Rapid shifts in foreign policy positions and a more bilateral and transactional US foreign policy may contribute to global geopolitical volatility in the next few years, amplifying uncertainty in geostrategic hotspots, says Fitch Ratings.
Geopolitics has become an increasingly relevant risk for global credit, with rising geostrategic competition between the US and China, the Russian invasion of Ukraine and a willingness by the US to break with historical foreign policies on trade, foreign aid and multilateral co-operation.
Elevated geopolitical risk affects issuers through multiple transmission mechanisms. It has, for example, put upward pressure on defence spending, making fiscal consolidation more challenging for certain sovereigns, while also benefiting aerospace and defence companies. Issuers with greater buffers or rating headroom should be better placed to weather moderately higher geopolitical risk. However, deeper and more pervasive negative rating effects are more likely in the event of severe tail-risk events.
We may capture some quantifiable geopolitical risk for sovereigns in our proprietary Sovereign Rating Model via macroeconomic, fiscal and governance metrics, or notch down sovereign ratings for risks not quantifiably captured by the model using our qualitative overlay framework. Risks may be reflected in further rating actions as they materialise. Geopolitical risks in other sectors, such as corporates and financial institutions, may be captured in operating environment scores, Country Ceilings, direct restrictions via sanctions or impacts on macroeconomic conditions and entity performance and prospects. Meanwhile, we may examine unquantifiable geopolitical event risks that cannot be appropriately captured in current ratings by instead identifying and examining the relevant risks in commentary, including scenario analyses.