Sovereign Mid-year 2023 Outlook: Negative Rating Outlook Framed by Slowdown, High Debt, Rising Rates

Download Scope’s Mid-Year Sovereign Outlook.

The challenging economic outlook reflects cost-of-living crises and higher global interest rates. Several positive factors for growth the agency outlined entering the year have crystallised, such as resilient demand and employment, China ending most of its zero-Covid policies, and the energy crisis in Europe being less severe than anticipated, but those factors have been partly offset by downside risks that have also crystallised, such as persistent inflation, more aggressive rate rises and real-estate corrections.

In December, Scope Ratings outlined a neutral balance of overall risk for its 2023 economic expectations.

The updated projections (Figure 1) assume slow growth for this year in the euro area (1.0%), stagnation in the United Kingdom (zero growth), resilient although slowing growth for the United States (1.9%) and recovery in China (5.0%). Euro-area projections assume a 0.1% contraction this year in Germany, alongside growth of 0.7% for France, 1.2% for Italy and 1.8% in Spain.

Next year, the European economy is seen picking up modestly (1.5% growth for the euro area; 0.8% for the UK), counterbalanced by weakening of the US economy (1.3%) and China (4.3%).

Higher-for-longer Inflation Even as Inflation Gradually Recedes

The global slowdown is raising labour-market slack, although unemployment remains near multi-decade lows and continues to exert pressure on prices. The agency’s view has been for higher-for-longer inflation even though inflation is assumed to recede gradually from its peaks. Scope Ratings slightly cut global and euro-area inflation forecasts for this year from its December 2022 estimates but 2024 inflation forecasts have been raised.

Based on prevailing inflation conditions, the agency expects official rates from the Federal Reserve, ECB and Bank of England to be held at coming peaks until late 2024 at least. Tighter monetary policy raises risks of policy mistakes that could facilitate financial instability.

Scope Ratings Maintains a Negative Outlook for Sovereign Ratings This Year

Scope Ratings maintains a negative outlook for sovereign ratings this year. Since the start of the year, negative sovereign rating actions have outweighed positive actions; downside rating actions have accelerated since escalation of the Russia-Ukraine war. Year to date, the agency downgraded the sovereign ratings of China, Czech Republic, Hungary and Poland; and lowered seven countries’ Outlooks: Austria, Estonia, France, Latvia, Lithuania, South Africa, United States. Three sovereigns’ ratings or Outlooks have been revised up: Ireland, Portugal and Ukraine.

Ten sovereign borrowers, or 26% of publicly-rated sovereigns, are rated presently with a Negative Outlook alongside two sovereigns (5% of the sovereign portfolio) rated with a Positive Outlook.

Figure 1. Scope Ratings global economic forecasts, summary

Download Scope Ratings’ Mid-Year 2023 Global Economic Outlook (report).

Download the agency’s global macro projections (Excel).

For a look at all of today’s economic events, check out our economic calendar.

Giacomo Barisone is Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH. Dennis Shen, Senior Director at Scope Ratings, contributed to authoring this commentary.