The outlook for sovereign debt is unlikely to improve in 2026, as geopolitical tensions and the trade wars continue to put pressure on government balance sheets, according to a report released by

Morningstar DBRS on Tuesday. “Large fiscal imbalances in a number of advanced economies could leave less space for these governments to respond to future downturns,” the ratings agency warned, noting that there are no positive trends among the sovereign credits it monitors and three with negative trends.

“By way of comparison, at this time last year there were six sovereigns with positive trends, and only one with a negative.”

Morningstar DBRS said it is unlikely that upgrades will outnumber downgrades in 2026 as they did this year.

There were a few less dire items in the report, however, including that 90 per cent of sovereign credit ratings are expected to be unchanged over the next 12 months.

In addition, the analysis noted that while Canada and Germany

adopted looser fiscal stances in their latest budgets , both countries have space for expansionary policy without adverse credit rating implications.

The report said the global economy has weathered the trade policy-induced shock relatively well during 2025, with the most visible impact in the sizeable trade dislocation between the U.S. and China.

The IMF revised global growth expectations upward in its October 2025 World Economic Outlook relative to its projections in April. Moreover, inflation declined further in most advanced and emerging economies and approached central banks’ respective targets, prompting most central banks to maintain or move toward a less restrictive policy stance.

Despite these developments, the ratings agency warned protectionist trade policies in the U.S. could lead to higher average tariff rates and that additional countervailing tariffs were possible if mutually acceptable trade agreements are not met.

“ Global trade policy will likely be a source of continued surprises,” the Morningstar DBRS analysts wrote.

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