreover, we do not expect the recent parliamentary election results to have a major negative impact on the prospects for fiscal improvements in India. Tax revenue in the country has risen to its highest level in more than 10 years.

Fiscal performance is also a credit concern for China. Government debt issuance in 2024 remains high despite the recovery of consumer activities after the end of pandemic-period movement restrictions.

However, the government continues to provide strong fiscal support for the economy to offset the negative impact of deleveraging in the real estate and local government sectors. Overall favorable financing conditions support the 'A+' sovereign ratings on China, and credible monetary policy settings and large domestic savings help head off immediate pressures on the ratings.

Lastly, geopolitics remain an issue in the region. In particular, these relate to tensions in the Taiwan Strait and the future of the relations with the U.S., even more so after the U.S. holds its general elections in November.

Table 5