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1、 Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 This report does not constitute a rating action Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 2 Foreword Dear reader,S&P Global Ratings Global Credit Outlook 2023 presents our macroeconomic and credit outlooks for the year ahead,includin
2、g our base-case forecasts,assumptions,and key risks for what promises to be another challenging period for the global economy and markets.This years theme,No Easy Way Out,looks in detail at the shocks reverberating across economies and markets,and why finding a way through the strains weighing on cr
3、edit leaves little room for error.Because governments,having piled on debt during the pandemic,largely lack the fiscal capacity to spend their way through this turn in the credit cycle,we expect credit pressures to intensify in the near term.And while we could see a stabilization of financing condit
4、ions in the latter half of the year,uncertainties remain high,with a focal point being the Russia-Ukraine war and its implications for energy markets.This report harnesses the power of our regional and global Credit Conditions Committees(CCC),who meet quarterly to review conditions in Asia-Pacific,N
5、orth America,and Europe as well as the Emerging Markets and globally.These committees define the house base case underpinning our credit ratings,in addition to identifying the key macro credit risks and their potential rating impact in various asset classes.This publication also highlights the deep
6、resources of the broader teams of S&P Global Ratings analysts and the Credit Research&Insights group,as well as their wealth of data and expertise in covering credit markets.Our Top Global Risks detail what could affect our baseline expectations,assessing the risk levels and forward-looking trends i
7、n a number of areas.They include the risks that:Tight and volatile financing conditions persist on the back of entrenched inflation,increasingly straining the debt-service capacity of more vulnerable borrowers;A deeper and longer recession than expected in the largest economies further dampens globa
8、l growth;Persistent input-cost inflation and high energy prices,combined with weakening demand,squeeze corporate profits and weigh on governments fiscal balances;and Geopolitical tensions intensify,roiling markets and eroding business conditions.In parallel,we see increased structural pressure on cr
9、edit from the physical and transition risks associated with climate change and the energy transition.Aligned with these risks,we answer the pressing Questions That Matter for 2023,collected through our interactions with investors and other market participants.Alexandra Dimitrijevic Global Head of An
10、alytical Research and Development Co-Chair,Global CCC London Gregg Lemos-Stein Chief Analytical Officer,Corporate Ratings Co-Chair,Global CCC New York gregg.lemos- Acknowledgements We would like to thank the many colleagues who have contributed to this report to provide you with S&P Global Ratings e
11、ssential insights.Special thanks to Ruth Yang,Molly Mintz,Joe Maguire,Yucheng Zheng,Bernadette Stroeder,Tom Lowenstein,Jennie Brookman,Rose Burke,Alison Dunn,Cathy Holcombe,and Alex Ilushik.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 3 Contents Global Credit Outlook 2023:No Easy Way Out 4
12、Global Economic Outlook 2023:Surprising Resilience Unlikely To Last 13 Top Global Risks 20 Questions That Matter Looking Forward:After inflation,whats next?21 Emerging Markets:Is a strong dollar a concern?24 Private Credit:How long can private credit remain the safety valve of liquidity?26 Central B
13、anks:Will ECB normalization jeopardize eurozone financial stability?28 Infrastructure:Will high inflation and rising interest rates derail U.S.public infrastructure investment?31 Macro:As global growth slows,why is the right mix of monetary and fiscal policy important?33 China:Will cracks break the
14、economic wall?35 Corporates:Will companies buckle under higher borrowing costs and inflation?37 Emerging Credit Risks:In an extremely dynamic risk environment,how does S&P Global Ratings evaluate emerging risks?39 Energy:Can Europe compete without cheap energy?41 Supply Chains:Will the U.S.-China se
15、miconductor dispute split the chip industry?44 Energy Transition:How has the decarbonization pathway changed as access and affordability move up the energy transition agenda?46 Climate Risk:What are the short-to medium-term costs of climate change?48 Physical Risk:If extreme weather events become th
16、e norm,how might individuals,companies,and governments manage the costs?50 Cyber:How will cyber warfare shape credit risk?53 Future Of Money:Will stablecoins and CBDCS become mainstream?55 Regional Credit Conditions North America:Worse Before It Gets Better 57 Europe:Time To Face The Music 59 Asia-P
17、acific:Still Above Water 61 Emerging Markets:Downturn Exacerbates Risks 63 Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 4 Global Credit Outlook 2023 No Easy Way Out As we look at the global credit markets for the year ahead,some of the shocks that have reverberated across economies and mark
18、ets are showing early signs of easing.While nothing is assured,our base-case scenario assumes policy rates will peak by the middle of the year in the largest economies,with the global economy slowly regaining momentum as China lifts its COVID restrictions and supply disruptions ease further.This cou
19、ld lead to a stabilization of financing conditions in the latter half of the year,assuming central banks succeed in trimming inflation.But uncertainties remain high,with a focal point being the unfolding war between Russia and Ukraine and its implications for energy markets.Finding the way out of th
20、e strains weighing on credit leaves little room for error.Inflation continues to run hot in many regions,which means central bankers are likely to remain hawkish in the near term;supply bottlenecks persist as the Russia-Ukraine war rages on and Chinas COVID lockdowns continue;and some major economie
21、s are set to slip into recession as price pressures sap consumer demand and higher borrowing costs crimp investment.Moreover,the lag between rate hikes and their effects means that prices will stay elevatedand consumer purchasing power diminishedfor some time.Additionally,governments largely lack th
22、e fiscal capacity to spend their way through this turn in the credit cycle,having piled on debt during the pandemic.In the near term,we expect credit pressures to intensify,with a world order thats increasingly fragmented and fragile.Sectors dependent on discretionary spending such as consumer goods
23、 and retail,energy-intensive sectors such as chemicals,and rate-sensitive sectors such as housing,will likely suffer most,while others such as commodities and energy producers are benefiting from the current environment.Similarly,rising rates in most cases are boosting banks net interest income,and
24、they appear to be well-positioned for higher loan losses,which take time to materialize,thanks to robust capitalization and liquidity.On the other hand,sovereigns will Key Takeaways As we end a year in which COVID,a war in Europe and an associated energy crisis,and high inflation roiled markets and
25、slowed the global economy,early signs of easing of some of these pressures provide hope that credit conditions could stabilize in the second half of 2023.But finding a way out of the strains weighing on credit leaves little room for error.In the near term,S&P Global Ratings expects pressures on cred
26、it ratings to intensify,as corporate borrowers find it more difficult to pass through high input costs to consumers struggling with rising prices and a mild recession in some of the worlds largest economies.We forecast speculative-grade corporate default rates in the U.S.and Europe to double.As majo
27、r central banks remain hawkish to fight inflation,governments have diminishing fiscal options to deploy after piling on debt during the pandemic.Many borrowers built up enough buffers during the long stretch of favorable financing conditions to ride out a rough patchat least for some timesupporting
28、credit quality in many sectors.However,ratings are lower than they were prior to the pandemic,and debt levels higher,with 29%of nonfinancial corporates rated B-or below.Risks to our base-case scenario remain firmly on the downside,given an increasingly fragmented and fragile geopolitical situation.T
29、ighter financing conditions on the back of entrenched inflation,a deeper and longer-than-expected recession,and persistent input-cost inflation could squeeze further corporate margins and government balances,leading to sharper credit deterioration.Contacts Alexandra Dimitrijevic London+44-20-7176-31
30、28 alexandra.dimitrijevic Gregg Lemos-Stein New York+1-212-438-1809 gregg.lemos-stein David Tesher New York+1-212-438-2618 david.tesher Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 5 continue to feel credit pressures,with slower economic activity weighing on fiscal balances(and countries ge
31、nerally having less fiscal flexibility after the pandemic).Credit conditions in emerging markets(EMs)will remain under particular pressure from the combination of a strong U.S dollar,high energy and food prices,and a slowdown in global demand.Chart 1*Global SG default rate data as of Q3 2022.All Q4
32、2022 data as of Nov.24,2022.Quarter-over-quarter trend indicates changes compared to the Q3 2022 data published in Global Credit Conditions Q4 2022:Darkening Horizons.IG-investment grade.SG-speculative grade.YTD-year-to-date.Weakest links are defined as issuers rated B-and below,with either a negati
33、ve outlook or on CreditWatch negative.North America includes U.S.and Canada.Emerging markets include countriesin Asia-Pacific,Latin America,and Europe.Default counts may include confidentially-rated issuers and are preliminary and subject to change.Net outlook bias refers to the percentage of issuer
34、s with a positive bias minus the percentage of issuers with a negative bias.All outlook bias calculations include global financial,nonfinancial and sovereign issuers.Sources:S&P Global Ratings and S&P Global Market Intelligences CreditPro.Interest rates will continue to rise.Central banks determinat
35、ion to bring down inflation suggests that policy rates need to go higher still.We estimate that the U.S.Federal Reserves policy rate will peak at 5.0%-5.25%in the second quarter and the European Central Banks at 2.25%in the first quarter.Policy makers will likely err on the side of doing too much,gi
36、ven that many were seen as behind the curve in the inflation battle.As a result,the chances of an economic soft landing have all but disappeared.We estimate that the steepest increases in policy rates in four decades,combined with ongoing geopolitical tensions and energy-supply constraints from the
37、Russia-Ukraine war,mean a sharp slowdown is all but inevitable.Historical fallen angels(No.)IGrating actions(No.)IG biases(%)Global SG default rate(%)*SG rating actions(No.)SG biases(%)Ratings at a glance(%)Regional default insights(No.)Rating and outlook quarterly trendsQ4 202265132022 YTD351616242
38、021 YTD3613918Leading sectorConsumerMedia andHomebuildersHomebuilders2022 YTDproductsentertainmentandreal estateandreal estateNorthAmericaEuropeAsia-PacificEmerging marketsOutlook bias(6.5)(6.0)0.0(3.0)NorthAmericaEuropeAsia-PacificEmerging marketsPotential fallen angels3.13.53.34.7Weakest links(of
39、SG)12.08.78.39.6Quarter-over-quarter trend.Positive quarterly change.Negative quarterly change.No quarterly change.2022202020182016-15050UpgradesDowngrades800600400200020020222020200UpgradesDowngrades17.23896209.76.7Negative05022202020520202220202018201601
40、0203040502022202020562022202020182016210.01.6PositiveNegativePositive20Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 6 Growth is slowing almost everywhere.We now forecast a contraction in GDP of 0.1%in 2023 in the U.S.,with a shallow recession in the first half;the eurozone coming
41、 in flat for the full year;and growth in China of 4.8%.And while there are signs that inflation is easing(for example,the U.S.Consumer Price Index fell to 7.7%year-over-year in October,from a peak of 9.1%in June),prices are still running well above central bank targets.Policy makers may want to see
42、a string of declines before pausing rate hikes,even as economic activity falters.In the U.S.,we think inflation will drop to 4.3%in 2023,from 8.1%this year,and continue toward 2%thereafter.Similarly,we forecast inflation in the eurozone will fall to 5.7%in 2023,from 8.3%,before easing toward 2%.Conc
