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Fitch: Recovery Taking Hold but Risks to Global Sovereign Outlook Remain

Fitch Ratings-London-12 December 2013: Fitch Ratings says in its 2014 Outlook report for global sovereigns that a gradual, broad-based economic recovery is taking hold, supporting a more positive macro-economic outlook. However, despite an easing of downward pressure on developed market (DM) sovereigns, a number of key risks remain for sovereign creditworthiness and ratings.

Although the eurozone crisis has eased, we expect the recovery in the region to be weak, constrained by high public debt levels, the risk of stalling reform and policy momentum and concerns over deflation. The ratings of five eurozone sovereigns remain on Negative Outlook, but Fitch expects most ratings in the region to be unchanged in 2014.

The US fiscal crisis is unresolved, although the announcement of an agreement on 2014 and 2015 spending levels by the Co-Chairs of the Congressional Budgetary Committee is a positive first step. This agreement, still to be approved by Congress, is a sign of improved bi-partisanship political and budget policy functionality in Washington that reduces the risk of a further government shutdown or debt ceiling crisis.

The US debt ceiling suspension in October was only a short-term fix until 7 February 2014, when the debt ceiling will need to be raised again. A repeat episode of political brinkmanship would create uncertainty and could damage US growth prospects, with a knock-on effect on the global economy. Fitch will aim to resolve its Rating Watch Negative (RWN) on the US sovereign rating in 1Q14, although the timing will depend on the resolution of the FY2014 budget and debt ceiling.

The impact of the tapering of the US Federal Reserve's quantitative easing programme is uncertain, although Fitch expects tapering to have a similar but more muted effect on global financial markets than the false start in mid-2013. Emerging markets (EMs) that attract sizeable portfolio flows - and are viewed as more risky, due to higher fiscal and/or external imbalances - are likely to experience more disruption, with possible equity, bond market and currency adjustments. DM interest rates may be affected but our base case is that sovereign ratings will not be.

China's ability to transform its economy away from investment-driven growth will be critical for its own credit profile and as a driver of EM growth. The longer that investment and leverage remain on an unsustainable path, the greater the eventual costs of fixing the problem - costs that Fitch expects would fall partly on the sovereign, with potential negative rating implications. However, early signs from the policy debate after the Third Plenum suggest that the authorities are serious about rebalancing.

The downward pressure on DM sovereign ratings is easing. Following the 2013 downgrades of the UK and France, and the stabilisation of their Outlooks, the ratio of Stable to Negative Outlooks for DM sovereigns - at 3.5:1 - has improved during the past 12 months, compared with 2:1 at December 2012.

Conversely, the mix of EM sovereign upgrades and downgrades in 2013 reflected a balanced picture, with downgrades outnumbering upgrades by 11 to ten; in 2012 the equivalent totals were two and six. These rating actions, and the 2:1 ratio of Negative/Positive Outlooks, underline that EM sovereign credit quality is not a one-way bet.

Fitch expects that world growth will accelerate in 2014 and 2015, driven by a more robust recovery in major advanced economies (MAE), while EM growth rates will improve only modestly. Our latest forecasts for world GDP growth, weighted at market exchange rates, are 2.3% in 2013, firming to 2.9% in 2014 and 3.2% in 2015.

The report, '2014 Outlook: Global Sovereigns' is available at www.fitchratings.com or by clicking the link above.

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Mardi 17 Décembre 2013

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