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S&P: Global credit conditions still favorable; populism, geopolitical risks grow

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S&P: Global credit conditions still favorable; populism, geopolitical risks grow

Borrowers around the world are benefiting from generally favorable credit conditions, but geopolitical risks in particular regions may threaten "what has been an unprecedented run in some areas," according to S&P Global Ratings.

Risks for borrowers in the U.S. will most likely come from Washington D.C., as Congress prepares to pass a tax overhaul that, among other provisions, lowers corporate rates and switches to a territorial tax system from a worldwide one, according to the report. Vacancies on the Federal Open Market Committee are creating uncertainties about stalled monetary policy decisions from the Federal Reserve, while negotiations on NAFTA have stalled.

In Europe, the Middle East and Africa, the negotiations over Brexit and the terms under which the U.K. will leave the European Union create some of the most serious uncertainties. Rising nationalism, youth unemployment, high income inequality, illegal immigration and insufficient integration among communities to defuse terrorism threats are among the other risks highlighted in the report.

In the Asia-Pacific region, the report highlights concerns about sustainable growth in China and weak domestic demand in Japan as a potential risk, with "slow, unsteady implementation of China's deleveraging policy," potentially increasing concerns over its long-term growth prospects and financial instability.

Risks for Latin America also include the impasse over NAFTA, while the faster pace of Federal Reserve policy normalization "could lead to capital outflow pressures and restrict market access for borrowers." Currency volatility that reignites inflation pressure would undermine the region's improving GDP outlook. The report also cites upcoming elections as a potential risk if investment flows are interrupted because winning candidates do not support economic policy reforms to address various fiscal challenges.

The report lists six top global risks, including high and increasing geopolitical tensions, particularly those emanating from the Korean peninsula and the Persian Gulf. The report also rates populism and anti-globalization movement risks as elevated and stable, with a Eurobarometer poll suggesting that Catalonia's call for independence isn't affecting EU plans for greater integration. S&P places a high, stable score on the issue of asset price volatility and liquidity reversal, citing the planned unwinding of central bank balance sheets and low inflation as supporting an orderly adjustment in global investment portfolios.

Trade and investment interruption are also rated as high and stable, given the uncertainties of U.S. tax reform and the NAFTA talks, along with President Donald Trump's buy and hire American executive order, which could "put global investment flows at risk and embolden protectionist sentiment globally," the report reads.

China's debt overhang is ranked as elevated and stable as credit growth appears to be slowing.

"Still, China's high-risk non-financial corporate debt now represents 30% of the world's total, exceeding Europe and America's 20% share," the report warns. "While China's debt is largely domestic-funded, a disorderly deleveraging could destabilize asset and commodity markets."

The report also rates cyber-security threats to business activity as elevated and stable as, "increasing technological dependency, global interconnectedness and rapid technological change means that cyber risk has systemic dimensions," according to the report.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.