43、erns about liquidity are also growing,as central banks withdraw support at an unprecedented pace.Beyond aggressively raising its policy rate,the Fed is selling assets to normalize its balance sheet through so-called quantitative tightening,and ECB policy makers have said they will do the same starti
44、ng in 2023.Most central banks in Asia-Pacific(except for China)are trailing the Feds policy rate hikes,to stem capital outflows and suppress inflation.Japan,having kept rates flat through 2022,will likely begin hiking them to limit the yens depreciation.Across regions,a real or perceived monetary-po
45、licy misstep(in either direction)could increase volatility in credit markets and result in an even sharper repricing of financial and real assets,higher debt-servicing costs,and tighter access to funding.This is especially concerning given high debt levels,and could particularly hurt lower-rated bor
46、rowers.While credit ratings reflect our base-case scenario,we monitor top global risks that could derail our baseline expectations,leading to further credit deterioration.They include the risks that:Tight and volatile financing conditions persist amid an entrenched inflation,increasingly pressuring
47、debt-service capacity of more vulnerable borrowers;A deeper and longer-than-expected recession in the largest economies further damps global growth;Persistent input-cost inflation and high energy prices,combined with weakening demand,squeeze corporate profits and put pressure on governments fiscal b
48、alances;and Amplifying geopolitical tensions roil markets and weigh on business conditions.In parallel,we see greater structural pressure on credit from the physical and transition risks associated with climate change,along with rising systemic risks from cyberattacks.Credit Pressures Are Intensifyi
49、ng We expect credit ratings to deteriorate,as credit fundamentalsfor many corporates and some sovereignserode further,though not in all sectors.The net outlook bias,indicating potential ratings trends in the next 12-18 months,widened to negative 5.3%as of Nov.24 for corporate borrowers.Global corpor
50、ate sectors with the highest net negative outlook bias are consumer products,autos,homebuilders/real estate,and capital goods(see charts 1 and 2).However,not all sectors are in the same boat.In particular,commodities exporters have benefited from higher prices and a strong U.S.dollar.Global sectors
51、with the highest net positive outlook bias are metals/mining and steel,and oil and gas.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 7 Chart 2 Outlook bias by sector(%)Data as of Nov.24,2022.Includes global financial,nonfinancial and sovereign issuers.Positive bias-Percentage of issuers with
52、 a positive outlook or CreditWatch placement.Negative bias-Percentage of issuers with a negative outlook or on CreditWatch.Net outlook bias-Percentage of issuers with a positive bias minus the percentage of issuers with a negative bias.Source:S&P Global Ratings.Many borrowers built up buffers during
53、 the long stretch of favorable financing conditions sufficient for them to ride out this rough patchat least for some time.Overall,the maturity wall for nonfinancial corporate debt appears broadly manageable in the near term after many companies pushed out maturities at lower rates.Investment-grade
54、debt accounts for 76%of total debt maturing in 2023(see chart 3).However,corporate debt coming due rises steadily through 2026,and the share of speculative-grade grows,surpassing that of investment-grade in 2028.While speculative-grade maturities are relatively modest in the near term,those in upcom
55、ing years could pressure weaker credits that face challenging financing conditions.Chart 3 Global nonfinancial corporate debt maturities by grade Data as of July 1,2022.Includes nonfinancial corporate issuers bonds,loans,and revolving credit facilities that are rated by S&P Global Ratings.Excludes d
56、ebt instruments that do not have a global scale rating.Foreign currencies are converted to U.S.dollars at the exchange rate on close of business on July 1,2022.Source:S&P Global Ratings.25202025Aerospace and defenseAutomotiveBanks and brokersCapital goodsChemicals,packaging and environmen
57、tal servicesConsumer productsForest products and building materialsHealth careHigh technologyHomebuilders/real estate co.InsuranceMedia and entertainmentMetals,mining and steelOil and gasRetail/restaurantsSovereignTelecommunicationsTransportationUtilityTotalNegative biasPositive biasNet outlook bias
58、02004006008001,0001,2001,4001,6001,800202320242025202620272028Bil.$Speculative-gradeInvestment-gradeGlobal Credit Outlook 2023:No Easy Way Out Dec.1,2022 8 Defaults are set to jump.S&P Global Ratings now expects the trailing-12-month speculative-grade corporate default rates in the U.S.and Europe to
59、 reach 3.75%and 3.25%,respectively,by September(see chart 4).These would be more than double the 1.6%and 1.4%in September 2022,bringing defaults close to their respective long-term averages.And with so much depending on the length,breadth,and depth of a potential global economic downturn,our pessimi
60、stic forecasts for default rates of 6.0%and 5.5%arent out of the question.Chart 4 Trend lines point to our optimistic-,base-,and worse-case scenarios.Data as of Sept.2022.Sources:S&P Global Ratings and S&P Global Market Intelligences CreditPro.Meanwhile,spreads on speculative-grade debt have some ro
61、om to widenin the U.S.at leastbased on the estimated spread calculated by S&P Global Ratings Credit Research&Insights,which uses a framework based on broad measures of financial market sentiment,economic activity,and liquidity.At 800 basis points(bps),our estimated spread on U.S.speculative-grade co
62、rporate debt is roughly 320 bps higher than the actual spread of 480 bps(see chart 5).This suggests fixed-income U.S.investors are too sanguine in their risk assessments,given the headwinds borrowers face.By contrast,theres very little difference in Europe,with an actual spread that is narrower by a
63、bout 29 bps than our estimate of 654 bps(see chart 6).Chart 5 U.S.estimated spread suggests widening ahead(bps)Data as of Sept.30,2022.Source:S&P Global Ratings.Chart 6 European spread level appears largely appropriate(bps)Data as of Sept.30,2022.Sources:ICE Benchmark Administration Limited(IBA),ICE
64、 BofAML Euro High Yield Index Option-Adjusted Spread,retrieved from FRED,Federal Reserve Bank of St.Louis,S&P Global Ratings.02505007501,0001,2501,5001,75020032006200920021Speculative-grade spreadEstimated spread05001,0001,5002,0002,50020032006200920021Speculative-grade spreadE
65、stimated spreadGlobal Credit Outlook 2023:No Easy Way Out Dec.1,2022 9 U.S.Dollar Ratchets Up Pressures For Some Strength in the dollar could complicate an already uncertain outlook for EMs,although its recent easing may relieve some pressures on the most affected borrowers.As it stands,80%of EM cor
66、porate debt maturing in 2023 is in dollars,and about 24%is rated BB+or lower(see chart 7).Continued dollar strength could trigger an increase in capital outflows and lead to a sharp rise in refinancing risk.Chart 7 EM U.S.dollar debt maturities by rating Data as of July 1,2022.Near term maturities c
67、ould be lower due to recent refinancing and data reporting lags.Includes bonds,loans,and revolving credit facilities that are denominated in dollars and rated by S&P Global Ratings(with a global scale rating)from financial and nonfinancial issuers.Source:S&P Global Ratings.In Europe,dollar strength
68、could fuel inflationary pressures.In the context of high-cost energy,which is mainly bought in U.S.dollars,depreciation of European currencies amplifies inflation and makes it more difficult for the ECB to stabilize prices.According to our models,the depreciation of the euro against the dollar added
69、 approximately half a percentage point to inflation in the eurozone and reduced household consumption by the same amount.Overall,the prospect of higher-for-longer interest rates in the U.S.could underpin the dollar and pressure other central banks to counter with more aggressive rate hikes.At the sa
70、me time,a precipitous drop in the dollars value could also be problematic.While the recent easing of the greenback against other major currencies hasnt increased market volatility,a quick or disorderly reversal could spur swings in financial markets and spell trouble for companies and investors that
71、 are caught off guard.For China,Business As Usual Is A Long Way Off Chinas zero-COVID policy and a property-market slump are weighing on the economy.Slower consumption and still weak home sales have sapped the financial health of local governments,banks,and various corporate sectors.Any prolongation
72、 of the countrys strict COVID stance will exacerbate the hit to corporate revenue and profitability.And even when China does relax its zero-COVID policy,the countrys reopening is going to take some time.While Beijing has eased some restrictions,China is hardly back to business as usual.Activity in t
73、he worlds second-largest economy(and by far the leading exporter)remains stifled by recurring lockdowns and closures,given the rebound in COVID cases across major cities such as Beijing and Guangzhou.Concurrently,a full reopening could complicate efforts to limit inflation.While increased production
74、 and the loosening of bottlenecks for Chinese manufacturers should act as 00708090202220232024202520262027Bil.$CCC/CBBBBBBAAAGlobal Credit Outlook 2023:No Easy Way Out Dec.1,2022 10 a disinflationary pressure,increased domestic demand for goods and services,as well as energy and raw mater
75、ials,could underpin prices.Once the country does reopen,we expect growth momentum to pick up,but the gains will soon fade.We expect Chinas trend growth to slow to 4.4%in 2022-2030 and to 3.1%in 2031-2040.Thats well short of the 6%in 2017-2021.While the Chinese economy continues to benefit from relat
76、ively solid productivity growth and capital accumulation,the working-age population is shrinking,rebalancing needs call for lower investment,and geopolitical tensions will impede productivity-enhancing ties with developed economies.Geopolitical Risks Are At Their Highest In Decades The Russia-Ukrain
77、e war seems to have entered a phase of attrition,and while the conflict hasnt yet spilled over to neighboring countries,the risk of miscalculations,mistakes,or other unexpected events is as high as its been since the end of the Cold War more than 30 years ago.In Europe,we expect gas and power market
78、s to remain very tight for at least two to three years,reflecting the challenges to replace Russian energy.Europes high reliance on Russias pipelined gas enabled Moscow to weaponize the energy supplies,sending governments scrambling to avoid blackouts and rationing over the winter.While leaders have
79、 succeeded in easing the continents energy crisis of late,the effectiveness of these measures is finite,and the real challenge will come to refill the reserves for the winter of 2024 without Russian gas supply amid increased competition for limited LNG stocks from reopening China.This means energy p
80、rices will likely remain high until Europe is able to develop sufficient alternative energy sources from renewables and nuclear.This will affect business models and profitability for energy-intensive industries.And with two of the worlds largest agricultural exporters at war,global agricultural supp
81、liesin particular,corn,rice,and livestockwill likely remain tight,especially as industries growing appetite for agricultural commodities leaves little margin for error among key producing regions.While the U.S.-China relationship remains uneasy,we dont expect a full decoupling of the worlds two bigg
82、est economies.Any ratcheting up of tensions between the two countries over Russia or the South China Sea region,or an escalation of the technology race,could impede trade,intellectual property,investments,and financial transactions for both and other economieswith some sectors suffering disproportio
83、nately.Tensions regarding Taiwan are casting a pall over the islands long-term business and economic prospectsand the semiconductor sector would be the most vulnerable if cross-strait tensions worsen further.The Nov.14 meeting between U.S.President Joe Biden and Chinas President Xi Jinping on the si
