Our regional and global Credit Conditions Committees—and the research publications we produce—provide financial market participants around the world with an essential resource for identifying and understanding prevailing and potential credit risks.
As an assessment of the external operating environment, our regional and global Credit Conditions Committee forums—covering Asia-Pacific, Emerging Markets, Europe, and North America, which cascade into our global coverage—form an integral part of S&P Global Ratings’ credit rating analysis.
At the CCCs, our senior researchers, economists, and analysts (covering corporates, financial institutions, insurance, structured finance, sovereigns, and U.S. public finance) meet each quarter to evaluate the trends affecting the current and future states of economies, industries, and credit markets. The CCCs identify base case and downside scenarios, and rank exogenous risks. These views are cascaded to our analytical teams to inform their rating deliberations.
Our quarterly and special CCC reports crystallize the Committees’ conclusions, backed by a host of proprietary data, and with an eye toward helping investors make decisions—providing financial market participants around the world with a primary resource for identifying and understanding prevailing and potential credit risks.
The recent direct missile and drone attack from Iran's territory targeting Israel represents a dangerous expansion of the Israel–Hamas war. But given the advance signaling and coordinated defense that minimized harm, we don’t believe we are on the verge of an immediate full-scale regional conflict. The central narrative of our base-case scenario remains broadly unchanged including our baseline macroeconomic assumptions for the major economies. Nevertheless, our expectations will be contingent on the nature and magnitude of the Israeli response. The medium-term trajectory remains fraught with risk, given the enormous challenges in finding a de-escalatory pathway. This means that those key transmission channels exposed to the conflict that could affect credit conditions will continue to be monitored closely.
Most economies maintained better-than-expected growth in 2023, helping offset the negative impact of persistently higher interest rates. Defaults will remain near current levels by the end of the year after peaking around Q3. Softer economic growth and still-elevated interest rates will pressure low-rated corporates in consumer-related sectors and emerging markets. Early 2024 has provided an opportunistic window for issuers to refinance debt, albeit at noticeably higher rates. A more severe economic downturn, a longer-than-expected period of high rates, a worsening geopolitical landscape, and challenges for China could derail our base case and lead to weaker business activity and market liquidity.
Overall: As the year progresses, credit conditions could brighten somewhat, especially if the U.S. economy settles into a soft landing and the Federal Reserve eases monetary policy in an orderly fashion.
Risks: High financing costs and input-price pressures remain persistent risks. A prolonged period of elevated borrowing costs could make the burden of debt service and/or refinancing too heavy for borrowers in need of interest-rate relief.
Ratings: The net outlook bias, indicating potential ratings trends, stayed relatively flat over the past quarter and was at negative 10.3% as of March 15. Telecom, health care, and consumer products still have the highest negative bias—with around 30% of issuers having a negative outlook or on CreditWatch with negative implications.
Overall: Our base case centers on a soft landing in 2024. Labor markets will remain tight, while disinflation will continue, enabling the European Central Bank (ECB) to cut rates by 25 basis points (bps) three times in the second half of 2024. Ageing populations, low productivity growth, and questions about the full deployment of the NextGenerationEU program will likely hamper the economic rebound over 2025-2026.
Risks: The main risks for Europe are regional geopolitical conflicts which could spread across borders. Beyond that, protectionism represents an increasing threat to European trade. Many fixed-rate borrowers remain exposed to higher refinancing costs, especially if rate cuts are deferred and bond yields are back up. After a turbulent couple of years, we now view an extended period of slow economic growth as the main macroeconomic downside risk.
Ratings: Credit quality is stabilizing on the back of a more robust macroeconomic outlook and easing financing conditions. Pockets of risk will remain as the lagged effect of inflation and higher rates feed through to asset quality. Credit losses within the banking sector will likely normalize from a low level, while a few negative rating actions could emerge in residential mortgage-backed securities (RMBS) and auto asset-based securities (ABS). For corporates, stress will be largely contained to 'CCC' rated borrowers, with defaults amounting to about 3.5% at year-end 2024.
Stable growth. Strong domestic consumption and increasing trade flows for much of Asia-Pacific will help keep the region's growth on track, at 4.4% for 2024 and 4.6% for 2025. But we believe China's ongoing property woes and Japan's monetary policy normalization could dampen the growth momentum and hurt credit.
Improving financing conditions. A stable economic outlook and easing monetary policies should support financing conditions, and that's prompted us to revise our financing risk trend assessment to improving. However, high rates compared with the pre-COVID era will exacerbate borrowers' debt-servicing burdens, especially for those that are highly indebted with impending financing needs. The risk level remains high.
Easing recessionary and inflationary fears. A soft economic landing in the U.S., buoyed by robust labor markets and services sectors, could subdue risks around weak demand and exports. Producers are still able to pass-through high costs to consumers, lessening margin compression. Thus, we have lowered the risk level to elevated for the economic landing and high prices.
Risks to outlook. Asia-Pacific's top risk remains China's property challenges and their impact on spending by households and businesses. Intensifying geopolitical tensions could hurt business confidence and expose the region to energy shocks (e.g., from a widening Middle East conflict).
Expected soft landing of advanced economies will continue supporting credit conditions in emerging markets (EMs), risks are receding to a certain degree, but the long-term outlook remains challenging. Our baseline assumptions point to sustained economic growth of both advanced economies and EMs, albeit diverging paths for the latter. Continued disinflationary trajectory and expected monetary easing should continue improving financing conditions, stabilizing credit conditions. Nevertheless, high borrowing costs will continue pressuring lower-rated issuers.
Risk trends for EMs have eased as major economies follow a soft-landing trajectory and financing conditions improve. We see the following threats ahead if current expectations with respect to our baseline assumptions are not met. On the one hand, the Federal Reserve could delay monetary easing if the U.S. economy and labor markets remain strong, which will keep borrowing costs high. On the other hand, geopolitical risks continue causing supplychain disruptions that could lead to renewed inflationary pressure; furthermore, we can't rule out heightened trade protectionism down the road. Finally, China is still struggling with domestic factors that could weigh on its economic growth, which could spill over to the region's economies and EMs reliant on China.
We expect that the soft-landing economic trajectory, along with market optimism, will continue to stabilize rating trends across EMs. Defaults will likely occur mostly among lower-rated entities that continue struggling accessing debt markets and facing very high borrowing costs.
Our forward-looking global and regional Credit Cycle Indicators (CCIs), which tend to lead credit stress and recovery by six to 10 quarters, maintain their upward trajectory toward a credit recovery in 2025.
However, headwinds in 2024 could mean a bumpy ride to recovery. Costlier debt, households' reduced propensity to spend, and lenders' risk aversion will strain corporate borrowers' profit margins and liquidity profiles, and exacerbate credit pressures.
Risk of stickier than anticipated inflation could prompt central banks to keep rates high. A sharp economic slowdown and squeezed disposable income could lead households to pull back on consumption.
