Published on 14 Aug 2019.
The global growth outlook is dimmer amid unresolved and heightened trade tensions of various large economies. These conditions have prompted a synchronised easing of monetary conditions in many countries – the key interest rates of Malaysia, Thailand, India and South Korea were revised downwards – in recent months. This raises the likelihood of governments adopting a more supportive fiscal policy stance as worsening external conditions are expected to weigh on the growth outlook of the respective countries.
Due to the nature of this downturn, externally oriented economies would likely employ more accommodative policies or delay planned revenue enhancing measures. For instance, South Korea had recently passed legislation to facilitate a budgetary stimulus (0.3% of GDP) and Malaysia had announced a resumption of large-scale transportation projects which had been placed under review. China, meanwhile, has reduced tax rates and stepped up publicly led investments in infrastructure and advanced manufacturing.
An accommodative fiscal stance during a growth downturn does not in itself increase pressure on a country’s sovereign rating, as economic performance is also a factor in our assessment. Avoiding a prolonged economic slowdown or enabling a cyclical recovery would be desirable for long-term fiscal sustainability, in RAM Ratings’ view. In particular, governments should prevent the occurrence of systemic crises (e.g., a widespread banking crisis) and the materialisation of sizeable contingent liabilities which could adversely alter their fiscal trajectories over the long term.
In this respect, the impact of an expansionary fiscal policy on sovereign ratings would be based on the following considerations: (1) the scale of any expanded budgetary deficit vis-à-vis available fiscal space; (2) the timeframe of temporary support policies, particularly if they are fiscally onerous; (3) the effect of these policies in relation to economic growth or known structural imbalances; and (4) any commitment to re-implement postponed revenue measures.
Out of the 21 global-scale ratings assigned by RAM, only one sovereign rating has a negative outlook (Cambodia, gB1(pi)) due to a country-specific risk related to a potential withdrawal of preferential trade access to the EU and US markets. No rating action has yet been taken in regard to economies whose fiscal positions or growth trajectories would likely be affected by escalating global trade frictions.
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