Inflation, war and Covid drag global credit conditions, says S&P Global Ratings

S&P Global Ratings released a report warning that deteriorating global macroeconomic conditions, combined with heightened geopolitical uncertainty and prolonged Covid lockdowns in China, are fueling persistently high inflation, market volatility and rising yields, posing an increasingly challenging outlook for credit.

In the analysis “Special update on global credit conditions: Inflation, war and Covid continue”, it is noted that credit ratings could come under further pressure if the situation persists for more than a quarter or two, or deteriorates furtheras households struggle with falling real incomes and rising energy and food prices; companies face weaker demand conditions with margin erosion; and financial conditions tighten further.

With this scenario, S&P Global Ratings indicates that defaults could start to rise towards the end of the year as we head into 2023.

For now, credit ratings show resilienceas they benefit from largely growing economies, consumption supported by household savings and record corporate cash balances,” said Alexandra Dimitrijevic, Global Head of Analytical Research and Development at S&P Global Ratings.

“Global rating actions in April and May were balanced, outside of countries directly affected by the conflict, and the net outlook bias, which speaks to forward-looking rating trends, remains close to neutral. The difficulty index for US speculative-grade borrowers, an indicator of future default trends, is increasing but remains well below the five-year averageDimitrijevic pointed out.

S&P Global Ratings is awaiting the global macroeconomic base scenario for its update of credit conditions, in which it observes:

– That he conflict between Russia and Ukraine and rising tensions with NATO are protracted more than expected.

Inflation remains stubbornly highdriven by food and rising commodity prices.

– The Chinese authorities continue to lockdown major cities and regions to stop Covid-19.

– And the US Federal Reserve and other major central banks are intensifying its fight to control inflationary pressures.

From a credit perspective, S&P Global Ratings indicates that this represents a turnaround as credit outlook becomes more challenging.

While widespread concerns related to recession scenarios in advanced economies have not materialized so far, they represent a growing downside risk for later in the year and into 2023.

S&P Global Ratings reminds that credit ratings are essential to drive growth, provide transparency and help educate market participants so they can make decisions with confidence.

For more information about the report, see here.

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