The Big Picture presents research on six themes shaping credit in 2018: Growth, Financial Stability, Political & Geopolitical Risk, Technology & Innovation, Climate Change & Sustainability, and Demographics.
Growth in US state tax revenue was robust in fiscal 2018 and positioned many states to carry an operating surplus into fiscal 2019, which for all but four states began on July 1. Likely aided by the strong revenue performance, nearly all states began fiscal 2019 with an adopted budget in place.
A shift to consumption-led growth in China will have mixed credit implications for African sovereigns. Trade volumes for oil and ferrous metal exporters will likely flatten, while rising Chinese incomes will likely benefit non-ferrous metal exporters and tourist destinations.
Over the last decade Chinese investment in Latin America has particularly benefited countries, banks, utilities and companies with limited access to funding. However, higher debt burdens, and weaker trade balances are potential risks for any borrowers dependent on highly discretionary lending.
The government’s efforts to create a local market for Islamic finance instruments are supporting the sovereign's credit quality by adding stability and diversity to its borrowing profile.
Global equity prices have rebounded from the turmoil in the spring but show signs of being weighed down by news on trade, while government bond prices have declined from high levels amid expectations of higher interest rates in the US and in other economies. Systemic financial risks have increased, reflecting reduced liquidity in the US.
The gradual unwinding of the European Central Bank’s stimulus will likely lead to tighter financing conditions and an increase in borrowing costs at a modest pace, which most debt issuers in the euro area will be able to withstand.
The tariffs on US soybeans, if kept in place for an extended period of time, are likely to erode US farmers’ net income and reduce equipment residual values, credit negatives for US asset-backed securities backed by loans or leases secured by agricultural equipment. However, several mitigants should limit the effect on the ABS, and cumulative net loss rates in the securitizations will likely remain within our expectations.
The precise direction of the policies of incoming president Andres Manuel Lopez Obrador will not be clear until after his 1 December inauguration. In the meantime, financial markets in Mexico could become unusually volatile, with negative consequences for the exchange rate and market yields.
The continued deadlock in the negotiations between the European Union and the UK suggests that the current significant uncertainties around Brexit will persist for longer than anticipated, and highlights the downside risks associated with a “no deal” Brexit.
Four technologies are remaking the automotive market: the connectivity of vehicles, alternative fuel vehicles, autonomous driving and ride sharing. This transformation is comparable in scope to the dawn of the automotive age a century ago and will have ramifications for industries well beyond auto manufacturing.
Genetic testing is already improving health outcomes with great potential going forward. However, the results of genetic testing are not always available to insurers, which could put life insurers that write new long-term policies at an information disadvantage relative to their policyholders.
US export restrictions and investment controls aimed at curbing technology transfer, intellectual property infringement and the effects of the Made in China 2025 initiative would lead to disruptions in specific US industries, particularly those with extensive involvement in China.
Efforts to decarbonize the global economy are likely to bring greater scrutiny to the cement sector at a time when demand for cement is likely to continue to rise significantly as the world's population grows and continues to industrialize and urbanize.
An increasing number of sovereigns are turning to green bonds as a means to raise capital for climate mitigation and adaptation activities. We expect this trend to accelerate.
For some oil-exporting sovereigns, the shift towards lower reliance on oil-related products – carbon transition – over the coming decades will considerably lower fiscal strength in the absence of additional revenue from other sources, undermining creditworthiness.
Governance risks are directly incorporated into our analysis of a sovereign’s institutional strength, while environmental and social risks may influence our assessment of economic, institutional and, to a lesser extent, fiscal strength.
Millennials are showing signs of entering the US housing market in significant numbers. State housing finance agencies' single-family programs will continue to benefit from this trend, although they face obstacles in expanding into the digital mortgage space, which millennial homebuyers favor.
Over the next decade, the global higher education sector will face new challenges, as well as encounter opportunities to grow and improve efficiency. As the pace of change continues to accelerate, driven by factors such as demographics and technology, the ability of universities to innovate and adapt will be a key determinant of future credit quality.
Belarus and Ukraine are most vulnerable to the negative economic impact of shifting demographics, while the Kyrgyz Republic is most exposed to the credit-negative fiscal implications arising from this trend.