Fitch warns that the global sovereign debt outlook is deteriorating, and emerging markets are facing a dual squeeze

Fitch Ratings has sent a troubling signal to the market—downgrading the global sovereign debt outlook for 2025 from "neutral" to "negative."

On June 10, Fitch Ratings released its mid-year outlook, downgrading the global sovereign debt rating outlook for 2025 from "neutral" to "negative." It is expected that global GDP growth will slow from 2.9% in 2024 to 2% in 2025. The core driver of this adjustment is the escalating global trade war and the resulting extreme policy uncertainty.

Fitch's report bluntly characterizes the current situation as a "significant adverse global economic shock." The uncertainty surrounding tariff endpoints, the impact on global trade volumes and supply chains, the deteriorating investment environment, and strained international relations are creating a mutually reinforcing vicious cycle. This accumulation of multiple uncertainties may expose investors to a more complex market environment than the trade frictions of 2018.

More dangerously, this series of chain reactions is pushing the Federal Reserve to a crossroads in policy. The specific impact and timing of tariffs on prices and economic activity are full of unknowns, which directly leads to the Federal Reserve's interest rate path becoming unclear, greatly increasing the volatility risk in the financing environment.

A Tale of Two Markets: Struggling Global Markets

For major oil-exporting countries, the situation will become particularly difficult.

Fitch predicts that Brent crude oil prices will drop from $79.5 per barrel in 2024 to $65 in 2025, which will put immense pressure on the economies and finances of these countries.

To make matters worse, the U.S. move to cut international aid will expose some already fragile emerging markets to additional risks.

However, the report points out that the trend of dollar depreciation will become a "lifeline" for some emerging markets.

For countries burdened with high dollar-denominated debt, a weaker dollar can effectively reduce their debt repayment burden. More importantly, this provides their central banks with valuable policy space, allowing them to cut interest rates more quickly to stimulate their domestic economies.

High Debt and Geopolitical Shadows

In addition to the imminent trade risks, the structural scars of the global economy remain alarming.

Fitch warns that public finances in various countries will continue to be under pressure in 2025, especially in developed markets. The reasons behind this are complex: rising defense spending, increasingly heavy interest costs in a high-interest-rate environment, severe demographic aging trends, weak economic growth, and ongoing social pressures are all collectively squeezing the fiscal space of governments.

Data shows that the median global government debt as a percentage of GDP is expected to rise slightly from 54.1% at the end of 2024 to 54.5% at the end of 2025, indicating that the debt burden is still increasing.

There are no signs that geopolitical risks are diminishing.

The report notes that the fires of war in Ukraine and the Middle East are still burning, U.S.-China strategic competition is intensifying, trade tensions and social discontent are rising, and the "flux in U.S. foreign policy" is adding new variables to an already chaotic situation

The Rating Picture Is Not Entirely Pessimistic

Despite facing numerous challenges, Fitch's rating outlook remains close to balanced by mid-2025, with 13 countries receiving a positive outlook, slightly higher than the 10 countries with a negative outlook.

A key detail is that a series of rating downgrades since 2020 has created "headroom" for the current ratings of some countries, allowing them to have stronger resilience when facing deteriorating credit conditions.

However, whether this "technical buffer" can withstand the upcoming stress tests remains in question.

Ultimately, policy responses will be a key variable in determining the direction of ratings. In some cases, timely and effective policy interventions may still support sovereign credit and prevent it from sliding into a deeper quagmire