The outlook for sovereign creditworthiness in 2018 is stable overall, with the healthy growth and synchronized global economic expansion of 2017 likely to continue into 2018, said Moody's Investors Service in a new report.

"The benign state of the global sovereign credit environment is reflected in the fact that almost three-quarters of Moody's-rated sovereigns currently hold a stable rating outlook, while the increasingly solid momentum in growth balances against the continuing risks from high debt levels as well as from elevated geopolitical tensions," said Alastair Wilson, Moody's managing director for Global Sovereigns.

Moody's conclusions are contained in its just-released "Sovereigns --Global: 2018 outlook stable as healthy growth tempers high debt, geopolitical tensions". The stable outlook reflects Moody's expectations for the fundamental credit conditions that will drive sovereign credit over the next 12-18 months.

In line with the credit environment that Moody's foresees for sovereigns in 2018, 102 (74 per cent) of the 137 Moody's-rated sovereigns have a stable outlook, and a further 13 (10 per cent) hold a positive outlook. Only 22 (16 per cent) sovereigns have a negative outlook compared with 35 (26 per cent) a year ago, pointing to the likelihood of fewer downward rating adjustments in 2018 compared with 2017.

"The macroeconomic environment for sovereigns is more favourable than it was a year ago," says Wilson. "Moody's expects global GDP growth in 2018 to remain over 3 per cent in 2018, similar to 2017. That benign economic backdrop allows governments a longer window in which to carry out economic and fiscal reforms."

Unusually low inflation levels across both the advanced economies and many emerging markets will keep the pace of the normalization in monetary policy gradual. Moody's does not believe that the normalization process poses a broad threat to sovereign credit.

However, Moody's report cites a number of challenges that forestall a greater improvement in global credit conditions despite the favourable global macroeconomic environment.

One is that domestic political uncertainty and social tensions weaken the commitment to economic and fiscal reform. There is progress on this front, with ongoing labour market reforms in a number of European countries as well as in Japan (A1 stable), albeit at a slow pace.

Elsewhere, sovereigns including Saudi Arabia (A1 stable), the United Arab Emirates (Aa2 stable), the Philippines (Baa2 stable) and India (Baa3 positive) are implementing measures aimed at increasing fiscal space.

However, political and social considerations remain an obstacle to rapid reforms, particularly in countries such as Brazil (Ba2 negative), South Africa (Baa3 negative) and Turkey (Ba1 negative). And while a number of European governments have implemented reforms of pension systems to postpone retirement ages, reduce benefits and/or raise contributions, much less has been done to address the forthcoming sharp increase in healthcare costs.

Overall, slow progress on reforms leaves many sovereigns more vulnerable to a deterioration in their credit profiles in the event of a shock.

A further challenge is that public debt levels will also remain high, although at generally stable levels. This is because governments are likely to calibrate fiscal consolidation so as not to unsettle the ongoing economic recovery. As a result, Moody's expects nearly half of all sovereigns' debt burdens to remain within one percentage point of the level recorded in 2017.

"While benign economic conditions lower the risk posed by high debt levels, few sovereigns have much, if any, fiscal space to respond to shocks," said Wilson.

The third challenge is that heightened geopolitical risks have a higher profile than in recent years and could potentially undermine the stable outlook for sovereign credit. The probability of a military conflict in the Korean peninsula has risen, and tensions have escalated in the GCC region, said Moody’s.

The trade policies of the US (Aaa stable) continue to pose a risk to growth, particularly for its closest trading partners. And while anti-consensus political movements have not gained the electoral the traction in western Europe that was feared at the start of the year, the potential for destabilizing political events remains, as illustrated by the ongoing tensions between Spain (Baa2 stable) and Catalunya (Ba3 negative). – TradeArabia News Service