HONG KONG
Numerous governments have introduced measures to cushion the impact of rising prices on households since mid-2021, and the effects of the Russia-Ukraine conflict on commodity markets suggest more such moves are likely.
Many sovereigns should be able to absorb the impact of temporary measures on public finances, but some will find these policies hard to roll back, resulting in lasting effects that could weigh on sovereign credit profiles, said Fitch Ratings in its report “Anti-Inflation Measures Add to Fiscal Risks”on Monday.
The rating agency said that between mid-2021 and mid-February 2022, 66 of 120 Fitch-rated sovereigns deployed ad hoc policies, such as subsidies, tax cuts, price controls and grants to counter inflation, in addition to the usual monetary policy toolkit. This includes almost all Fitch-rated sovereigns in emerging Europe and almost two-thirds in western Europe.
However, such measures have been adopted less frequently in Asia, where inflationary pressure has generally been weaker, and Latin America.
Fitch believes that if measures are removed within a year or two, they are unlikely in most cases to be sufficient in scale to drive sovereign rating adjustments directly. However, they may slow the process of fiscal consolidation in the wake of the Covid-19 pandemic shock, which is a key rating sensitivity for many sovereigns.
If temporary policies become entrenched, they may have a more significant impact on public finances. This risk is significant as global commodity prices may stay high for longer than we had anticipated. The Russia-Ukraine conflict has added to upward pressure on energy prices, particularly in Europe.
The governments may also be unwilling to risk the political repercussions of removing subsidies. Events in Kazakhstan, where fuel-price liberalisation fed into widespread social unrest and violence in January 2022, are an extreme example, but few governments find it easy to remove popular subsidies.
