Analysts at Swiss Re have warned that the high levels of sovereign debt across emerging markets could impact the outlook for re/insurers in these regions through lower insurance demand and weaker investment returns.
In a new report, Swiss Re Institute notes that emerging markets’ sovereign debt is at the highest level for a century after the unprecedented fiscal stimulus needed overcome the COVID-19 crisis.
The rise in debt weakens sovereign credit ratings as well as heightening economic, political and currency risks, reducing countries’ economic resilience.
And Swiss Re believes that insurance markets in these countries are particularly exposed to lower insurance demand and weaker investment returns if global financial market sentiment turns.
Emerging markets are structurally more vulnerable to debt-oriented risks than advanced ones, and analysts expect emerging market public finances will likely remain weak given low appetite for reducing public spending.
High spending, loss of confidence in a government’s ability to raise revenues and rising public debt can trigger sovereign credit rating downgrades, raising borrowing costs.
Rating downgrades can result in losses in the value of bonds and higher capital charges, which particularly relevant for the insurance industry due to its focus on investing in fixed income securities.
Swiss Re further notes that high debt shrinks governments’ fiscal space to respond to future economic shocks by reducing their ability to borrow to stimulate the economy in recessionary conditions.
The rise in debt in 2020 therefore indicates elevated exposure to both general economic shocks and rising core economy interest rates, as well as a reduced ability to engage in fiscal stimulus.