Sovereign Defaults Drop

The sovereign default rate increased in 2017 with four rated defaults, owing to acombination of materialising contingent liabilities, rising public debt, repayment difficulties stemming from the 2014-16 drop in oil prices, and country-specific political risks, Moody’s Investors Servicedisclosed in its annual default study.

In 2018, Barbados (Caa3) defaulted when it missed an interest payment. At year-end 2017, the one-year default rate was 3.1 per cent, which was four times higher than the average default rate over 1983-2017. The spike followed two decades of a low frequency in sovereign defaults.

Also, in 2017, the average sovereign bond recovery rate was 57 per cent, close to the historical average recovery of 55 per centfor sovereign issuers. However, there was large variability in sovereign recovery rates as they ranged from 18 per cent to 95per cent.

The four Moody’s-rated defaults included: the Republic of the Congo (Caa2 negative), which defaulted on debt issued by a state-owned company, while both Mozambique (Caa3 negative) and Venezuela (C stable) missed interest payments on their government bonds and Belize (B3 stable) initiated a distressed bond exchange.

The sovereign bond default study anticipates three main themes will drive the sovereign credit outlook for 2018-19: a supportive global growth outlook, tightening global financial conditions, and heightened political risks.

“We expect global growth to moderate by the end of 2018 and in 2019 as advanced economies reach full employment, borrowing costs rise, and credit conditions tighten,” Moody’s Associate Managing Director, Elena Duggar, said.

As global financial conditions steadily tighten, it would leave some sovereigns with wider economic imbalances and larger short-term refinancing needs.

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