SP Global Credit Conditions Q3 2019 Final · Global Credit Conditions Q3 2019 Ebbing Growth, Rising Risks ... Number of relevant natural loss events worldwide 1985-2018 Widespread

October 1, 2019

Alexandra DimitrijevicTerry Chan, CFADavid TesherGareth Williams

Paul GruenwaldJose Perez-GorozpePaul Watters, CFA

Global Credit ConditionsQ3 2019Ebbing Growth, Rising Risks

Overview | Ebbing Growth, Rising Risks

Key Takeaways

– Faltering growth: Economic growth expectations are faltering as political and trade tensions stymie investment plans and erode confidence. Global recession remains unlikely given renewed monetary stimulus, but lower-for-longer rates are heightening financial-sector risks. Credit quality is deteriorating in cyclically-sensitive sectors.

– Tensions: Domestic political tensions – possible impeachment hearings in the U.S.; the Brexitimbroglio; elections and policy uncertainty in Latin America – are eliding with persistent global risks – U.S. and China trade and tech disputes; proxy conflict in the Middle East – to create a confidence-sapping climate of uncertainty. There is little prospect of immediate resolutions.

– Policy response: Central banks have once again reached for the monetary policy playbook with widespread reductions in interest rates and renewed unconventional stimulus. This has helped underpin financing conditions and is likely to mean low interest rates and flatter yield curves persist into 2020-21. Absent further shocks, this is likely to prevent a global recession.

– Risks for the long term: Nevertheless, this renewed stimulus poses longer term risks as it further encourages financial risk-taking through a hunt for yield, undermines financial sector profitability and exacerbates pension liability pressure. There is little sign that the stimulus has boosted investment intensions or confidence.

3

Purchasing Manager Indices

Economic Policy Uncertainty Indices

Global Economy | Down But Not Out

Source: S&P Global Economics, CEIC, Refinitiv

– Global growth continues to slow as the weakness in manufacturing and trade with still-robust household spending persists. The main driver of this slowdown remains uncertainty around the U.S.-China relationship.

– Major central banks have lowered rates to support growth and boost inflation, with actions characterized more as insurance cuts than an easing cycle.

– We forecast a continued moderate pace of activity in the near-term with the balance of risks on the downside; labor market developments - still positive - will be key.

– U.S.: We forecast U.S. growth to approach 2% in 2020-2021, close to its steady-state path. However, our Business Cycle Barometer shows near-term recession risks are rising. We now put the probability at 30-35% —more than twice what it was a year ago.

– Europe: Key parts of the European economy are struggling – Germany, Italy and the U.K. amongst them –bringing renewed monetary easing and restarted QE. Overall, we see European growth slowing to 1.1% in next year, from 1.2% this year.

– China: Activity continues to slow and we expect GDP to expand 6.2% this year. There are some signals that the Chinese authorities could allow growth to slow below 6% next year, which would be a welcome development given years of credit-fueled investment.

48

50

52

54

56

58

9/16 12/16 3/17 6/17 9/17 12/17 3/18 6/18 9/18 12/18 3/19 6/19

DM Mfg DM non-Mfg EM Mfg EM non-Mfg

0

100

200

300

400

500

600

700

800

8/14 2/15 8/15 2/16 8/16 2/17 8/17 2/18 8/18 2/19 8/19

UK USA CH

1. Political tensions affecting growth 2. Mature markets negative feedback loop

Credit Conditions | Global Top Risks

Risk level Very low Moderate Elevated High Very high

4

Rising political tensions and heightened uncertainty, weighing on business and consumer confidence, risks undermining global growth prospects. The lengthening list of disputes includes the U.S.-China trade-technology war, Brexit, U.S.-Mexico-Canada Agreement delayed ratification, U.S.-Iran tensions, recent attack on Saudi oil facilities, and Japan-Korea technology dispute.

