KUALA LUMPUR (May 18): Deteriorating global macroeconomic conditions, combined with heightened geopolitical uncertainty and lingering COVID-19 lockdowns in China, fuel persistently high inflation, market volatility, and rising yields, and pose an increasingly challenging outlook for credit.
In a report titled "Global Credit Conditions Special Update: Inflation, War, And COVID Drag On” released on Wednesday (May 18), S&P Global Ratings global head of analytical research and development Alexandra Dimitrijevic said that for now, credit ratings are showing resilience as they benefit from still largely growing economies, consumption supported by household savings, and record corporate cash balances.
“Rating actions globally in April and May were balanced, outside of countries directly impacted by the conflict, and the net outlook bias, which speaks to forward-looking rating trends, remains close to neutral.
“The distress ratio for U.S. speculative-grade borrowers, an indicator of future default trends, is increasing but remains well below the five-year average,” she said.
Dimitrijevic said credit ratings could come under more pressure if the situation persists for more than one or two quarters, or deteriorates further, as households struggle with falling real incomes and rising energy and food prices, businesses face weaker demand conditions and margin erosion, and financing conditions ratchet tighter.
She said defaults could start picking up toward the end of the year as we get into 2023.
Dimitrijevic said the interim credit conditions update follows S&P Global economists' downward revisions to global macroeconomic base-case forecasts, reflecting that key forecast assumptions are likely to play out over a longer period and be more damaging than previously expected.
“The conflict between Russia and Ukraine and growing tensions with NATO are more protracted than expected.
“Inflation remains stubbornly high, fueled by food and rising commodity prices,” she said.
She said the Chinese authorities are continuing to lock down major cities and regions to stem COVID-19.
“And the U.S. Federal Reserve and other major central banks are ramping up their fight to rein in inflation pressures.
“From a credit perspective, this represents a wind shift as credit prospects become more challenging,” said Dimitrijevic.
S&P said while widespread concerns relating to recessionary scenarios in advanced economies have not been realized so far, they are a growing downside risk for later in the year and into 2023, particularly if the war in Ukraine drags on and escalates, or the authorities struggle to contain the pandemic in China.
It said the Fed is also treading a fine line in reining back inflation without destabilizing financial markets, undermining confidence, or triggering a hard landing for the economy.