84、delines of the G-20 summit in Bali has,at minimum,kept the lines of communication open between the two economic rivals.Sovereigns:Tight Margins Of Maneuver High food and energy prices,along with rising financing costs,are exacerbating pressures for sovereign borrowersespecially considering their wea
85、ker fiscal flexibility after the pandemic.After inflation and solid economic activity bolstered tax revenues for much of 2022,slower economic activity will weigh on sovereigns fiscal balances.We dont expect government fiscal support to approach pandemic levels,as their fiscal margins of maneuver hav
86、e sharply tightened,and the objective will likely be more focused on aiding vulnerable households and smaller enterprises.Against this backdrop,sovereign debt will remain high-and possibly increase-as fiscal consolidation is delayed and,in some cases,even reversed.Financing costs will remain elevate
87、d,as we expect central banks to maintain high interest rates and reduce their balance sheets to Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 11 bring inflation under control.As many governments try to ease the burdens of higher energy and food prices on their populations,while tax revenues
88、start reflecting a weaker economic environment,increases in debt could weigh on credit quality.Slower global GDP growth,persistent inflation,and higher funding costs will likely outweigh countermeasures that governments take in response.Under these conditions,debt refinancing will become harder,and
89、in some cases inaccessible,for sovereigns at the lower end of the ratings scale.This comes at a time when external funding needs are growing across many EMs that are net importers of food and energy and are exposed to foreign-currency debt.As some sovereigns increase debt burdens in response to econ
90、omic downturns,this could pressure those(both with investment-and speculative-grade ratings)most exposed to these risks.As it stands,19.2%of sovereigns we rate in Latin America,12.1%of those in Europe,and 9.5%of those in Asia-Pacific have a negative outlook or are on CreditWatch with negative implic
91、ations.Nonfinancial Corporates:Facing A Triple Threat Corporations around the world are facing a triple threat of declining demand,persistently higher costs,and investors increased risk-aversion.Still,for most borrowers,it will take time before macroeconomic and credit headwinds are fully felt in op
92、erating performance.Heading into 2022,most were well-positioned with low-cost,long-dated debt,and strong balance sheets.In the early part of 2023,we see corporations continuing to grapple with cost pressures and comparatively tight financing conditions,on top of declining demand as consumer purchasi
93、ng power erodes.As a result,the pace of downgrades will likely pick upparticularly in sectors such as consumer goods,retail and restaurants,and media and entertainment.This comes as the proportion of global issuers rated B-and lower sits at 29%,slightly lower than the peak of 33%at the end of 2020,b
94、ut consistent with the start of its ascent at the pandemics outbreak in March 2020.Chart 8 Nonfinancial corporates cash holdings appear to be falling quickly Global nonfinancial median cash holdings f-Forecast.Data through Oct.3,2022.Source:S&P Global Ratings.Moreover,borrowers cash on hand is shrin
95、king quickly.Issuance has plummeted to a degree normally associated with recessions.The largest and fastest interest-rate increases in a generation have deterred both lenders and borrowers who havent been able to rely on markets settling down long enough to establish reliable pricing.And while cash
96、buffers look set to remain above 2019 levels,theyre falling fast(see chart 8).This decline,as well as our expectation that 418.7632.9610.7468.085.4136.8121.4111.5005006007002007 2008 2009 2000019 2020 2021 2022fMil.$Investment-gradeSpeculative-gradeGlobal
97、Credit Outlook 2023:No Easy Way Out Dec.1,2022 12 interest rates will stabilize(relative to 2022),should produce a rebound in corporate issuance levels in 2023but at a higher cost.At any rate,interest costs will likely trend higher.Central banks efforts to quell inflation have put an end to the days
98、 of ever cheaper borrowing costs;we estimate that the median effective interest rate paid by speculative-grade corporate issuers on their debt will rise 1.2 percentage points to 5.3%in 2023 from the 2021 low,returning interest costs to 2014 levels and likely to trend higher as cheaper debt matures.F
99、or example,the average yield in the secondary market on B category U.S.corporate debt has risen to 9.4%as of Nov.28 from 5.2%at the beginning of 2022.Financial Institutions:Rising Rates Boost Net Interest Income Most banks are well positioned in a rising rate environment.After banks entered 2022 wit
100、h generally strong capitalization and liquidity,we expect only a modest erosion by the end of 2023.For many lenders across regions,stimulus-boosted savings in the private sector coming out of the pandemic bolstered deposit bases.And while financial institutions,like their corporate counterparts,have
101、 lately faced sharply tighter market conditions,deposit bases and banks strong liquidity positions have tempered their need to borrow.Also,rising rates in most cases are boosting net interest income;and while excess liquidity will gradually normalize,banks are able to pass on higher funding costs to
102、 borrowers.Nonbank financial institutions face a different picture.These entities tend to rely more on market funding and dont benefit from access to central bank credit lines.For them,tighter financing conditions may in some cases prove more challenging even if many have used the past years of abun
103、dant market liquidity to push out debt maturities.We expect increasing credit divergence,with rating trends across the global banking sector being tested in 2023.We have stable outlooks on about 79%of our global bank ratings,but we expect some deterioration for EM banks,nonbank financial institution
104、s,and entities in countries most exposed to energy restrictions.Structured Finance:Weakening But Resilient Similarly,structured finance obligors arent immune to worsening economic conditions,and we generally expect to see weakening of collateral pool asset quality.However,given the current strength
105、of the labor markets in the U.S.and Europe,and with our base-case macroeconomic forecast showing only a limited increase in unemployment and a mild decline in GDP for certain countries,our structured finance ratings are poised to remain resilient,with the greater risk for negative effects on specula
106、tive-grade ratings.If macroeconomic conditions devolve considerablyespecially with regard to unemploymentthis would result in deeper deterioration in collateral and ratings trends.Based on our global base-case macroeconomic forecast,elevated inflation and rising interest rates will create affordabil
107、ity challenges for some consumers and corporations.In particular,consumer-related securitizations that are primarily exposed to lower-income consumers and collateralized loan obligations(or CLOS,which are made up of highly leveraged corporate loans)will suffer the most negative effects on pool colla
108、teral performance.Also,commercial mortgaged-backed securities(CMBS)with high exposure to certain office,retail,and lodging properties will continue to see weakness due not only to slower growth,but also to medium-and longer-term negative trends of remote/hybrid work,e-commerce,and weak travel demand
109、.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 13 Global Chief Economist Paul Gruenwald New York+1-212-437-1710 Global Economic Outlook 2023 Surprising Resilience Unlikely To Last Global Activity:Not Quite Dead Yet The highly anticipated global recession has yet to arrive.The consensus view
110、is that a sharp slowdown is all but inevitable,given the steepest rise in policy rates in four decades,ongoing geopolitical tensions,and energy supply constraints stemming from the Russia-Ukraine conflict.In line with this view,sentiment indicators such as purchasing managers indices have been signa
111、ling a sharp slowdown for months.And an array of consumer and business confidence indicators have given similar signals.However,activity data are not cooperating and third quarter GDP featured a swathe of upside surprises.The U.S.economy grew by 2.6%on an annualized basis as slowing but still positi
112、ve consumption growth,especially in services,and exports offset weakness in the interest rate sensitive real estate sector.The Eurozone economy surprised by growing at all,with output expanding by 0.8%annualized in the flash estimate,with all major economies,including Germany,recording higher output
113、.China surprised on the upside as well,growing 3.9%on a year-on-year basis,boosted by net exports and government spending.The property sector has remained weak due to restrictive housing sector policy and ongoing COVID-19 restrictions.Inflation remains stubbornly high,especially in the advanced econ
114、omies.While policy rates have been lifted this year by up to 300 basis points(in the U.S.and Canada,less so elsewhere),overall inflation has yet to peak.Supply-side inflation has recently begun to moderate as supply chains normalize and food and fuel prices have plateaued,at least for now.But demand
115、-side inflation-most effected by central bank policy-has not.This suggests that more rate hikes are required.Long and varying lags of monetary policy transmission cloud the picture.As we have argued previously,the U.S.has the largest macro imbalances of any major economy and emerging markets were ge
116、nerally quicker to respond to inflation pressures last year and rate cycle are near completion.Labor markets remain resilient,and in our view remain key to the slowdown narrative.While employment growth has slowed in most economies as activity growth has eased,it remains Key Takeaways Global activit
117、y has held up surprisingly well so far despite a torrid pace of policy rate hikes and consistently high geopolitical uncertainties.Recent outperformance will not last in our view.We see significant slowdowns ahead.Labor markets are key to determining the depth of the downturn.Getting inflation under
118、 control while minimizing damage to output remains the main macro policy challenge;the lagged effects of rate hikes will make assessing this difficult.Given the big inflation miss over the past two years,policymakers will err on the tough side.Our growth forecasts are generally higher for 2022 relat
119、ive to our previous round,but broadly unchanged for 2023-2025.Inflation forecasts are higher and stickier.Risks are on the downside.2023 will be a revelatory year.We will learn how much monetary tightening is needed to curb inflation,how deep any recession will be,and the early contours of the post
120、COVID-economy.We suspect the post-COVID world will differ from the pre-COVID world across several dimensions.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 14 sufficient to keep unemployment rates at or near four-decade lows.Some weakness has appeared in the more interest rate sensitive secto
121、rs such as real estate and durable goods,but services activity and employment remain robust and labor markets remain tight.The current unemployment rate in most regions remains inconsistent with low and stable inflation.And as long as economic agents have jobs or think they will they will continue t
122、o spend,perhaps more moderately,and support activity.Chart 1 Unemployment rates(%)Source:FRED.We think this resilience is temporary.The determination of monetary policymakers to bring inflation(expectations)back to low and stable rates suggests that policy rates still need to go higher.And,given the
123、 big miss on correctly identifying last years incipient inflation pressure as persistent means that policymakers will error on the side of doing too much rather than too little.As a result,the window for a soft,non-recession landing is closing fast:a meaningful slowdown is highly likely to come.Infl
124、ation Fighting:Now Comes The Tricky Part Inflation fighting has been straightforward this past year.In a perverse way this has been aided by many central banks being behind the curve.Large and frequent rate rises were needed to bring the monetary policy stance beyond neutral in order to slow activit
125、y,bring price pressures down and bolster credibility.The period of outsized rate hikes appears to be ending,but rate hikes are not finished.We are simply returning to the environment of the last few decades when central banks moved in 25 basis point increments.The challenge now is when to stop hikin
