Ratings agency Fitch on Thursday lowered its outlook on sovereign debt due to concerns about global rate hikes and the likelihood of new defaults.

Fitch, which tracks more than 100 countries, said the conflict between Ukraine and Russia has exacerbated issues such as higher inflation, trade disruptions and weakened the global economy. All this is now worsening sovereign lending conditions.

„Higher interest rates are driving up the cost of servicing government debt,” Fitch’s head of sovereign banking James McCormack said, downgrading the firm’s view of the sovereign sector from „positive” to „neutral.”

Emerging market (EM) economies are most at risk, but some highly indebted developed markets are also at risk, including in the euro area, Fitch noted.

The number of countries whose credit ratings have been downgraded has started to rise again this year as pressure builds.

Most of the governments covered by Fitch have either introduced subsidies or cut tax breaks to try and cushion the impact of rising inflation. But this comes at a cost.

“While the moderate deterioration in the fiscal position could be absorbed by the positive effect of inflation on public debt dynamics, such an effect depends on maintaining low interest rates, which is now less clear,” McCormack said.

While commodity exporters will benefit from higher prices, those who are forced to import most of their energy or food will suffer.

McCormack added that gross external financing needs will be the highest this year both in nominal terms and relative to foreign exchange reserves for sovereign emerging market countries that are net importers of commodities.

“Now they are facing tighter global funding conditions, and with a record high share of sovereign bonds rated 'B’ or below, it is likely that there will be additional defaults.”

The list of countries either in default or whose financial market bond yields suggest they would be at risk of default currently stands at a record 17 countries: Pakistan, Sri Lanka, Zambia, Lebanon, Tunisia, Ghana, Ethiopia, Ukraine , Tajikistan, El Salvador, Suriname, Ecuador, Belize, Argentina, Russia, Belarus and Venezuela.