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In This List

With a U.S. Government Shutdown, There Will Be Blood

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Global Platts

Energy: What to Watch in 2019

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

U.S. Bank Outlook 2019 Still Sunny, But The Good Times May Be Behind Us


With a U.S. Government Shutdown, There Will Be Blood

When Congress returns from recess after the Labor Day holiday, they have a lot of high-stakes deadlines to resolve. First on their list: to extend funding for government agencies and raise the nation's debt ceiling. Otherwise, the government shuts down, and once again Congress will leave Washington, and with it, the Republican strategy to rewrite the federal tax code in an effort to rescue their struggling legislative plans will be sidelined.

S&P Global Ratings U.S. economics team continues to see the likelihood of a shutdown in late September as slim, with the crisis from Hurricane Harvey further reducing the chances. But betting on a rational U.S. government can be risky. With that in mind, assuming that the government crosses that line, S&P Global economists estimate that a shutdown could shave approximately 0.2 percentage points, or $6.5 billion, off of real fourth-quarter GDP growth for each week it drags on. If a shutdown were to begin later in the fourth-quarter, the hit to quarterly GDP growth would be even larger. But, since this shutdown would potentially happen at the start, some initial losses would be regained once government facilities are back in operation. Other economic activity, however, including lost productivity from furloughed government employees, would not be recovered.

Overview
  • S&P Global economists predict a government shutdown, if it began early in the quarter, would shave about 0.2 percentage points, or at least $6.5 billion, off of real fourth-quarter GDP each week it continues.
  • A shutdown affects not only Washington and its employees but has ripple effects across sectors throughout the country--from shopping malls to national parks--from contractors to hotels.
  • Our analysis is based in part on the 1995-1996 government shutdown and the more recent 16-day shutdown during the Obama Administration in October 2013.
  • A shutdown comes at the same time as the Treasury hitting the debt ceiling. Failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery.

At first blush, chances of a shutdown seems highly unlikely, given the administration is Republican and the GOP holds majorities in both the House and the Senate (albeit, slim ones). However, the recent comment by President Trump at the Arizona rally on Aug. 22--"If we have to close down our government, we're building that wall," referring to the proposed Mexican border wall--and reiterated by the White House on Aug. 24, has raised the specter that a shutdown is looming at the end of September. At the same time, a debt-ceiling impasse would leave the Treasury with insufficient cash to meet all financial obligations, making a very bad situation much worse.

Although lawmaker Paul Ryan doesn't think that "anyone is interested in a shutdown," the president can veto any spending bill that reaches his desk, ultimately forcing closure of the government. Conversely, Congress may have the incentive, and enough votes, to override a presidential veto in order to avoid a shutdown.

Our analysis is, in part, based on the experience of the back-to-back shutdowns of almost four weeks that happened during the Clinton Administration in 1995-1996 and the more recent 16-day shutdown during the Obama Administration in October 2013. While the Bureau of Economic Analysis (BEA) said that the full effects of the partial October 2013 shutdown can't be quantified, they estimated that the direct effect from lost hours worked by federal employees reduced fourth-quarter GDP by 0.3 percentage points. (The BEA earlier estimated that one-third of the 11.9% decline in federal spending and investment in the fourth-quarter 1995 GDP report was due to the shutdowns of the federal government in mid-November and late December.)

The Butterfly Effect

The BEA estimated only the direct impact of the shutdown. But, since the government touches almost every aspect of the economy, the full effect of a shutdown would likely be much larger. A disruption in government spending means no government paychecks to spend at the mall, lost business and revenue to private contractors, lost sales at retail shops, particularly those that circle now-closed national parks, and less tax revenue for Uncle Sam. That means less economic activity and fewer jobs. We expect something in line with the Council of Economic Advisors (CEA), which earlier estimated that 120,000 fewer private-sector jobs were created during the first two weeks of the 2013 shutdown.

Ironically, a possible shutdown will add to the budget deficit, because it's costly to stop and start programs. Based on the total cost of furloughed federal workers, the 16-day shutdown in 2013 cost the U.S. government at least $2 billion, according to the Office of Management and Budget (OMB), while the two 1995-96 shutdowns cost the U.S. government $1.4 billion ($2.2 billion in today's dollar).

A shutdown will initially slow GDP, because the output lost when hundreds of thousands of government workers are furloughed subtracts directly from GDP. And, with each day the shutdown drags on, federal workers may start to pull back on household spending, at restaurants, childcare, or retail stores because of worries that they won't get paid anytime soon. That's almost 1 million people who won't be getting regular paychecks.

Yet the economic impact of the shutdown goes beyond the federal workforce.