126、g.Milton Friedman famously said that monetary policy works with long and variable lags.The implication is that policymakers should not be targeting current inflation(which they cannot influence);rather,they should be looking at forecast inflation in the second half of 2023 and expectations.If rate r
127、ises to date suggest that demand will slow sufficiently to bring inflation back to target over that forecast period,then there is no reason to continue hiking.With growth and demand remaining resilient and inflation forecast to remain 02468061998 2000 2002 2004 2006 2008 201020
128、018 2020 2022U.S.EurozoneU.K.AustraliaGlobal Credit Outlook 2023:No Easy Way Out Dec.1,2022 15 above target,given current monetary policy settings(and financial conditions),the implication is that policy rates will need to rise further.Complicating this challenge is the wedge between core
129、 and non-core inflation.Headline inflation(core plus non-core)has peaked or should be peaking in the coming months.However,core inflation continues to rise in many economies as labor markets remain strong and savings cushions are being deployed.Policymakers face a tricky environment where further mo
130、netary tightening is likely to be required at a time when growth and headline inflation are both falling.Chart 2 Policy rate hikes in 2022-G20 advanced economies(bps)bps-Basis points.Sources:Central Bank websites,S&P Global Ratings Economics.While inflation fighting is largely a domestic affair,ther
131、e is an international spillover dimension as well.This involves the U.S.dollar as the main global safe haven and U.S.Treasury as the main global reserve asset.When a central bank lifts its policy rates,one of the channels through which monetary policy works is through strengthening the currency,whic
132、h lowers import prices.However,when the U.S.Federal Reserve is raising rates at the same time,perhaps combined with global risk aversion,then the U.S.dollar strengthens and other currencies depreciate,even when the local central bank is lifting rates.This means,in effect,that other countries import
133、U.S.inflation through their weaker currencies and that local central banks need to do more to bring local inflation under control.On the real side,tighter monetary policy means lower output and inflation than would otherwise be required.The macro policy mix will become an increasingly important issu
134、e as inflation remains elevated and output slows.Ideally,monetary and fiscal policy should generally be rowing in the same direction.However,with inflation still higher but employment starting to soften,monetary policy will need to remain tight while pressure will grow for fiscal policy to ease.Addi
135、ng demand to the economy through fiscal stimulus will tend to push inflation higher and require more tightening by central banks.Governments will try to thread the needle and limit targeting support to the most vulnerable.00JapanEurozoneKoreaU.K.AustraliaCanadaU.S.Q4Q3Q2Q1Global Credit Ou
136、tlook 2023:No Easy Way Out Dec.1,2022 16 Chart 3 General government fiscal impulse Change in cyclically adjusted deficit(%of GDP)p-Projection.Sources:IMF Fiscal Monitor,S&P Global Ratings Economics.Our Forecasts:Not Materially Different Our updated GDP forecasts are not materially different from our
137、 previous round.The larger change is in 2022 since growth has held up better than we expected and upward revisions are widespread.We have marginally marked down 2023 growth,with the United Kingdom being an outlier as the recession there looks to be deeper than previously thought.Growth is unchanged
138、for 2024-2025.Inflation forecasts are generally higher across the board because price pressures are more entrenched than before,meaning both higher rates for longer and a slower return to target rates.U.S.Growth momentum continues to moderate,although output in the third quarter rose at an unexpecte
139、dly high 2.6%annualized.Retail sales rebounded in October,but the latest reading for consumer and business sentiment continue to ease;both remain above the neutral level of 50.Job gains in October came in strong as well,with some pressure starting to emerge in interest rate sensitive sectors such as
140、 real estate.Inflation eased to 7.7%year over year in October,lower than expected;core inflation also came in lower at 6.3%.Nonetheless,the Fed continues to move aggressively,delivering its fourth consecutive 75 basis point rate increase in early November.We are forecasting 1.8%growth in 2022 and fr
141、actionally negative growth in 2023 with a shallow recession in the first half of the year.Rising prices and interest rates will continue to eat away at household purchasing power and consumer confidence.Inflation should fall sharply from 8.1%this year to 4.3%in 2023 and continue toward 2%thereafter.
142、We see the Fed Funds rate now peaking at 5.25%.For further details,see Economic Outlook U.S.Q1 2023:Tipping Toward Recession.Eurozone Growth again surprised on the upside in Q3 with the Eurozone economy expanding by 0.8%on an annualized basis;all four major economies grew in the quarter.The labor ma
143、rket remains strong as employment expanded in the third quarter,and the unemployment rate stands at a record low 6.6%.Manufacturing production in the EU is at an all-time high,driven by a strong rebound in the automotive and the pharmaceutical sectors while energy-intensive sectors have curtailed ac
144、tivity due to high costs.Inflation remains extremely elevated at 10.6%in October,driven by energy emerging marketsGlobal Credit Outlook 2023:No Easy Way Out Dec.1,2022 17 price inflation of more than 40%.Core inflation remains lower than in the U.S.at 5.0%in light of smaller macroeconomic imbalances
145、.In a similar vein,Eurozone construction in Q3 was only 2.4%below the record level reached in Q1,showing a less-depressed housing sector than in the U.S.Sentiment remains weak as the composite PMI remains below 50,but edged up in November.We now forecast GDP growth for the Eurozone at 3.3%in 2022,fa
146、lling to zero next year as sticky inflation,higher interest rates and stunted hiring sharply decelerate spending.High wage growth and public investment will provide support.Germany is the weakest of the major economies and is likely to see a shallow recession during the year;other major Eurozone eco
147、nomies will likely escape that fate.Inflation should fall from 8.3%this year to 5.7%next year.We see 75 basis points more from the ECB.For further details,see Economic Outlook Eurozone Q1 2023:Reality Check.Asia-Pacific Chinas recovery in Q3,driven in part by state-financed industrial production gro
148、wth,masked underlying weaknesses.Organic growth remained soft and sentiment remained weak amid a broadly unchanged COVID stance and a property downturn.While the work report coming out of the Party Congress in October suggested a broadly unchanged approach to economic policymaking,the comprehensive
149、package of property policy easing measures announced in November should help lay the foundation for an eventual recovery.Growth in the rest of Asia is holding up well,with the more domestically oriented economies of India and Indonesia outperforming.Tight U.S.Fed policy remains a headache for the re
150、gions central banks,given imported inflation via currency depreciation.Japan remains an outlier.We have raised our 2022 China growth forecast by 0.5 percentage point to 3.2%and growth should pick up in 2023 as the government eases its COVID stance and the property market stabilizes;the forecast for
151、2023-2025 remains unchanged.Elsewhere,Indias forecast has been lowered by 0.5 percentage points for the next two fiscal years on slower global demand.Regional growth remains healthy overall.For further details,see Economic Outlook Asia Pacific Q1 2023:Global Slowdown Will Hit,Not Halt,Asia-Pacific G
152、rowth.Emerging Markets(EM)EM growth is decelerating in line with our expectations,with broad divergence based on proximity to Europe,size of the domestic market,and the composition of the export basket.Headline inflation has likely passed its peak in most EMs,driven by energy prices and slowing dema
153、nd,reflecting tightening financial conditions.EM central banks,which were quicker off the mark than their developed market(DM)counterparts,have in some cases stopped or paused their tightening cycles,particularly in Latin America and Eastern Europe(Brazil,Chile,Poland,Hungary).Turkey remains an outl
154、ier on the policy front.EM Asia has experienced less inflation pressures than other EMs,in line with the regional trend.High U.S.interest rates and a strong dollar pose outsized risks to EMs.We have lowered our GDP growth forecasts for EMs to 3.8%in 2023(from 4.1%).This revision comes from all EMs e
155、xcluding China and Saudi Arabia.Most EM will expand below their trend rates in 2023.Forecasts for 2024 and 2025 remain broadly unchanged.Even as inflation should ease in most EMs next year from falls in food and fuel inflation,its poised to remain above many EM central banks targets.For further deta
156、ils,see Economic Outlook Emerging Markets Q1 2023:Hanging In There,But Growth Prospects Remain Tough.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 18 Chart 4 GDP growth forecasts Annual percentage change(%)*Fiscal year,beginning Apr.1 in the reference calendar year.CCC-Credit Conditions Comm
157、ittee.Source:S&P Global Ratings Economics.Main Risks:Stubborn Inflation,Geopolitics Stubborn inflation requiring more than expected rate hikes remains our top risk.Indeed,we have already partly moved to this scenario from our previous forecast round.Policy rate projections in the U.S.are higher and
158、the probability of a recession-free soft landing continues to decline.Higher rate hikes are not fully priced in and the higher-for-longer scenario implies a potentially sharper downturn and more pain in the interest-rate sensitive sectors of the economy.Geopolitical developments comprise our second
159、downside risk.The Russia-Ukraine conflict has entered its eighth month with a large degree of uncertainty around its duration.The impact on sentiment has been well documented and is a contributing factor in our forecast for a sharp growth slowdown.More directly,good and energy prices remain elevated
160、 although ongoing increases(inflation)have disappeared for now.Nonetheless,supply concerns remain for gas(heating)and food,beyond this winter for the former at least.Any escalation or broadening of the conflict would magnify this risk.Higher Chinese growth stemming from a relaxation of COVID restric
161、tions remains our main upside risk.Although growth has picked up recently on the back of government investment spending,the household sector is languishing and growth for the year will come in well below the official target of 5.5%.While the property sector correction is necessary in our view and wi
162、ll be a multi-year process,vigorous COVID-related restrictions are putting a large drag on growth.A move toward the health policy in place in most other countries would boost growth and,given Chinas large size,global Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 19 Revelations And Non-Revela
163、tions In 2023 We wrap up with some likely macro revelations that are likely to occur in 2023,as well as some issues that will remain unresolved.Supply chain-related pressures that emerged as a result of the pandemic will likely be resolved in the first part of the year;however,the reconfiguration an
164、d rebalancing from efficiency to resilience will take years.The bottom of the current economic and financial cycle will be reached,probably in the second half of the year;however,the rebound will differ across regions,complicated by nationalism and geopolitics.Finally,inflation will have peaked and
165、will be on a downward path;however,getting inflation back down to low and stable and firmly re-anchoring expectations will be a long grinding.Putting the genie back in the bottle will not be easy.Other issues will remain unresolved.The rise of geopolitics and nationalism is not transitory and will b
166、e with us for the foreseeable future;the era of pure textbook macroeconomics has clearly ended.The green transition will accelerate as we pay more attention to sustainability(and its proper definitions)and natural capital.In short,it is not just about economics,credit,and finance any more.We are liv
167、ing in a multidisciplinary world,and we are not going back to the simpler pre-COVID world of 2019.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 20 Top Global Risks Difficult financing conditions persist,pressuring borrowers debt-service capacity Risk level Risk trend Sharply higher policy ra
