KUALA LUMPUR (Nov 15): The outlook for sovereign creditworthiness in 2023 is negative, according to Moody’s Investors Service.

In a report on Monday (Nov 14), the firm said that although inflation will start declining, prices of food and energy will remain high, curbing economic growth and raising social tensions.

It said the ability of governments to effectively respond to growing demands will vary, depending on their fiscal and institutional capacity. At the same time, tighter financial conditions and economic scarring will push some debt burdens to unsustainable levels, while rising borrowing costs will erode debt affordability.

Moody’s said default risks in these tough conditions are most elevated for frontier-market sovereigns that need to borrow large sums in 2023, which have low foreign-currency reserves coverage of their imports and debt financing needs.

Risks to the baseline forecasts are also high, stemming from a potentially prolonged slowdown in China (A1 stable), a more extended energy crisis in Europe, further escalation of the Russia-Ukraine (Caa3 negative) military conflict, a longer period of aggressive monetary tightening in the US (Aaa stable), and deteriorating China-US relations.

Moody’s said credit-positive trends will be most evident for commodity producers — especially energy exporters — who will benefit from higher prices, while some other governments will also stand out for their broad resilience to the latest round of shocks.

The firm said global inflation-adjusted real gross domestic product growth will slow to 1.7% in 2023, from 3.0% in 2022, as higher prices and tighter monetary policy hurt consumer spending, investment and wider economic sentiment.

It said those sovereigns that have not fully returned to their pre-pandemic output, or those that show signs of deeper economic scarring, are most vulnerable to sustained weakening in growth potential and, in turn, their debt sustainability.

Moody’s said Asia will outperform other regions with a higher growth in China (4.0%) than in 2022, given a gradual rebound in consumption, sustained public infrastructure spending, and a broader recovery in the services sector.

However, it said China's growth will remain subdued by historical standards.

It said additional stress in the property sector is a key source of risk.

“Elsewhere, we forecast large Asian economies such as India (Baa3 stable), Indonesia (Baa2 stable), Malaysia (A3 stable), the Philippines (Baa2 stable), and Thailand (Baa1 stable) to grow at or in excess of 4.5%, as domestic consumption, investment and tourism return to normal.

“Japan (A1 stable) and South Korea (Aa2 stable) are among the world's largest liquefied natural gas importers, and high energy prices will keep inflation elevated, with tighter monetary policy in the latter, and slowing global demand dampening output,” it said.