NEW YORK — The sovereign default rate increased in 2017 with four rated defaults, owing to a combination of materializing contingent liabilities, rising public debt, repayment difficulties stemming from the 2014-16 drop in oil prices, and country-specific political risks, Moody's Investors Service said in its annual default study titled "Sovereign – Global: Sovereign default and recovery rates,1983-2017".

In 2018, Barbados (Caa3) defaulted when it missed an interest payment.

At year-end 2017, the one-year default rate was 3.1%, which was four times higher than the average default rate over 1983-2017. The spike follows two decades of a low frequency in sovereign defaults.

Also in 2017, the average sovereign bond recovery rate was 57%, close to the historical average recovery of 55% for sovereign issuers. However, there is large variability in sovereign recovery rates as they range from 18% to 95%.

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," said Moody's Associate Managing Director Elena Duggar.

As global financial conditions steadily tighten, it will leave some sovereigns with wider economic imbalances and larger short-term refinancing needs. In particular, emerging and frontier markets,

especially among Middle East and North African (MENA) sovereigns will face increasing debt service costs on elevated public debt levels as interest rates rise.

"The larger share of positive and stable sovereign outlooks as of mid-2018 reflects an improvement in credit fundamentals relative to the previous several years," Duggar said. "When the cycle turns, only the

weakest governments will experience a sharp deterioration in debt sustainability or even default."

Other significant downside risks have been highlighted by the recent reversals in capital flows to emerging markets. A continuation of weaker capital flows and tightening liquidity in emerging markets would lead to shortening of debt maturities. It could further exacerbate difficulties in funding current account deficits and external debt payment obligations for some countries in the event of sustained US dollar strength. — SG