Private contractors who depend on government sales will lose business. During the 2013 shutdown, according to a National Association of Government Contractors survey, 29% of members said that, as a result of the stalemate, they planned to delay hiring. Fifty-eight percent said it would have a negative effect on their business. As contractors delay project, reverberations will be felt throughout the spending chain. This will likely have a ripple effect that spreads through to the economy more broadly.

Vacations and school trips will likely be curtailed when hundreds of national parks and monuments are closed for business. (Even the Panda Cam at the Smithsonian will be under lock and key.) With national parks spread across the U.S., closing these sites does not just mean lost ticket sales. Many regional economies depend almost entirely on visitors to nearby national parks. Those visitors eat at their restaurants, stay at their hotels, and shop at local businesses. That creates jobs, which may no longer be needed if a shutdown drags on.

The End of Days

Businesses don't want to invest during periods of uncertainty, and households will likely delay spending. We saw huge effects during the U.S. debt ceiling crisis in the summer of 2011, with consumer confidence hitting a 31-year low in August, and third-quarter annualized real GDP growing just 0.8%. Given that this round of debt-ceiling negotiations will happen amid government shutdown threats, the hit to the economy could be even more severe.

This all is a prelude to the Treasury Department's hitting the debt ceiling on Sept. 29, 2017, one day before the expiration of the bipartisan spending agreement to fund government agencies. With markets somewhat jittery about a possible selective default of the U.S. sovereign, worries of a shutdown threat only adds to their concerns. The shutdown and the looming debt ceiling combined could significantly hurt business and consumer sentiment, as well as the overall economy. Government disarray leaves GOP lawmakers' hope to approve a compressive tax plan, or even our expectation for a modest tax cut, by early next year, now seem like wishful thinking.

While we believe the Senate will pass its deal to raise the debt ceiling, the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.

Should a default occur, the resulting sudden, unplanned contraction of current spending could see government spending cut by about 4% of annualized GDP. The economy would fall back into a recession, wiping out much of the progress made by the recovery.

Finally, the economists at the Federal Reserve, whose monetary policy is now "data-driven," will no longer have government economic reports, such as the Bureau of Labor Statistics' jobs figures, that they need to understand what's going on in the U.S. economy. The length of time that the central bank is without data could add more uncertainty to the Fed's decision that an economic recovery is making progress and cause members to push out the start of the tapering. And with the risk of a government shutdown as we head toward the debt ceiling increasing, the Fed will be more cautious. While we still expect the Fed to announce plans to gradually unwind its balance sheet, their likely plans to delay interest rate hikes until next year will be even more justified. In turn, the economists at S&P Global, like those from across a multitude of sectors, may be forced to re-examine our forecast for the U.S. and the prospects for potential long-term economic growth.

According to the OMB, the last three government shutdowns already cost the federal government over $4.25 billion, when we adjust for inflation. These numbers don't begin to account for lost federal worker productivity and lost trust in the federal government, not to mention lost economic activity (and lost taxes) on money never spent by businesses and households while the government is closed. While we at S&P Global Ratings continue to see the likelihood of a shutdown in late September as slim, the risks are increasing, with the costs high.

 



COP24 Special Edition Shining A Light On Climate Finance

Highlights

− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

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Energy: What to Watch in 2019

Highlights

S&P Global Platts Analytics Issues Two Special Reports

Pricing across the global energy markets will face headwinds in 2019, with a weaker and more uncertain macroeconomic framework deflating price formation in general, according to two special reports just issued by S&P Global Platts Analytics. Such headwinds will require the industry and portfolio managers to take a big-picture approach.

See the Executive Summary of the S&P Global Platts Analytics special report 2018 Review and 2019 here. Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here.

"One of the key lessons learned in 2018, painfully by some, is that market sentiment can shift violently without much change in fundamentals, requiring a steady, holistic perspective," said Chris Midgley, global head of analytics, S&P Global Platts. "It is clear that this volatility will remain a feature across the energy markets in 2019, particularly as IMO 2020 nears."

Particularly blustery headwinds are in store for markets where prices finished 2018 at elevated levels, and well above costs, such as North American natural gas and global coal. However, if the supply side can adjust to the reality of slowing demand growth, energy prices can find support. For natural gas liquids (NGLs), the ongoing logistical constraints at the US Gulf Coast are likely to manifest on continued price volatility, particularly for ethane and liquid petroleum gas (LPG), over the next year despite strong global demand.

LPG, such as propane and butane and used in transportation fuel, refrigeration, heating and cooking, is rapidly facing US export capacity constraints, especially along the US Gulf Coast. For LPG feedstock propylene, there is clear potential for high volatility globally over the next 12-18 months.

