KUALA LUMPUR: The outlook for global credit conditions this year has turned more negative amid slower global growth, Moody's Investors Service said.

This was aggravated by the rising borrowing costs, surging prices for energy and commodities, supply-chain disruption and increased financial market volatility, Moody's added.

Moody's credit strategy managing director Elena H Duggar said the surge in energy and food costs spurred by the invasion of Ukraine was weakening the purchasing power of households, raising input costs for companies and dampening investor sentiment.

"Among sovereign debt issuers, debt sustainability will be especially challenging for many frontier market sovereigns as their borrowing costs climb while their economies still have not fully recovered from the pandemic crisis," she said. 

Still, Moody's said, credit fundamentals remained generally healthy for higher-rated debt issuers, as credit metrics recovered in 2021 and as liquidity remained strong overall. 

However, for speculative-grade issuers with low free cash flow and a high portion of the floating-rate debt, debt affordability, liquidity and refinancing risks were rising.

Moody's said as central banks started to raise interest rates in response to high inflation, financial market conditions were tightening across continents. 

"Moody's proprietary regional Financial Condition Indicators —composite measures of financial and economic activity — show a steady tightening of financial conditions since February. 

"Currently, financial conditions across the US, UK, euro area and emerging markets were less favourable than historical averages. Financial conditions will continue to tighten as interest rates climb," it added.

Moody's said downside risks to economic growth were unusually high, as there were numerous developments that could result in a further dampening of the macro outlook. 

Some central banks could be forced to tighten monetary policy further so as to engineer a recession if enduring supply shocks keot inflation from falling. 

"Central banks that are tepid in their response to inflationary pressures could face the prospects of an unanchoring of inflation expectations that result in a wage-price spiral and potentially a stagnant economy.

"Other risks include the possibility of commodity prices jumping even higher, longer-lasting supply-chain disruptions, a larger-than-expected slowdown of China's economy, and new, more dangerous strains of Covid-19 that lead to a renewed health emergency and restrictions on mobility and activity. 

"This unusually high uncertainty will translate into volatile energy prices and financial markets over the next six to eight months," it said.