New risks are emerging, and established risks are evolving—all of which require a new playbook for issuers and investors in the debt markets.
S&P Global Ratings expects additional credit deterioration in 2024, largely at the lower end of the ratings scale. An environment of increasingly rapid change requires financial market participants to adapt their playbooks.
Looking ahead at 2024 and beyond, we are closely watching how credit headwinds, capital flows, geopolitical uncertainty, energy and climate resilience, and crypto, cyber, and tech disruption transform the global economy and financial markets over what promises to be yet another challenging period.
Geopolitical UncertaintyGeopolitical risks have returned to center stage, with the war between Israel and Hamas, the prolonged Russia-Ukraine conflict, and ongoing U.S.-China tensions. This increased geopolitical fragmentation affects corporates and governments in their strategies for supply chain and energy security, with potential broader implications on food prices, global trade, and inflation—while increasing the potential for event risk.
We estimate sovereigns' long-term borrowing will reach $11.5 trillion in 2024, more than 50% above the pre-pandemic-levels, amid softer GDP growth, the heavy election schedule, elevated interest, and defense spending.
The U.S. will account for 39% of global long-term issuance, increasing its 2024 borrowing by $1 trillion to the total of $4.5 trillion, the biggest nominal increase among all rated sovereigns, as growth decelerates and the upcoming elections complicate fiscal consolidation.
For the first time on record, we project China will overtake Japan as the second-largest sovereign issuer, with the equivalent of $1.7 trillion of gross long-term issuance, amid government efforts to support the economy.
Other major sovereign issuers, primally G-7 countries, will keep borrowing broadly flat compared with last year, the notable exception being the U.K., which in U.S. dollar terms will borrow 28% more than in 2023.
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Credit HeadwindsWe are back to an environment of higher real interest rates, concluding an era of cheap money that started in the wake of the Great Financial Crisis. Borrowers across all asset classes will need to adjust to tighter financing conditions and softer economic growth. With a durably higher cost of debt, a ramp-up in maturities, and slowing economic activity in the cards for 2024, the focus comes back to credit fundamentals and liquidity analysis.
Global leverage trending up and structurally higher interest rates will increase the financing bill for governments, corporates, and households.
Additional investments will be necessary to address climate-related risks, the energy transition, digital transformation, and an aging population, with developing economies disproportionately affected.
International collaboration and a combination of public and private capital will be required to make the transition affordable globally, but increasing geopolitical fragmentation will make this more difficult.
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Capital FlowsWith the era of easy money over, investors are rebalancing their portfolios to adjust for shifting risks and returns. Borrowers (especially those at the lower end of the ratings ladder facing tighter access to credit) will need to adapt to the reshuffling of capital flows from long-duration speculative assets to safer havens—as well as adapt to the knock-on implications for overall market liquidity, foreign exchange reserves, and investment in emerging markets.
2024 will likely mark the end of a period of extraordinary liquidity. We address five questions whose outcomes could have material effects on the liquidity and volatility of global credit markets.
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Energy and Climate ResilienceNew challenges are also emerging from the necessity to accelerate the world’s transition to a low-carbon economy to limit the potential dramatic consequences of climate change. Extreme weather conditions and worsening physical risks continue to increase and influence credit fundamentals. However, we believe companies' and governments' readiness to address these risks, in large part, remains low and could become even more challenging to overcome in an environment of slower growth and tighter financing conditions.
By 2050, if global warming does not stay well below 2 degrees Celsius (2 C), up to 4.4% of the world's GDP could be lost annually, absent adaptation. This will test countries' adaptation plans, particularly those of lower-income nations that are disproportionately exposed and less able to prevent permanent losses. The GDP at risk measure is based on a static view of the economy, assuming no adaptation and that all hazards occur in one year in all exposed places
The rising likelihood of compound climate events adds to the challenges of climate analytics. Understanding these non-linear dynamics appears crucial to assessing specific risks each country faces and may help policymakers pursue more-targeted policies.
The adaptation gap is widening, given slow progress on preparedness, and financing conditions are tightening. Financing rising adaptation costs as the impacts of climate hazards worsen may become more difficult in an environment of higher interest rates, adding another hurdle to developing countries' adaptation implementation.
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Crypto, Cyber, & Tech DisruptionThe transformation of global and regional financial systems amid the adoption of new technologies—from generative artificial intelligence to blockchain and beyond—is accelerating an era of growth and discovery while also heightening single-entity and systemic cyber risk, forcing corporate and government entities to adapt their playbooks.
While companies across sectors and industries have been using traditional artificial intelligence (AI) for years, we expect the adoption and impact of generative AI to increase exponentially in the years to come. AI-based technologies have not yet risen to the level of influence that leads to rating changes, but AI has been already cited as a credit factor in specific instances and has the potential to redefine the competitive landscape for almost every sector in the longer-term.
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