Source: www.policycertainty.com Normalized data values: 100 = average for 2000-2009 for geopolitical risk index and for 1997-2015 for economic policy uncertainty index.

Source: Refinitiv

Risk trend Improving Unchanged Worsening

GDP growth trends (especially of U.S. and China), low inflation, inverted yield curves, and negative interest rates in Europe and Japan are worrying investors. In particular, overvaluation in financial assets and further debt accumulation risks becoming a source of instability, particularly if economic growth slows materially. Indeed, we now estimate the risk of a U.S. recession at 30%- 35%.



0

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100

150

200

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300

350

98 00 02 04 06 08 10 12 14 16 18

Global Economic Policy Uncertainty Index Geopolitical Risk Index

6 Month Moving Average

-1

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1

2

3

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5

6

2007 2009 2011 2013 2015 2017 2019

JGBs USTs Bunds GiltsPer cent

Near-term Event Risk Stage Of Cycle Risk

Economic and geopolitical policy uncertainty indices 10-Year government bond yields

3. Trade and politics threaten Emerging Markets 4. China’s leverage hampering rebalancing



5

Continued trade tensions between the U.S. and China, geopolitical and domestic policy uncertainty in many EMs have weighed on confidence and are hampering investment. A significant slowdown or outright reversal in capital flows to Emerging Markets would further weaken their economic outlook.

Source: Institute of International Finance Source: Bank for International Settlements


China contributes at least a third of global GDP growth. The debt overhang there remains an impediment to a rebalancing of the economy. The Chinese government’s intent to deleverage the system is challenged by its desire to keep GDP growth up although the desire is showing signs of moderating.



-30-20-10

01020304050607080

Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19

$ bi

llion

Debt China EquityEM ex-China Equity Total Portfolio FlowsTotal Flows, average 2010-2014

0%

50%

100%

150%

200%

250%

2013 2014 2015 2016 2017 2018 2019 Q1

Household credit-to-GDP Corporate credit-to-GDP Government credit-to-GDP

Stage Of Cycle Risk Stage Of Cycle Risk

Non-resident portfolio flows into emerging markets China debt-ratio trajectory

5. Climate change impact on economies 6. Cybersecurity threats to business activity



6

Environmental risk factors related to greenhouse emissions, water, waste have become more urgent global issues. The challenge from a credit viewpoint is how to manage the asymmetric risks and related costs attached to climate change and regulation.

Source: Munich Re NatCatSERVICEAccounted events have caused at least one fatality and/or produced normalised losses >= US$ 100k, 300k, 1m, or 3m (depending on the assigned World Bank income group of the affected country).

Source: Cyence


Increasing technological dependency, global interconnectedness and rapid technological change means that cyber risk has systemic dimensions.



Secular Risk Secular Risk

16%

12%

11%

10%10%

9%

9%

9%

9%5%

Manufacturing

Software andtechnology servicesWholesale trade

Education and research

Retail trade

Utilities

Business services

Financial services

Licensed professionalservicesHealthcare

0

100

200

300

400

500

600

700

800

900

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

Geophysical events Meteorological events

Hydrological events Climatological events

Number of relevant natural loss events worldwide 1985-2018 Widespread cloud usage across sectors highlights systemic dimension of cyber threat

NEW

Regional Highlights

Asia-Pacific | China Slows, Trade Tensions Blow

Key Takeaways

– Overall: Credit conditions are expected to be bumpy. Despite looser monetary policy, China's slowdown and U.S.-China trade tensions are adversely affecting sentiment. This is hurting revenue and profit growth and intensifying refinancing risk.

– What's changed: Investor sentiment is becoming more cautious amid heightened geopolitical stress and slower economic growth.

– Risks and imbalances: The greatest near-term risk is the strategic conflict between the U.S. and China, with its attendant market impact. Other top risks include corporate refinancing and market liquidity, property repricing, and China's debt.

– Financing conditions: Headwinds have returned. Should investor sentiment sour interest spreads could rise, despite lower official rates.