Analysts at S&P Global Platts see weakening prices of Henry Hub natural gas. The slowdown in US demand growth will exceed that of supply. But if winter temperatures prove to be colder than normal, near-term prices will need to move higher to bring on enough supply to replenish depleted storage levels.

For global liquefied natural gas (LNG), it will be end-user-backed LNG demand that faces particular struggle to cope with the speed and force of new supply entering the market in 2019. Non price-responsive demand in Asia will be easily met and JKM spot physical prices (reflecting LNG as delivered into Japan, Korea and China) will sag next year.

Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here. Among the 22 key take-away themes:

  • NGL supply growth will strain the North American energy system
  • Saudi Arabia will need to be nimble to balance 2019 oil supply
  • US oil supply limited by pipelines
  • Oil demand slowing: trade war, industrial slump
  • 2019 LNG supply additions largest since the Qatari mega-trains
  • US gas supply growth to exceed demand growth even with LNG exports
  • Global solar growth slowing
  • Shipping disruption looming - IMO 2020
  • New Russian gas pipeline advantage over Ukraine
  • US coal demand to decline again in 2019
  • Growth in new refineries and complex capacity likely to weigh on refinery margins especially in Asia

Year 2019 will certainly be one of transition for crude and refined oil products as it will lead into 2020 when roughly three million barrels per day of high-sulfur fuel oil must be “destroyed” (including enhanced usage of HSFO in power generation) due to the International Marine Organization (IMO) mandate of eco-friendly shipping fuels in use at sea. A similar amount of middle distillate/low sulfur fuel must be created (by refinery changes and by running more crude oil. The increase in refinery capacity between now and 2020 is large, but mostly needed to cover normal demand growth. Expect prices of light sweet crudes to be bid up in 4Q19.



Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

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U.S. Bank Outlook 2019 Still Sunny, But The Good Times May Be Behind Us

Highlights

- S&P Global Ratings expects U.S. banks to face continued market volatility in 2019 stemming from a slowdown in economic growth, policy uncertainty, rising rates, and monetary tightening.

- Although it is not our current base, we believe we are incrementally closer to a turn in the credit cycle in 2019. When the credit cycle does turn, bank profitability will come under pressure as imbalances brought on by years of excess liquidity and low rates will flow through banks' income statements and balance sheets.

- Key areas of concern in credit are commercial and industrial (C&I) -- particularly leveraged lending, commercial real estate (CRE), and pockets of consumer credit -- credit cards, auto, and personal loans.

- Separately, fee income could come under pressure as the economy slows and if market valuations decline. Bank revenues in areas like assets and wealth management may also decline because they are tied, in part, to market valuations. Fees for originating and selling mortgage loans could also drop.

- Nevertheless, U.S. bank balance sheets are sound, with higher capital and liquidity levels, and we believe rated banks are well prepared to withstand potentially weakening credit conditions.

- New regulation may result in lower capital and liquidity levels for some (mainly regional) banks. On the other hand, the stressed capital buffer (SCB) proposal could prompt some global systemically important banks (GSIBs) to continue to face higher capital requirements.

- Longer term, from a business standpoint, it will be important for bank management teams to remain vigilant to disruption from technologically sophisticated competitors (fintechs), as well as to the threat of cyberattacks.

- Under our base-case scenario, we expect bank ratings to remain largely stable through 2019. 83% of our operating company ratings currently have stable outlooks, 8% have positive outlooks, and 9% have negative outlooks.

Our Fundamental Forecast For U.S. Banks In 2019 Remains Slightly Positive

Current U.S. Bank Ratings Distribution

Current Bank Ratings Outlooks

Bank Profitability Trends

Loan Growth Trends

Flattening Yield Curves And Rising Deposit Costs Should Lead To Decelerating NIMs

Asset Quality Is Excellent But Likely Will Deteriorate Incrementally As Rates Rise

Aggregate Net Charge-Off Rates Remain Below Historical Levels

Investment-Grade Loans Moving To Speculative-Grade Could Pressure Banks' C&I Portfolios

Low Interest Rates Have Helped Keep Debt Service Low For Consumers, But Trends Could Be Less Benign As Rates Turn Higher

The Evolving Composition Of Consumer Debt

Postcrisis Credit Card Loan Growth Has Been Robust

Capital Levels Are Likely To Decline For Regional Banks But May Increase For Some GSIBs

All Eight U.S. GSIBs Are Above Their Required Regulatory Minimums

Bank's Funding Profiles Remain In Good Shape

Liquidity Looks Decent, But Regional Banks' Liquidity Could Decline Due To A Recent Regulatory Proposal