S&P Global Ratings believes 2023 will begin as a journey through intensifying credit pressures, leading to (if all goes well) more stable financing conditions by year-end.
New risks are constantly emerging, and well-known risks will evolve.
Against this backdrop, we will be closely watching how market participants confront credit headwinds, deal with reshuffling capital flows, navigate geopolitical uncertainty, seek energy and climate resilience, and manage crypto and cyber disruption.
The capacity of these trends to instantly disrupt our interconnected world—and the credit markets that underpin it—is evident.
Confronting Credit HeadwindsSlower economic growth and rapidly rising interest rates are defining the role of debt across markets. On top of the rising cost of capital in primary markets, corporate borrowers are facing the headwinds of sticky inflation, a potential global economic downturn, eroding customer demand, and still-shaky supply chains. We expect this combination to lead to credit deterioration as fundamentals for many corporates and some sovereigns deteriorate further, although unevenly, across industries, rating levels, and geographies.
Record leverage. Global debt has hit a record $300 trillion, or 349% leverage on gross domestic product. This translates to $37,500 of average debt for each person in the world versus GDP per capita of just $12,000. Government debt-to-GDP leverage grew aggressively, by 76%, to a total of 102%, from 2007 to 2022.
Higher interest rates. Debt servicing has become more difficult. Fed funds and European Central Bank rates are up an average of 3 percentage points in 2022. Assuming 35% of debt is floating rate, this means $3 trillion more in interest expenses, or $380 per capita.
Great Reset. There is no easy way to keep global leverage down. Trade-offs include more cautious lending, reduced overspending, restructuring low-performing enterprises and writing down less-productive debt. This will require a “Great Reset” of policymaker mindset and community acceptance.
READ MORE
Reshuffling Capital FlowsWith the era of easy money over, investors are rebalancing their portfolios to adjust for shifting risks and returns. Borrowers (especially those at the lower end of the ratings ladder facing tighter access to credit) will need to adapt to the reshuffling of capital flows from long-duration speculative assets to safer havens--as well as adapt to the knock-on implications for overall market liquidity, foreign exchange reserves, and investment in emerging markets.
After years of strong parallels, financing on speculative-grade loans in the U.S. have recently become more restrictive than speculative-grade bonds.
Some of this may be attributed to the shift in relative risk over the last 10 plus years: a majority of high-yield bonds are now in the 'BB' category, while 60% of all loans are in the 'B' category. Previously, a majority of bonds were 'B', while loans were majority 'BB'.
Relative risk aside, the bond market may be too optimistically priced, and the Federal Reserve interest rate pivot may take longer to materialize than anticipated.
Still, bonds have had higher default rates than loans, but given their diverging characteristics, this historical gap in default rates may close as both asset classes will be challenged by rising rates, but in different ways.
READ MORE
Navigating Geopolitical UncertaintyInternational and domestic flashpoints--the COVID-19 pandemic, the Russia-Ukraine war and associated energy and commodities crises, U.S.-China tensions over the South China Sea and technology supply chains, and social unrest unfurling from Iran to Brazil and beyond--have undoubtedly fueled geopolitical fragmentation recently. The regionally divergent outcomes of geopolitical tensions on financial markets and global trade may result in the reshoring of supply chains to improve resilience and to the revamping of business models as global demand patterns change.
Seeking Energy and Climate ResilienceThe conundrum of balancing decarbonization with energy supply security and affordability is one not easily managed. The energy crisis in Europe, global supply-chain bottlenecks, and emerging markets' growth are limiting reductions in greenhouse gas emissions, despite countries' implementation of decarbonization policies. Europe's ability to meet its energy needs while continuing to lead the world toward net-zero--with either regulation or technology as the key driver--may set the tone for the year.
The U.S. Inflation Reduction Act (the act or law) is proving consequential in the likelihood it will turbocharge renewables development and the broader goal of a net-zero future.
The act's subsidies and incentives could shift production to the U.S. for tax reasons, emphasizing the EU’s competitiveness concerns, as it was already under pressure from energy price differentials triggered by the Russia-Ukraine war.
Certain segments in the power sector, autos, midstream utilities, agribusiness, and health care may experience positive credit impacts from improved cash flows and reduced development and technology costs for renewables and carbon capture.
READ MORE
Managing Crypto and Cyber DisruptionThe transformation of global and regional financial systems amid the adoption of new technologies--from artificial intelligence to cryptocurrencies, tokenization, distributed ledgers, and beyond--is accelerating an era of growth and discovery. It is also heightening single-entity and systemic cyber risk. Entities with weaker cyber governance and risk management will be more exposed to rating implications this year.
The temporary depegging of two stablecoins following the failure of Silicon Valley Bank (SVB) highlights risks in major stablecoins at the core of the crypto ecosystem.
While regulation has largely focused on stablecoins' potential to transmit risk to the traditional economy, the fallout from SVB's failure has demonstrated how risk contagion can pass both ways.
It remains to be seen whether the failure of SVB, Silvergate, and Signature Bank will affect the wider crypto ecosystem, particularly if other banks are reluctant to step in to serve it.
READ MORE