168、tes and quantitative tightening by major central banks are pressuring already-strained financing conditionswhich is especially concerning against the backdrop of high debt levels,and could hurt lower-rated borrowers,in particular.A real or perceived monetary-policy misstep(in either direction)could
169、increase volatility in credit markets and result in an even sharper repricing of financial and real assets,higher debt-servicing costs,and tighter access to funding.This also poses risks for EMs that rely heavily on foreign funding,have large external and/or fiscal imbalances,and are exposed to furt
170、her strengthening of the U.S.dollar.Slumps in largest economies deepen the global slowdown Risk level Risk trend As many major central banks aggressively raise interest rates,persistent high inflation eats into consumer purchasing power,and energy scarcity continues in Europe,the U.S.and Europes lar
171、gest economies could fall into deeper downturns than we expect,accompanied by a steep rise in unemployment.At the same time,Chinas persistent COVID policy and prolonged weakness in the property sector could hurt consumption and business confidence.A worse-than-forecast recession in the U.S.and Europ
172、e,and further slowdown in China,could further weaken global growth.Input-cost inflation and weakening demand squeeze corporate profits,threatening credit quality Risk level Risk trend Hawkish central banks have yet to meaningfully bring down inflation,and economic activity is already slowingincreasi
173、ng downside macro risks and the likelihood of stagflation.As input-price pressures persist,companies that have been able to pass through increased costs to maintain profit margins are now finding this more difficult as consumers purchasing power erodes and pent-up demand after the pandemic fades.Con
174、currently,the strong dollar points to higher imported inflation for Asia-Pacific and EMs,compounding margin pressures.Geopolitical tensions intensify,roiling markets and weighing on business conditions Risk level Risk trend As the Russia-Ukraine war drags on and the risks of escalation(potentially i
175、nvolving NATO allies)increase,the effects on markets and economies could deepen.While European governments have lately succeeded in easing the continents energy crisis,the effectiveness of these measures is finite,and the conflict could keep upward pressure on energyand foodprices.Meanwhile,tensions
176、 between the U.S.and China continue to simmer.Heightened global tensions among major countries add to“event risk”and could spur market volatility,further disrupt supply chains,depress investor confidence,and diminish global cooperation regarding environmental and public health priorities.Structural
177、Risks Physical risks from climate change weigh on growth and food supplies,while energy-security concerns delay decarbonization Risk level Risk trend The Russia-Ukraine military conflict has forced policymakers to prioritize energy security and affordability over sustainability in the short term.In
178、this light,the phase-out of carbon-intensive energy sources has been delayed in Europeeven as investments in some renewable energy ramp up.As other countries,too,delay decarbonization,theyre exposed in variable ways to the environmental challenges,whether through physical risk,adaptation costs,or ov
179、erhauling fossil-fuel industries.The dire need for policy action could disrupt industries,with potential implications for business and financial risks in energy-intensive sectors.Cyberattacks disrupt business models,add to systemic risks Risk level Risk trend Amid increasing technological dependency
180、 and global interconnectedness,cyberattacks pose a potential systemic threat and significant single-entity event risk,with the Russia-Ukraine military conflict raising the prospect of major attacks.Criminal and state-sponsored cyberattacks are likely to increase;with hackers becoming more sophistica
181、ted,new targets and methods are emerging.As public and private organizations accelerate their digitalization,a key to resilience is a robust cybersecurity system,from internal governance to IT software.Entities lacking well-tested playbooks(such as active detection or swift remediation)are the most
182、vulnerable.Source:S&P Global Ratings.Risk levels may be classified as moderate,elevated,high,or very high,and are evaluated by considering both the likelihood and systemic impact of such an event occurring over the next one to two years.Typically,these risks are not factored into our base-case ratin
183、g assumptions unless the risk level is very high.Risk trend reflects our current view on whether the risk level could increase or decrease over the next 12 months.ModerateElevatedHighVery highImprovingUnchangedWorseningModerateElevatedHighVery highImprovingUnchangedWorseningModerateElevatedHighVery
184、highImprovingUnchangedWorseningModerateElevatedHighVery highImprovingUnchangedWorseningModerateElevatedHighVery highImprovingUnchangedWorseningModerateElevatedHighVery highImprovingUnchangedWorseningGlobal Credit Outlook 2023:No Easy Way Out Dec.1,2022 21 Credit Research&Insights Terry Chan Melbourn
185、e+61-3-9631- Dampening inflation without impeding growth is the trillion-dollar conundrum.Looking Forward|After inflation,whats next?How this will shape 2023 Policy,the dollar,and China will be the main drivers from a macro perspective.Balancing monetary and fiscal policy to dampen inflation without
186、 impeding growth is the trillion-dollar conundrum for policymakers.For example,the European Central Banks(ECBs)monetary policy normalization bears risks for the eurozones financial stability.Higher U.S.rates and investors risk aversion have led to a stronger dollar,which mostly affects emerging mark
187、ets(EM).Meanwhile,China is struggling with weak domestic demand because of COVID-19 lockdowns and highly indebted property and local government sectors.For energy and the environment,transition risk is at the fore.The Russia-Ukraine war has highlighted the vulnerability of global energy supplies,wit
188、h Europe having to cope without cheap energy.This crisis could alter the energy transition agenda and decarbonization pathway.Meanwhile,extreme weather events are the new normal,heightening economic,financial,and credit costs.Furthermore,climate change is already imposing short-and medium-term costs
189、.Rising borrowing costs may be detrimental for governments,corporates,and infrastructure.With governments carrying more debt because of the pandemic,higher policy rates of central banks will hit governments interest expenses hard.Meanwhile,after nearly a decade of lower for longer cost of goods and
190、interest rates,less-resilient corporates could buckle under higher inflation and borrowing costs.Current adverse conditions could further delay infrastructure investment,which has been lacking in some countries,such as the U.S.Risk trends shaping 2023 and beyond Source:S&P Global Ratings.Technology
191、risks are on the rise.Heightened geopolitical tensions and adverse economic conditions have increased technology risks.The U.S.-China strategic confrontation,exemplified recently by U.S.restrictions on semiconductor technology exports to China,threatens a bifurcation of the complex and expensive sem
192、iconductor supply chain.Meanwhile,the number state-and nonstate-sponsored cyberattacks could rise further,the former because of GeopoliticaltensionsPrice pressuresClimateconsiderationsDigital disruptionStrained financingconditionsPhysical riskCentral banksInfrastructureGlobal recessionriskCompetitiv
193、eenergyCorporatesEnergytransitionCyber riskEmerging marketsEconomic policySupply chainEmergingcredit riskClimate riskCryptoPrivate creditChinaIf central banks overcome inflation in 2023,the next big challenge for borrowers will be weak demand and residual high costs.The stress will be worse for high
194、ly leveraged and emerging market issuers.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 22 About 81%of rated EM corporates debt maturing through 2023 is in U.S.dollars geopolitical tensions,the latter as worsening economic conditions tend to trigger more desperate crimes.Private credit and di
195、gital currencies are expanding.The private credit market has grown substantially in recent years.The ability of companies in this market to navigate an environment of high inflation and rising interest rates remains to be seen.Within the decentralized finance(DeFi)ecosystem,we expect policy work aro
196、und stablecoins and central bank digital currencies(CBDCs)to accelerate.On the crypto front,differences in crypto assets and DeFi platforms point to the need for investors to do case-by-case risk analyses.What we think and why There will be hard choices to make on the macroeconomic front.We expect i
197、nflation fighting by central banks to take precedence,given their mandates.However,the ECB looks set to normalize monetary policy only gradually over multiple years to maintain the eurozones financial stability.Compared with developed markets,the head start by EM central banks will help with trade-o
198、ffs.That said,EMs are exposed to the stronger U.S.dollar.About 81%of rated EM corporates debt maturing through 2023 is denominated in U.S.dollars.Defaults will still rise in China,while the government is expected to inject short-term stimulus and undertake longer-term reforms.It will be a critical p
199、eriod for energy and the energy transition.We see Europes gas and power markets remaining very tight for at least two to three years.The energy price shock makes a green economy transition even more urgent.However,global decarbonization plans have major execution risks and need massive investment.Be
200、cause security of supply is now the priority,the energy transition will occur over decades.Meanwhile,the protection gap between physical climate risks and insurance coverage continues to widen.Risks will increase even if progress on decarbonization is made,due to historical emissions and the lagging
201、 effects on the climate.Broadly,refinancing will be harder.For sovereigns,slower global growth,inflation,and higher funding costs will likely outweigh governments countermeasures.Debt refinancing is becoming harder,and in some cases inaccessible(that is,for sovereigns at the lower end of the ratings
202、 scale).For corporates,we expect revenue momentum to fade in 2023 and cash flow to come under sustained pressure.That said,earlier refinancing has bought time,with interest expenses likely to build up only slowly.For U.S.infrastructure,the highest construction-cost inflation in decades comes just as
203、 historic levels of federal investment are beginning to erode the benefits.The need to mitigate challenges to tech supply chains and cyber risks will persist.Diversification of technology supply chains is hard to execute.The worlds complex tech-supply chains-with China at the center-took shape over
204、decades.At the same time,government investment in cyber capabilities and defenses will rise.Although cyber insurance can mitigate the risk of cyberattacks,increasing premiums and the scope of coverage are problematic.What a macro downturn means for private debt and the future of money.In private cre
205、dit,we could see a repeat of 2020,with more sponsor interventions,if the next recession remains a short and shallow one.Private borrowers,predominantly in the middle-market space,are more vulnerable to macro downturns given their scale and scope.On digital money,stablecoins and CBDCs wont become mai
206、nstream in 2023 due to their small market size and regulatory uncertainty.Rising interest rates will raise questions regarding the calibration of the yield they should offer.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 23 Higher energy bills over a prolonged period could result in increased
207、 social discontent What could go wrong The wrong monetary policy mix could be a problem.Overly expansionary fiscal policy could prevent economies from necessary slowdowns and eventually lead to more-aggressive monetary policy responses to control inflation.This could cause a more painful downturn to
208、 wring inflation pressures out of the economy,at the cost of lost fiscal space.For EMs,there is the risk of capital-allocation shifts if regional and global growth slows too much.The risks facing China are a weak GDP rebound in 2023,re-centralization carried out too far,and worse China-U.S.decouplin