– Macroeconomic conditions: U.S.-China trade-tech tensions have intensified and regional growth has come in below our expectations.

– Sector themes: Idiosyncratic factors are driving the continuing dichotomy in ratings bias trend between corporates (negative) and financials and governments (positive).

8

1. U.S.-China Strategic Confrontation 2. China credit spread trends

Asia-Pacific Credit | Top Risks

9

Chart 1. Source: U.S. International Trade Commission Dataweb. Chart 2. Source: CEIC. Chart 3. SAR--Special Administrative Region. Source: Bank for International Settlements. Chart 4. Source: Bank for International Settlements.

3. Property Valuation Correction 4. China’s Leverage

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mineral ProductsHide and skins

Transportation equipmentAnimal products

Prepared foodstuffs

ChemicalsMiscellaneous

Fuel

MetalsWood products

Plastics and rubber

Vegetable productsMachinery

Stone and glass

Electronics and electrical machineryTextiles and clothing

Footwear

Toys and sports equipment As of Sep23, 2018List 4A (Sep1, 2019)List 4B (Dec15, 2019)Not covered

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Jun-

15

Aug

-15

Oct

-15

Dec

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Feb-

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Apr

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Jun-

16

Aug

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Oct

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Dec

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Feb-

17

Apr

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Jun-

17

Aug

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Oct

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Dec

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Feb-

18

Apr

-18

Jun-

18

Aug

-18

Oct

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Dec

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Feb-

19

Apr

-19

Yield gap between 5-yr Chinese government bonds and medium term notes rated AA-

50

70

90

110

130

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170

190

210

Inde

x va

lue

Australia China Hong Kong SAR India

Japan Korea Malaysia Singapore

Phillipines New Zealand Thailand Indonesia

0%50%

100%150%200%250%300%

2013 2014 2015 2016 2017 2018 2019 Q1

Household Credit-to-GDP Corporate Credit-to-GDP

Government Credit-to-GDP

Asia-Pacific's Investment-Led Slowdown APAC And EM Asia Inflation Slowing

Asia-Pacific Economics | Collateral Damage To Confidence

10

Note: PPP GDP-weighted excluding China and Vietnam due to data availability. Source: CEIC and S&P Global Economics.

Source: CEIC and S&P Global Economics

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Jul-

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% y

/y

Real GDP Growth Year Over Year

GDP Investment

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% y

/y

EM Asia CPI excluding China and India APAC CPI excluding China and India

Steel Supporting Manufacturing Growth in China China’s Financial Conditions Index Peaked

Asia-Pacific Economics | China Slowing

11

Note: ppts = percentage points. Source: CEIC and S&P Global Economics.Note: Average of first two components from principal component analysis of 41 variables. Quarterly data interpolated using the EM algorithm." Source: People's Bank of China, CEIC and S&P Global Economics."

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Financial Conditions Index

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Contribution To Real Manufacturing Growth

Autos Consumer goods Electronics

Other machinery Metals

Europe | Lingering in the Lowzone

Key Takeaways

– Overall: Weakening economic growth, political and trade tensions and ongoing tech disruption are pressuring credit quality. Renewed monetary policy efforts are likely to prevent a broader recession, but persistently low interest rates pose serious risks for financials and corporate pension liabilities.

– What's changed: The ECB has gone ‘all-in’ to shore up growth and underpin inflation. While the Eurozone should avoid technical recession, it is acutely vulnerable to external shocks (trade, oil).

– Risks and imbalances: Political risks remain at the fore, particularly global trade tensions and the increasingly vitriolic Brexit imbroglio. Greater market volatility is a growing global risk as credit risk premiums tighten in a low for longer rate environment.

– Financing conditions: Monetary policy appears close to the point where lower-for-longer near zero rates provides minimal stimulus, but raise downside risks for financial sector profitability.

– Macroeconomic conditions: Growth prospects continue to be scaled back as the manufacturing recession spreads to services and construction peaks, particularly in Germany.

