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With voters in 60-plus countries heading to polls in national or local elections this year, the potential ramifications are manifold. In addition to the risk of increased nationalism and associated geopolitical tensions, the outcomes may complicate governments' battle with spiraling debt leverage amid higher-for-longer interest rates.

What We're Watching

This significant number of elections, representing more than half the world's population and nearly as much in global GDP, could prompt governments to increase their already-high debt leverage. As elections approach across developed and emerging economies, incumbent administrations could boost fiscal spending—with outlays targeted to satisfy short-term voter expectations rather than as investment in the country's infrastructure and development, which put fiscal policy at odds with central banks' efforts to contain inflation. This comes amid a broad shift in governments' approaches to spending, facilitated by a period of previously ultra-low interest rates and exacerbated by the spending response to the pandemic, with higher debt levels and looser fiscal policy becoming more acceptable for many policymakers.

Against this backdrop, governments' capacity to respond to economic strife while maintaining their current credit quality continues to weaken. The long stretch of cheap money seen over the past two decades—with central bank policy interest rates at or near zero in many economies—contributed to leaders' loosening national purse strings. But after the extraordinary pandemic-era stimulus further spurred spending and subsequently fueled inflation, central banks' sharp tightening of monetary policy has created a feedback loop with higher-for-longer interest rates that is adding to—and complicating—countries' debt burdens.

With concurrent conflicts in the Middle East and Russia-Ukraine, and amid tensions in the South China Sea, the world is becoming even more fragmented at a time when greater international cooperation is needed to tackle pressing global issues such as climate mitigation and adaptation. The so-called Washington Consensus of policy prescriptions designed to foster market-driven economic expansion (including the liberalization of trade and international finance) has dissolved in the face of the world's rising inequality, the aftermath of the Global Financial Crisis, and the rupture of the business environment between China and the West. Now, isolationism is increasing with populist/nationalist candidates and regimes—who may leverage voter dissatisfaction over roaring costs of living alongside vulnerabilities in access to social infrastructure.

Nonetheless, global economic resilience supports overall sovereign ratings remaining stable, for now—although at relatively lower rating levels than before the pandemic, and even though a record number of sovereigns that have defaulted during or in the aftermath of the pandemic are still struggling to reestablish their market access. The balance of outlooks (positive minus negative) is still negative three, versus negative 13 in December 2022.

What We Think And Why

Geopolitical uncertainty can affect countries' external and domestic dynamics and poses significant threats to macroeconomic stability. Because many sovereigns going to the polls this year have weak fiscal and external balance sheets, their election outcomes could multiply the effects of any radical policy shifts. This also increases the risk of further political and social polarization around the world, which could curtail governments' capacity to make changes in the future.

Governments' approaches to growing debt burdens will become critical in the coming years. While we previously expected a substantial amount of post-pandemic fiscal tightening, countries' deficits (even after decreasing somewhat from 2020) are still significantly higher than in 2018-2019. S&P Global Ratings forecasts global government debt, driven mainly by fiscal policy in mature markets, to remain fairly high, reaching 87% of GDP by 2030. Emerging economies, in particular, have fewer buffers to deal with the surge in borrowing costs than developed markets do. And even in the U.S., the world's biggest economy's net general government debt is approaching 100% of GDP now.

Higher leverage will be detrimental for countries' short-term fiscal and debt outlooks and for their long-term development. For example, we believe most central and eastern European sovereigns (or CEE, which face a two year-heavy election schedule ahead) will find it difficult to meaningfully start reducing their debt after four years of record-high deficits. CEE sovereigns, at the same time, already have some of the higher fiscal deficits seen globally.

What Could Change

Intensifying geopolitical tensions threaten to destabilize the world order. While the implications of short- and long-term geopolitical changes could be felt across all markets, lower-rated sovereigns are exponentially more vulnerable to possible shocks.

For instance, the political and policy uncertainties that often accompany elections could be magnified in Asia this year—posing greater risks for the lower-rated sovereigns like Bangladesh, Mongolia, Pakistan, and Sri Lanka facing elections in 2024. Government finances are still recovering from pandemic- and inflation-related damage. At the same time, weaker exports and increasing capital outflows are weighing on sovereign credit metrics, and policy responses that cushion these effects are often politically unpopular. If oil prices surge and capital outflows intensify (a risk of the worsening of conflicts in the Middle East), fiscal and current account deficits in parts of Asia may increase.

Perhaps the most consequential national election this year will be in the U.S. In addition to a presidential election, 33 of the 100 Senate seats are at stake in regular elections, along with all 435 seats in the House of Representatives—with the outcome likely to have ramifications both at home and abroad.

Globally, given that much of the recent global economic resilience has been underpinned by governments' large expansionary fiscal stimulus, the concomitant rise in debt leverage means policymakers will eventually have to unwind at least some of this support in order to support credit quality. The scaling back of stimulus will likely weigh on demand and dent economic activity. This will be complicated by electorates' increased expectations for looser fiscal policy in challenging macroeconomic conditions.

Uncertainty could beget delays and deferrals in private-sector spending. Companies in economies of all sizes may curb capital expenditures as they take a wait-and-see approach to electoral and policy outcomes. Households, too, could look to save, thus weighing on economies broadly and especially on sectors and industries that depend most on discretionary consumer spending.

Writers: Molly Mintz and Joe Maguire