209、g trends.For energy and environmental risks,theres a need to balance trade-offs.For Europe,the negative shock of higher energy prices is now,while the positive effects of cheaper labor and a weaker currency will only show up later.Higher energy bills over a prolonged period could result in increased
210、 social discontent.Uncertainties about implementation of new decarbonization plans,such as the European RePowerEU plan or the U.S.Inflation Reduction Act,may result in different decarbonization pathways for each industry.Policymakers also face dilemmas between transition and physical risks,where inv
211、estments in one might not always benefit the other.A wider war means slower growth.A key risk for all is a deeper-than-expected recession or downturn.This could be triggered,for example,by the Russia-Ukraine conflict spilling over to other countries,bringing NATO into the war.A capital flight to saf
212、e havens would add more pressure on EMs.The resulting supply disruptions would likely trigger higher inflation for longer,pushing the world into stagflation.Our corporate rating analysts forecasts reflect assumptions of a mild downturn,with corporate EBITDA rising just 1%in 2023.In contrast,the five
213、 earnings recessions since 2000 saw global EBITDA fall by an average of 16%,from peak to trough.Geopolitical tensions may further affect tech and digital disruption.Escalating geopolitical tensions add uncertainty to the technology sectors transformation.Trade tensions,pandemic-related disruptions,a
214、nd a drive by some economies to be less dependent on Chinese manufacturing are complicating the countrys place in global supply chains.Meanwhile,the effects of cyberattacks could spread beyond intended targets,and across sectors and geographies.States weaponization of cyber will also bring forth har
215、sher repercussions that could further escalate conflicts.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 24 Primary Credit Analysts Patrick Drury Byrne Dublin+353-1-568-0605 Jose Perez Gorozpe Madrid+34-914-233-212 jose.perez- Emerging Markets|Is a strong dollar a concern?How this will shape 2
216、023 Refinancing corporate debt could become tougher.About 82%of emerging market(EM)corporate debt maturing in 2023,with a global scale rating from S&P Global Ratings,is denominated in U.S.dollars.Whats more,we estimate that about 24%is rated BB+or lower.This will exacerbate already rising financing
217、costs for EM issuers with no dollar revenue or inadequate foreign exchange hedges.Refinancing could be especially difficult for lower-rated issuers already grappling with restricted or no access to primary debt markets.A strong dollar complicates central banks attempts to tame mounting inflation.We
218、expect core inflation to stay above central banks targets across EMs(excluding China,Saudi Arabia,and Vietnam)as the strong dollar and higher energy and food prices push up the cost of goods and services.Central banks ability to adjust policy rates further to bring core inflation in line with their
219、targets depends on the current rate of core inflation,the amount of slack in the economy,and pressure from wage costs.In some countries,the reduction of energy subsidies will make efforts to control inflation more complex.In frontier sovereigns with dollarized debt,limited domestic savings,low house
220、hold incomes,and pressured domestic currencies,high energy and food inflation continue to depress growth.What we think and why Refinancing risk linked to dollar-denominated debt will be concentrated in certain regions and sectors.Issuers incorporated in China with our global scale rating have by far
221、 the highest amount of dollar-denominated debt due in 2023,about 47%of the EM total l.Despite a slowdown of economic growth,weaker renminbi,and continued property market stress,which all heighten refinancing risk,most of the exposures in China are investment grade(rated BBB-or higher).Brazil shows t
222、he second largest exposure,followed by Mexico.By sector,financial institutions have the largest amount of debt in U.S.dollars,but higher interest rates should underpin banks net interest margins and profitability if asset quality does not deteriorate sharply.In contrast,nonbank financial institution
223、s are more vulnerable to a disruption of funding access in difficult operating conditions,given their reliance on wholesale funding since most cannot collect deposits.Pressure on some EM currencies will persist.The economies most vulnerable to this situation are net energy and food importers,such as
224、 Jordan and Lebanon,and those relying heavily on external financing,including Argentina and Turkey.EM currencies have depreciated not only due to rising U.S.rates but also because of worsening current account balances owing to the surge of commodity prices after the Russia-Ukraine conflict began.Ene
225、rgy importers currencies have been hardest hit due to the spike in oil and gas prices and subsequent shock to their terms of trade.Among the few exceptions are commodity exporters Brazil and Peru,as well as Mexico,whose currency appreciated in the 10 months to Oct.31,2022.The U.S.dollars strength he
226、ightens refinancing risk,prolongs inflationary pressures,and complicates fiscal and monetary policy,adding to an already uncertain economic outlook.Strained financing conditions Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 25 Food and energy net importers are the most vulnerable to a streng
227、thening dollar Sources:WTO,ITC Trademap,and Oxford Economics.What could go wrong A prolonged global recession or more severe slowdown in the U.S.would put further pressure on EMs.Despite weathering the credit impact of the pandemic arguably better than expected,key EMs remain highly vulnerable to a
228、severe economic downturn.A sharper slowdown in the U.S.than we currently expect would hamper economic conditions across many EMs,particularly those that have close trade links with the U.S.(such as Mexico)or receive substantial remittances from the U.S.(Honduras,El Salvador,and Guatemala).It could a
229、lso trigger increasing capital outflows as investors turn toward safe-haven assets.This could exacerbate the impact of the dollars strength,eroding the value of certain EM currencies and further increasing refinancing risk for all issuers,particularly speculative-grade entities with dollar-denominat
230、ed debt.Stubbornly high inflation could bring medium-term refinancing peaks into view.There are signs that the Federal Reserve Banks measures may be slowing the rate of inflation in the U.S.,but its early days yet,and inflation remains elevated in other regions,most notably Europe,and is beginning t
231、o increase in EM Asia.In China,a pickup in growth will likely fuel rather than temper global inflation.If persistent inflation prevents central banks from lowering policy rates or leads to further hikes,refinancing costs will remain elevated and access potentially restricted for longer.This would pu
232、t the spotlight on refinancing risk after next year,where 2024 and 2025 would represent peak years for U.S.-denominated debt.BRABGRCHNCOLEGYHUNINDIDNMYSMEXPERPHLPOLZAFTHATURVNMJORLBNMARTUNCZEURYALBTJKKEN(14)(12)(10)(8)(6)(4)(2)02468-10-8-6-4-202468Net energy exports%of GDP(2019)Net food exports%of G
233、DP(2019)Angola:(Food:-3.1%;Energy:37.1%)Qatar:(Food:-1.8%;Energy:35.3%)Oman:(Food:-2.2%;Energy:34.4%)Saudi Arabia:(Food:-2.1%;Energy:25%)Russia:(Food:-0.3%;Energy:13%)Nigeria:(Food:-0.92%;Energy:9.8%)Kazakhstan:(Food:-0.3%;Energy:21.1%)Argentina:(Food:7.7%;Energy:-0.3%)Ukraine:(Food:10.7%;Energy:-7.
234、4%)Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 26 Primary Credit Analysts Ruth Yang New York+1-212-438-2722 Ramki Muthukrishnan New York+1-212-758-2257 ramki.muthukrishnan Private Credit|How long can private credit remain the safety valve of liquidity?How this will shape 2023 Private credi
235、t anchored the debt markets in 2022,supporting not only the traditional direct lending market but also large corporate borrowers unable to tap the bond or broadly syndicated loan(BSL)markets.Lenders ability to step in and support deal flow for large corporates as well as middle-market borrowers refl
236、ects the convergence between broadly syndicated and direct lending over the past decade.The result has been a private credit market with enough liquidity to fund larger and larger transactions,but also the flexibility to provide an array of financing structures-including unitranche and floating-rate
237、 notes-alongside traditional leveraged loans.However,this market is also far more opaque than the bond and BSL markets,and lacks certain infrastructure,such as standard credit agreements,a secondary market,or third-party mark-to-market pricing.A healthy private equity market is fundamental to mainta
238、ining private credit liquidity.Private credit can continue to support broader credit markets as long as private equity remains healthy.Todays robust private equity developed primarily in a low interest rate environment.The private equity model of generating returns by investing in companies comes in
239、to question as borrowing costs rise and corporate growth stalls.If private equity fundraising falters,lenders ability to provide liquidity to the credit markets in 2023 comes into question-and without that funding,the private credit markets may also stall.Rising interest rates and unrelenting inflat
240、ion put the traditional private credit borrowers at risk.Middle-market borrowers still represent the core of the private credit markets,and they potentially have less resilience for inflation and higher interest rates.As the global economy looks set to enter a recession of unknown duration and magni
241、tude,the prospect of rising default rates in 2023 raises the question of how private credit will navigate that challenge.What we think and why Large corporate borrowers will still rely on liquidity from private credit.Although central banks are likely to ease off their aggressive rate hikes in 2023,
242、it will take some time for public debt markets to normalize,and private credit will continue to support financing to large corporate borrowers.However,while the size of private credit transactions has risen steadily this year,the markets ability to support jumbo transactions is limited and,as a resu
243、lt,large corporate mergers and acquisitions may be scarce.For instance,jumbo buyouts such as Citrix($16 billion),Tenneco($7 billion),and Nielsen($16 billion)got hung up in 2022,all of which were announced in the first quarter of 2022 but didnt syndicate until the fourth quarter.In addition,private c
244、redits ability to provide cross-border financing is in doubt,and both Citrix and Nielsen relied on fundraising in both the U.S.and European markets.Traditional private credit borrowers are at risk for a default cycle.Though they generally have tighter documentation and higher pricing,middle-market t
245、ransactions are still highly leveraged.S&P Global Ratings Credit Estimates provide some insights on leverage for private borrowers,Private credit kept deal flow moving in 2022,but with rising interest rates and higher inflation,its capacity to continue to be a source of liquidity is questionable-par
246、ticularly for the large corporate market.Strained financing conditions Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 27 The direct lending market has never been through a default cycle at its current size and the data shows that in key consumer goods,industries(such as household products,tex
247、tiles,apparel,and luxury goods)are highly leveraged and poorly positioned to pass on extra costs.We estimate their median leverage at slightly higher than 7.5x,and many of these companies already have thin interest coverage,with a median of about 2.0 x.Even in non-cyclical sectors such as health car
248、e,where the median leverage is lower at 6.2x,there are significant cost and operational issues,including staff shortages,a surge pricing for contract workers,wage inflation,reimbursements,and supply disruptions.All these issues increase costs and erode companies ability to service debt.What could go
249、 wrong If a global recession is long and/or deep,causing a swell of defaults and restructurings in private credit,the outcome is uncertain.The direct lending market was much smaller during the global financial crisis of 2007-2008,and its never been through a default cycle at its current size.Todays
250、private credit market involves a lot more borrowers than large corporates;S&P Global Ratings Credit Research&Insights analysis indicates that there are more than 5,000 individual borrowers in the business development companies(BDCs)they track,compared to approximately 1,200 issuers in the Morningsta
