Global credit conditions enter 2020 in a state of precarious balance

Markets risk being upset by slowing economic growth, high debt and other negative factors, according to S&P Global Ratings reports

Amid an entrenched trade war, historic Asia-Pacific debt issuance, and a record US economic expansion, world credit markets are being pushed and pulled in several directions. In Asia-Pacific, credit conditions have a mixed outlook going into 2020, with credit quality expected to decline and defaults to rise, particularly among nonfinancial corporates, according to new reports published by S&P Global Ratings.

Going into 2020, global credit markets are in a delicate limbo and risk being upset by slowing economic growth, deteriorating profitability, high debt, political uncertainties, and mispricing of risk. Positive counterbalancing factors include low rates, resilient consumers, and some fiscal expansion.

"Our base case is for a moderate global slowdown, with a commensurate rise in defaults," says S&P Global Ratings credit analyst Alexandra Dimitrijevic.

US economic growth should slow to 1.9% in 2020 (from 2.3% for 2019). Despite trade tensions, S&P Global Ratings has revised its risk of a recession starting within the next 12 months to 25%-30%, from 30%-35% last quarter.

"Although a partial trade deal may happen between the US and China, uncertainty around trade remains and is hampering business investment," says S&P Global Ratings credit analyst David Tesher.

In emerging markets ex-China, politics and policy uncertainty are weighing down confidence and investment. A significant slowdown or outright reversal in capital flows would further weaken their economic outlook. In China, the debt overhang continues to hamper a rebalancing of the slowing economy.

GDP growth trends, low inflation, flat yield curves, and negative interest rates in Europe and Japan are worrying investors. Overvaluation in financial assets and debt accumulation risk becoming a source of instability.

Credit quality is slipping as eurozone growth stalls – S&P Global Ratings projects 1% GDP growth for the region in 2020 - led by slowing global trade and investment, despite cheap financing.

In Asia-Pacific, the highest profile risk is the US-China trade-technology conflict. Other challenges include corporate refinancing and market liquidity, property repricing, and China's high leverage.

"While lower official interest rates provide some relief in Asia-Pacific, declining credit quality and rising defaults, particularly among nonfinancial corporates, are expected," says S&P Global Ratings credit analyst Terry Chan.

S&P Global Ratings expects Chinese GDP to grow by 6.2% this year and 5.7% in 2020 as part of a needed slowdown.

"Investor sentiment is likely to remain skittish, jumping between optimism and pessimism in response to breaking news," says Chan. "We anticipate credit conditions in Asia-Pacific going into 2020 to be mixed."

Date

4 Dec 2019

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