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Our regional and global Credit Conditions Committees—and the research publications we produce—provide financial market participants around the world with an essential resource for identifying and understanding prevailing and potential credit risks.
As an assessment of the external operating environment, our regional and global Credit Conditions Committee forums—covering Asia-Pacific, Emerging Markets, Europe, and North America, which cascade into our global coverage—form an integral part of S&P Global Ratings’ credit rating analysis.
At the CCCs, our senior researchers, economists, and analysts (covering corporates, financial institutions, insurance, structured finance, sovereigns, and U.S. public finance) meet each quarter to evaluate the trends affecting the current and future states of economies, industries, and credit markets. The CCCs identify base case and downside scenarios, and rank exogenous risks. These views are cascaded to our analytical teams to inform their rating deliberations.
Our quarterly and special CCC reports crystallize the Committees’ conclusions, backed by a host of proprietary data, and with an eye toward helping investors make decisions—providing financial market participants around the world with a primary resource for identifying and understanding prevailing and potential credit risks.
Credit quality continues to erode. Despite recent economic and credit resilience, slowing economic growth, sticky inflation, and tighter financing conditions pushed the negative bias close to 15%. Credits in consumer goods, retail, media, real estate, and those at the lower end of the ratings scale are most at risk. Our base case is that default rates double this year to more than 4.0% in the U.S. and to 3.25% in Europe.
The full impact of sharply higher interest rates is yet to be realized. Banking stress in the U.S. and Europe is a reminder of how quickly confidence can erode. The rapid response by authorities suggests broader contagion will be avoided. Nevertheless, high interest rates will likely further strain credit financing costs and asset prices.
Downside risks have increased. Tighter financing conditions, combined with more conservative lending standards, could push many economies closer to a hard landing. Shifts in market sentiment or more revelations of hidden stress could spark renewed volatility. Geopolitical risks from the Ukraine war and U.S.-China tensions remain acute.
Overall: Borrowers in North America face a stretch of difficult financing conditions as banking-sector turmoil exacerbates credit strains and the U.S. looks set to slip into a shallow recession. Some borrowers may find financing options much more costly or, for the riskiest borrowers, unavailable.
Risks: Banks will likely implement stricter lending standards, making it more difficult and costly for entities, especially small and midsize businesses, to gain funding. Lower-rated borrowers, especially those exposed to unhedged floating-rate debt, may feel more severe liquidity strains.
Ratings: The net outlook bias widened to negative 8.3% as of March 26—a 21-month high. We expect the U.S. trailing-12-month speculative-grade corporate default rate to reach 4% by December.
Overall: Persistent and excessively high inflation requiring interest rates to remain in restrictive territory (potentially for about two years) even as the European economy stagnates, points to a marked change in financing conditions. This has been exacerbated by the erosion of confidence in the banking sector following, most recently, the forced takeover of Credit Suisse.
Risks: Tighter financing conditions could uncover pockets of financial vulnerability, rendering refinancing difficult. The economy could lapse into recession if consumer confidence materially falters and unemployment accelerates. Potentially severe tail risks relating to the Russia-Ukraine conflict.
Ratings: Rated European banks don't have the same funding and business profiles as the failed U.S. regional banks, and rising rates remain a significant tailwind to banks' profitability. Yet, heightened macro uncertainty and higher operating and credit costs are likely to dampen any positive rating momentum in the sector.
Steady as she goes. We project that growth in annual real GDP in Asia-Pacific will average at the mid 4% level over the next few years, buoyed by a likely rebound in China's economy this year post lockdown. The net rating outlook bias remains steady at negative 3%, as it was last quarter. However, downside risks are worsening.
Banking turmoil risk. We have yet to see any meaningful contagion for Asia-Pacific from the turmoil of U.S. regional banks and Credit Suisse. Asia-Pacific banks generally have more conventional asset and deposit profiles. We therefore see the contagion risk as moderate, albeit worsening.
Financing access risk. We regard financing access risk as high and worsening. Volatile markets and uncertain economic outlooks are causing lenders and investors to be more defensive. Domestic funding is continuing, but it is selective. The cash flows and liquidity of lower-rated and highly leveraged borrowers are particularly exposed.
Economic recovery risk. We assess the economic recovery risk as high and unchanged. Our base case is for China's economy to recover in 2023, and most other Asia-Pacific geographies in 2024. However, global central banks' continued fight against inflation and weakened business and consumer sentiment imply a high risk of a softer rebound.
Overall: Credit conditions in emerging markets (EMs) will remain under pressure through 2023, despite some positive factors. Slower economic activity along with stubborn inflation and rising financing costs will undermine corporates' and households' payment capacity. EM sovereigns are also withdrawing support measures linked to the pandemic to pursue fiscal consolidation. Finding the right balance will be challenging, with social demands on the rise as households remain in a fragile position amid continuously high prices. On a positive note, supply chains continue normalizing, which should help ease logistics costs. China's reopening may also support some EMs, and S&P Global's Purchasing Managers' Index (PMIs) continues to improve.
Risks: The balance of risks for EMs remains on the downside. Despite recent financial stability issues surfacing after the collapse of Silicon Valley Bank (SVB), we expect the U.S. Federal Reserve Bank (the Fed) will remain focused on its key objective of curbing inflation, which will likely be reflected in tighter financing conditions in 2023. Inflation also remains above central bank targets in most key EMs, and although we expect it to reduce during the year, high prices will likely linger. A sustained rise in interest rates, coupled with cost pressure and potential liquidity shortfalls, will continue weighing on EM issuers' fundamentals.
Credit: Rating trends show that EM issuers have not fully recovered from the shocks stemming from the pandemic and the war in Ukraine. Current conditions will likely be reflected in further weakening of credit quality across key EMs.
Our global and regional Credit Cycle Indicators signal a global credit correction.
Our indicators flagged a buildup of leverage and asset prices up to early 2021, which suggests current volatility may in part be manifesting risks that have been underway for many quarters.
The potential impact on nonperforming loans and defaults from this credit cycle peak could linger beyond the current stress period, especially considering the recent turbulence in the banking sector and a possible further tightening of lending conditions.