251、r/LSTA Leveraged Loan Index.This large number of borrowers raises the question of where the post-petition funding will come from after any bankruptcy filings,and whether there are enough advisors and workout specialists.We know that time in bankruptcy is closely related to recovery levels-the longer
252、 a restructuring takes,the lower the recovery.Will the restructuring infrastructure be able to efficiently support a large number of small borrowers,allowing the best possible outcomes and recoveries for lenders?An alternative scenario is that we could see a repeat of 2020 with more out-of-court res
253、tructurings than bankruptcies.Squeezed borrowers are likely to make all efforts to preserve liquidity including the temporary conversion of cash interest to partial cash and payment in kind(PIK)-pushing back scheduled amortization payments to a final single bullet payment,extending near-term payment
254、 maturities,temporary deferral of interest payments,and the provision of covenant holidays-all in return for sponsor infusion and possible tightening of documentation.However,most of these liquidity-preserving transactions offer lenders less than the original promise on the securities without adequa
255、te offsetting compensation,and we would regard them as tantamount to a selective default.In both restructuring scenarios,both borrowers and lenders will take losses.The post-recession landscape is also challenging.On an individual credit level,traditional private credit borrowers may not be able to
256、manage the normalization to higher interest rates.Deals are primarily floating rate,and the transition to a substantially higher base rate may weigh too heavily on borrowers margins.In addition,while spreads in the private credit market have generally been wider than those in BSL,the rising risks to
257、 credit will likely cause those spreads to widen more,further complicating the economics of raising capital in this market.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 28 Primary Credit Analysts Nicolas Charnay Frankfurt+49-693-399-9218 Sylvain Broyer Frankfurt+49-693-399-9156 Frank Gill Ma
258、drid+34-91-788-7213 Fiscal space and monetary policy flexibility are more limited today than before the pandemic Central Banks|Will ECB normalization jeopardize eurozone financial stability?How this will shape 2023 The ECB will continue normalizing its monetary policy in 2023.After ending net asset
259、purchases and quickly raising the main policy rates to a neutral level,the European Central Bank(ECB)will start reducing its balance sheet.A key milestone will be repayment of 2.1 trillion of outstanding TLTRO funding:cheap,long-term,and stigma-free funding that accounts for about 8%of eurozone bank
260、 liabilities,with variations across systems(see chart 1).Furthermore,the ECB will likely clarify the timing and pace for ending the reinvestment of maturing bonds held under quantitative easing,amounting to nearly 5 trillion.While reinvestments in the Pandemic Emergency Purchase Program(PEPP)should
261、continue in full through 2024,reinvestments in the larger asset purchase programs(APP)may start to decline from mid-2023.This journey may pose multiple risks to financial stability.Withdrawing liquidity from the banking system and bond markets will increase yields(see chart 2).The sudden widening of
262、 spreads between eurozone government bonds in June 2022 was a reminder that financial fragmentation risks and the sovereign-bank nexus remain in Italy,Greece,and Spain(see chart 3).The ECB was quick to react,and the announcement of its transmission-protection instrument helped spreads tighten afterw
263、ard.However,this antifragmentation tool has yet to be used and potential implementation might fall short of market expectations.Finally,the ECBs gradual shift toward quantitative tightening comes amid yet another external shock to eurozone economies:rising energy and food prices as a consequence of
264、the Russia-Ukraine conflict.Fiscal space is more limited today than in the months before the pandemic,and monetary policy flexibility is also much more constrained than in early 2020.What we think and why We expect normalization of ECB policy to take place gradually,over many years.With the ECB enco
265、uraging banks to repay TLTROs,this position on its balance sheet will shrink first and end sometime in 2024.The reduction of bond holdings might be more gradual,even if reinvestments under the APP end in full from mid-2023.First,we believe that active quantitative tightening(selling bonds in the mar
266、ket)will remain an option for the ECB.Second,since the average maturity of the ECBs bond portfolio is around seven years,reducing bond holdings passively by not reinvesting their proceeds prevents any significant reduction of this balance-sheet position before 2025.We see eurozone sovereigns as bett
267、er prepared to deal with financial fragmentation than 10 years ago.Europe has tools at hand to address this risk.On the monetary policy side,the flexibility given to reinvestment in the PEPP,the full allotment procedure,and Outright Monetary Transactions are all firewalls to the risk of fragmentatio
268、n.On the fiscal policy side,although not a national budgetary measure,the NextGenerationEU plan is acting as a redistributive mechanism that benefits more fragile economies in the EU.Also,the suspension of EU budgetary rules has given member states room to absorb external shocks,albeit a revised ver
269、sion of these rules is set to be reactivated in 2024.In addition,economic fundamentals are better today than they were a Financial accidents could happen on the road to monetary policy normalization,but eurozone sovereigns and banks are more resilient to such events than 10 years ago.Strained financ
270、ing conditions Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 29 decade ago.For instance,in Spain and France,structural reforms,which have targeted the labor market and price markups,have helped narrow the cost-competitiveness gap to Germany.Reforms attached to NextGenerationEU should benefit
271、 European countries competitiveness by investing in human and physical infrastructure,and mandating reforms to improve the business environment and labor flexibility.For example,Italy,under its National Recovery and Resilience Plan,is moving ahead with pro-growth reforms aimed at reducing bureaucrac
272、y and improving the efficiency of its public administration and judicial system.Overall,higher rates will benefit eurozone banks,but some banks will struggle with more-expensive funding.A return of interest rates to neutral levels is a clear positive for eurozone banks,which will finally see net int
273、erest income grow.However,the end to TLTRO funding will be a challenge for several eurozone banks that will need to refinance with stable,long-term funding to meet regulatory requirements.Issuing long-term debt or collecting deposits will come at a high cost for eurozone banks with weaker funding fr
274、anchises or perceived as exposed to weaker sovereigns,such as Greek or Italian banks.Access to inexpensive term funding will again become a key competitive advantage for eurozone banks,and potentially another source of financial and economic fragmentation in Europe.What could go wrong Financial mark
275、ets could lose trust in the ECBs capacity to maintain a gradual approach.Normalizing monetary policies was never going to be easy for the ECB but is being made more complex by the geopolitical risks we see materializing in Europe and implications arising from energy prices across the region,as well
276、as the risk of fiscal missteps along the way.The financial stress experienced in the U.K.government bond market lately was a reminder of the risks involved in any uncoordinated change in the policy mix.Another risk to financial stability could materialize if the ECB starts actively selling its bond
277、portfolio,should inflation remain far above target for longer.There is a risk that fiscal policy tightens too quickly as a consequence of more turbulent market conditions,exacerbating risks of a more protracted economic recession.The cost of past fiscal interventions to shield households and compani
278、es from various shocks-including a global pandemic and surging energy prices in connection with the war in Ukraine-means that European governments are entering this period of rising interest rates with very limited fiscal space.As a consequence,fiscal policy,like monetary policy,will gradually tight
279、en.Over the last year,liquidity in government bond markets has compressed,partly because nonresident participation in key markets has declined(see chart 4).Uncertainty about economic growth and inflation over the next few years will,in our view,increase the risk of volatility in government bond mark
280、ets,such as we saw earlier this year for U.K.gilts.As the ECB tapers its net purchases,the markets absorption capacity will diminish further.Mindful of this,larger European sovereign issuers appear more focused on reducing net borrowing further in 2023 and 2024.But they still aim to withdraw fiscal
281、stimulus only gradually.Worsening financing conditions would potentially force issuers to front-load procyclical cuts to public spending and potentially energy subsidies(Germany being the notable exception with its proposal of up to a 200 billion shield),leading to potentially self-defeating austeri
282、ty at the national level.Tighter funding conditions could expose the financial systems most vulnerable corners but will unlikely pose a systemic threat to eurozone banking systems.Certain nonbank actors running structural liquidity mismatches could face funding squeezes,such as open-ended investment
283、 funds,highly leveraged real estate investment funds,and finance companies relying on market funding.Also,sharp price movements could expose nonfinancial corporates transacting in derivatives(often for good risk management purposes)but facing massive margin calls.As for eurozone banks,much has been
284、done to enhance their resilience to shocks since the Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 30 introduction of the Single Supervisory Mechanism.EU banks are now well capitalized(with CET1 ratios increasing by about 270 basis points to 15.2%since 2015),highly liquid,and better risk man
285、aged than 10 years ago.Financial instability could lead to some mark-to-market losses,as well as rising funding and credit costs,but also to increased client trading activity.This would dent overall profits,with winners and losers depending on the business mix and funding strength.However,a repeat o
286、f the financial crisis,with a negative feedback loop between financial instability,bank deleveraging,and economic contraction,remains a remote possibility.Chart 1 Banks have unequal needs to refinance ECB funding ECB funding by country Chart 2 Less ECB bond holdings may risk financial stability ECB
287、purchases have reduced the term premium by 50bps Chart 3 The bank-sovereign nexus has not weakened significantly in some countries MFIs holdings of domestic government debt Chart 4 Non-residents have reduced their relative holdings of Italian government debts offset by central bank purchases Italian
288、 Central Government debt by creditor MFIs-Monetary financial institutions.Sources:ECB,Banca dItalia,S&P Global Ratings.0500600800GreeceItalyCyprusSpainPortugalNetherlandsAustriaFranceBelgiumGermanyLithuaniaFinland%Bil.Outstanding amount of ECB funding (left scale)As%of total liabilities(r
289、ight scale)2030405060708090100(80)(70)(60)(50)(40)(30)(20)(10)02015 2016 2017 2018 2019 2020 2021 2022Share of German bunds not held by ECB(%)bps10Y Bund-OIS(left scale)Bund Free float(right scale)0246800022%total assetsGermanyFranceItalySpainPortugalGreece0102030405
290、020062008200022%Domestic retailDomestic banksDomestic non bank financialBanca dItaliaGlobal Credit Outlook 2023:No Easy Way Out Dec.1,2022 31 Primary Credit Analysts Robin Prunty New York+1-212-438-2081 Kurt Forsgren Boston +1-617-530-8308 Jenny Poree San Francisco+1-415-371-50
291、44 Infrastructure|Will high inflation and rising interest rates derail U.S.public infrastructure investment?How this will shape 2023 U.S.state and local governments have shouldered an increasing share of infrastructure funding burdens.This spending decelerated in the decade following the Great Reces
292、sion,due in part to slower-than-average revenue growth and increasing fixed-cost obligations,like pensions and health care(see chart).We estimate this led to underinvestment of$1.5 trillion for states alone.A comprehensive tally of unfunded infrastructure in the U.S.is elusive,but the American Socie
