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.
Measures to broaden the tax base will provide the most support to the credit profiles of regional sovereigns that are also pursuing deficit reduction, including measures to manage expenditure, and that benefit from strong underlying GDP growth.
While the supply chain remains the most important transmission channel of the property market to the wider Chinese economy, the country’s financial and household sectors have increasing exposure to the property market.
A new report from the New York Federal Reserve Bank shows US household debt grew 3.8% in the first quarter from a year earlier, well below the rate of growth posted over the last three quarters of 2017 and only slightly higher than our 2.7% 2018 GDP forecast, a credit positive. The rate of new US household debt delinquencies was 4.54% in Q1, down slightly from a year earlier.
Puerto Rico enters the 2018 hurricane season still reeling from the destruction of Hurricanes Maria and Irma last year. The tenuous nature of the island’s economic recovery is credit negative for issuers based in Puerto Rico, with the severity varying by sector.
China’s reforms seek to address overcapacity and elevated leverage, while aiming to shift economic activity towards higher value-added sectors. Resulting faster productivity growth would help to make debt levels more sustainable and support the government’s debt-carrying ability and credit quality.
While most Latin American countries have been subject to currency depreciations over the last two months, Argentina is the most susceptible because of its large external funding needs and country-specific structural weaknesses.
Our review will assess the extent to which the policies of Turkey’s post-election government will weaken or support domestic economic and financial stability, especially the country’s balance-of-payment position and ability to withstand shocks.
Potential escalation of US trade restrictions and their effects on companies, consumer prices and regional economies would affect the tax revenues of select state and local governments, and over the long term, their social spending and taxing capacity.
Proposals from the US Department of Health & Human Services to lower US prescription drug prices, if enacted, would pressure US drug prices, a credit negative for branded and generic drug companies. The credit impact would vary by company, generally depending on the portion of each company’s sales coming from the US market.
China has significant financial and policy means to support its large state-owned companies as implementers of its high-tech vision. The Chinese government may increase direct and indirect financial support to technology sectors to mitigate the impact of any US actions on individual companies.
Global population growth and rising incomes will drive increasing demand for food in coming decades. This will require agribusiness to increase agricultural output with the aid of new technologies from autonomous vehicles to biotech and blockchain.
Measures to prevent floods, landslides and coastal erosion will likely cost Italian regional and local governments (RLGs) around €26 billion. However, while central government support is credit positive for Italian RLGs, the funding for such measures is uncertain given the new central government’s focus on other priorities.
Over the next five years, scheduled retirements of US coal-fired and nuclear power plants representing 35 gigawatts of generating capacity will continue the trend of declining CO2 emission. The impact on US power capacity will be limited, given the roughly 32 GW of new generation capacity, excluding renewable sources, that is now under construction.
Many European (re)insurers incorporate Environment, Social and Governance (ESG) issues into their business strategies. We expect their consideration of ESG matters to become increasingly sophisticated and comprehensive, particularly as factors such as population aging and climate change start to affect the sector in more tangible ways.
The exposure of US insurers to older, legacy long-term care policies is a major credit risk for the life insurance industry. The degree of risk depends on a specific insurer’s overall concentration in long-term care, the original pricing and characteristics of the policies, and the insurer’s success in achieving rate increases for long-term care products.
Demographic shifts will induce profound changes in economic growth trajectories and sector priorities.
Immigration to the Nordic countries will continue to have a positive impact on the size of the labor force and productivity, but a lower employment rate for some segments of the immigrant population will entail costs for the public finances.