293、ty of Civil Engineers(ASCE)most recent assessment is$2.6 trillion.Given persistent inflation,we expect this gap to widen.Recent federal legislation represents an important shift.The Inflation Reduction Act,the Infrastructure Investment and Jobs Act,and some portions of the American Rescue Plan promi
294、sed much-needed federal support and relieved some pressure on state and local governments.Combined,well over$1.5 trillion is targeted for traditional infrastructure,including roads,bridges,airports,transit systems,water and wastewater utilities,power grids,and broadband networks.Additionally,the new
295、 laws expanded spending on resiliency preparedness against storms,droughts,and wildfires,with a broad range of provisions focused on reducing demand for fossil fuels.This is a historic shift in funding,with substantial short-and long-term economic benefits.The ability to deploy and leverage these re
296、sources will depend on macroeconomic conditions over the next several years,given the time limitation associated with most of these initiatives.The amount of state and local government debt has been stable for the past 10 years.This contrasts with rapid growth at the national level.While this might
297、indicate debt capacity to leverage available federal resources,the reality is more complicated.The slow pace of economic growth and fixed cost pressures due to pensions and other health care obligations limit states discretionary spending capacity and contribute to a cautious approach to debt issuan
298、ce,given balanced-budget requirements.So,despite a prolonged period of low interest rates and favorable municipal market conditions,states and many local governments have deleveraged.State and local fiscal conditions are relatively strong now.However,prospects for a recession and rapid acceleration
299、of construction costs and interest rates could be a disincentive for state and local governments to issue debt to fund large projects.What we think and why Higher construction costs could force tough choices.The highest construction-cost inflation in decades comes at an inopportune time.An unprecede
300、nted amount of federal investment in infrastructure is starting to flow,but rising material and labor costs are beginning to erode some of its benefits.One broad measure of construction inflation is the Producer Price Index for building material and supplies dealers,which in September was more than
301、30%higher than pre-pandemic levels,with oil-price volatility(a key input to roadway and building materials and construction equipment)adding to the increase.Even if supply pressures ease,massive federal spending will increase competition,boosting prices further.Beyond fluctuating commodity and As po
302、licymakers raise interest rates to fight inflation,higher prices and borrowing costs could limit much-needed infrastructure investment,with long-term economic and financial implications.Prospects for a recession and rapid acceleration of construction costs and interest rates could be a disincentive
303、for state and local governments to issue debt to fund large projects Strained financing conditions Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 32 Read more U.S.Inflation Reduction Act Emphasizes Affordability;Credit Implications Across Sectors Are Mixed,Aug.18,2022 Construction Cost Inflat
304、ion Weighs On U.S.Public Infrastructure Investment,April 14,2022 Outlook for North America Engineering and Construction And Implications For P3 and Muni Infrastructure,April 7,2022 Construction Ahead:Roughly$1 Trillion Infrastructure Act Tackles Backlog And Future Risks,Nov.10,2021 Infrastructure Af
305、ter COVID-19:Risk Of Another Lost Decade Of U.S.State Government Capital Investment,Oct.29,2020 equipment prices,a shortage of skilled labor and the corresponding growth in wages will likely be more enduring.Its possible that some projects may be downsized,delayed,or canceled as the cost of material
306、s and labor escalates.Rising interest rates will increase the cost of borrowing.Tax-exempt rates are up more than 250 basis points year over year,with credit spreads also widening considerably.The current MMD(Municipal Market Data)curve remains well above the 20-year average.Although macroeconomic f
307、undamentals have influenced the curve,the main driver of spread widening is municipal bond fund outflows.With markets remaining volatile,as rates rise,the spreads on lower-rated issuers will likely follow,increasing financing risks.Higher rates imply limited refunding opportunities,already impaired
308、following tax-law changes in 2017,and this has implications for many municipal market issuers budgets.Furthermore,the availability of credit(both letters and lines)could shrink and subsequently push up the cost of credit if banks become more defensive ahead of an unpredictable recessionary environme
309、nt and expected need to preserve capital.This dynamic will likely increase costs for issuers with variable-rate debt or those that use lines of credit for liquidity purposes.What could go wrong The recession could be more severe,or last longer,than we currently expect.Despite the economys recent wea
310、kening and our expectation of a recession in 2023,credit conditions in U.S.public finance have been relatively stable,largely due to strong reserves and federal stimulus.A deeper or more prolonged recession than we assume in our base case may strain budgets and possibly translate into lower capital
311、investment.Less investment means slower economic growth,diminished productivity,and deferred maintenance over the next 20 years.The ASCE estimates the economic opportunity cost of failing to close the infrastructure-investment gap would include the loss of$10 trillion in potential U.S.GDP growth,mor
312、e than 3 million jobs,and$2.4 trillion in export value by 2039.Deferring critical maintenance will also increase costs in the future.U.S.states non-general fund capital expenditure lags other spending items Capex as percentage of total expenditures(%)Source:National Association of State Budget Offic
313、ers;S&P Global Ratings.024689732005200720092001720192021Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 33 Primary Author Paul Gruenwald New York+1-212-438-1710 Read more Dispatch from Washington:Initial Takeaways from the IMF and IIF Annual Meetings
314、,Oct.14,2022 No Easy Way To Correct Outsized Dollar Strength,Oct.6,2022 Macro|As global growth slows,why is the right mix of monetary and fiscal policy important?How this will shape 2023 The current macro juncture is awkward for policymakers.Rising,above-target inflation and slowing,below-potential
315、growth are not a good combination,since the two main macro policy arrows are pointing in opposite directions.High inflation calls for restrictive monetary policy to rein in demand while low growth calls for looser fiscal policy to stimulate demand.The more fiscal policy expands,the more tightening t
316、he central bank needs to do.This trade-off is inevitable at present,but the pain and inefficiencies rise when the tug of war worsens.Rising rates cause pain across the economy-to asset holders,borrowers,and workers-while government borrowing in the context of already high debt eats up precious fisca
317、l space.Inflation signals remain noisy,clouding the picture.Even after a year of inflation rates not seen since the 1980s,prominent economists cannot agree on the seriousness of the challenge.Some think policymakers are raising rates too quickly,while others think that policymakers will need to do m
318、ore than what is currently priced in markets.Needless to say,this lack of clarity complicates the policy response,as does the uncertain lag between policy action and economic outcomes.General government fiscal impulse Change in cyclically adjusted deficit(%of GDP)e-Estimate.Sources:IMF Fiscal Monito
319、r,S&P Global Ratings Economics.What we think and why Given a huge policy miss,inflation fighting will take precedence over preserving growth.Central banks credibility has taken a sizable hit over the past year.This is particularly true in advanced economies,where the debate over transitory versus pe
320、rsistent inflation raged while inflation blew past policy targets,necessitating the strongest rate hike cycle in four decades.(8)(6)(4)(2)024620022e2023eEurozoneU.S.G-20 emerging marketsMonetary and fiscal policy should work in tandem for the best macro outcomes.But thats a dilemma amid l
321、ow growth(calling for loose fiscal policy)and high inflation(needing a tight monetary stance).Global recession risk Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 34 There will be a temptation to apply policy band-aids Fiscal policy will likely target protection of the most vulnerable.While g
322、overnments are mindful of their debt sustainability,they will not completely sideline fiscal efforts in the pursuit of price stability.There is a clear economic-and moral-case for cushioning the shocks of higher inflation and slower growth to societys most vulnerable.Price controls should not be con
323、fused with actual inflation gains.There will be a temptation to apply policy band-aids.While capping the price tag of a particular good or service obviously lowers the price impact,it likely involves fiscal costs and does nothing to reduce underlying upward price pressures from a too loose policy st
324、ance.What could go wrong The wrong policy mix could make things worse.Overly expansionary fiscal policy could prevent the economy from a necessary slowdown and lead to a more aggressive monetary policy response to control inflation.This could lead to a more painful downturn to wring inflation pressu
325、res out of the economy,at the cost of lost fiscal space.Monetary policymakers could ease up too soon,wary of causing too much short-term pain.While largely technocratic,central bankers are not fully insulated from political pressures.In the case of a sharp slowdown with still rising inflation expect
326、ations,monetary authorities could lose their mettle,resulting in an eventually steeper path of rate rises to get inflation under control,causing a deeper recession and higher unemployment.Central banks independence could come into question,portending fiscal dominance.The idea of a technocratic centr
327、al bank operating independently within the government has generated decades of relative price stability.Moves to put the central bank under control of the legislature risks politicizing monetary policy.This would likely lead to an inflation bias that artificially pumps up growth,leading to inferior
328、economic outcomes.Global Credit Outlook 2023:No Easy Way Out Dec.1,2022 35 Primary Credit Analysts Eunice Tan Hong Kong+852-2533-3553 Terry Chan Melbourne+61-3-9631-2174 China|Will cracks break the economic wall?How this will shape 2023 Low productivity to slow Chinas growth trend.COVID-19 lockdowns
329、 and a property downturn have slowed Chinas growth momentum.The countrys investment-led growth model is debt fueled and losing steam.According to the U.N.,Chinas share of global exports stood at 15.2%in 2021,a five-fold increase since 1995.However,other emerging markets are eclipsing Chinas advantag
330、e of cheap labor.Furthermore,the countrys aging demographic reduces labor participation(with the retirement age unchanged).Unless these challenges are addressed,Chinas long-term growth trajectory is likely to be subdued(see chart 1).Heavy debt is a burden.Some corporate sectors(e.g.,property and con
331、struction)and local governments have excessive debt,while the central government has relatively low indebtedness(see chart 2).We believe Beijing is reluctant to deliver an all-encompassing bailout of overleveraged borrowers for fear of encouraging further moral hazard.Government stimulus packages ar
332、e blunt instruments and funds dont always go where needed.Consequently,tighter oversight on infrastructure financing could come,to improve the viability of entities.The U.S.tech war rages on.Chinas strained relationship with the U.S.is bad for the economy.The most recent development is the U.S.gover
333、nments restriction on the export of advanced semiconductor hardware and talent to China.China is one of the worlds largest importers and exporters of semiconductor chips(see chart 3).Integrated circuits are among the countrys top two imports by value(the other is oil).While China has stated its intention to be a global technology leader,its advanced chip-design capability is still developing.Conse