– Sector themes: The main areas of concern are around the impact of low rates (banks, insurance), Brexit (U.K. public sector entities in particular) and slowing global growth (corporates).

12

1. New Car Registrations (3mma YoY%) 2. Weakening Sentiment Spreading From Industry

Eurozone Economics | Manufacturing Recession Spreading to Services Dampening Inflation

13

Chart 1. Source: Refinitiv. Chart 2. Source: Refinitiv, SPGR. Chart 3. Source: Refinitiv. Chart 4. Source: ECB, BIS, SPGR

3. China Leading Producer Prices Lower Globally 4. Eurozone Govt Debt Securities Not Held by ECB

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13 14 15 16 17 18 19

Italy UK France Germany

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Industry Services Construction

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U.S. Japan China Germany

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Jun-15 Jun-16 Jun-17 Jun-18

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€

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Germany Eurozone excl. Ger. (rhs)

Eurozone | Growth Flatlining; LT Yields Grounded

0.5

1.0

1.5

2.0

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Dec-17 Dec-18 Dec-19 Dec-20 Dec-21

GD

P (Y

oY %

)

Actual Dec-17 Jun-18

Dec-18 Jun-19 Sep-19

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-0.5

0.0

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1.0

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2.5

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Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-2110

yr E

uroz

one

Bon

d Yi

eld

(%)

Actual Dec-17 Jun-18

Dec-18 Jun-19 Sep-19

14

Source: S&P Global Ratings

2020 Eurozone GDP Forecasts Revised Lower …10yr Bund Yields Staying Low for Longer

No-deal Brexit Geopolitical Risk

Credit Conditions | EMEA Top Risks


15

Our base case is that the U.K. will not leave the EU without a deal. Even so, given the government’s intention to leave the EU, a no-deal Brexit remains a meaningful likelihood, though more likely in 2020 than in 2019. A no-deal Brexit would likely push the UK economy into a recession next year and create further rating headwinds, particularly for more cyclical sectors.

Source: ONS, S&P Global Ratings Source: Refinitiv, S&P Global Ratings. Data as of Sept. 16, 2019


Tensions between Iran and the U.S. as well as its regional allies are on the rise. While we continue to exclude direct military conflict in our base case scenario or significant disruption to global oil supply, these risks are non-negligible. In the unlikely scenario of a blockage of the Strait of Hormuz or military conflict, the ratings on sovereigns and banks in the Gulf Cooperation Council could come under significant pressure.


Near-term Event Risk Near-term Event Risk

Threat of No-deal Brexit Distorting National Income Components Oil – Spot Prices Faded After Saudi Attack; Futures Calm

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-2

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Sep-17 Mar-18 Sep-18 Mar-19

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ontr

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gr

owth

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)

Net Acq. of Valuables* Net ExportsGovt Consumption StockbuildingFixed Investment Priv. Consumption GDP


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01/17 01/19 01/21

Crude Oil - Brent - Spot Price

Crude Oil - Brent - Futures Strip (ICE)

Crude Oil - Brent - S&P Ratings ForecastUSD/BBL

Latin America | Policy Uncertainty Undermines Growth Prospects

16

Key Takeaways

– Overall: Growth prospects continue to weaken as policy uncertainty in the region's largest countries increases. We have consequently lowered our growth expectations for 2019 and 2020. Although looser U.S. monetary policy helps, external conditions remain challenging.

– What's changed: Investment continues to slump in the largest economies as policy uncertainty prevails. Upcoming elections in Argentina, delays in key reforms in Brazil, and lack of clarity and polemic decisions in Mexico are acting as a drag on already fragile investor confidence.

– Risks and imbalances: Domestic political challenges continue intensifying and are the main drag on investor confidence and economic growth in the region. External conditions all remain difficult given U.S.-China trade tensions and friction in the Middle East.

– Financing conditions: U.S. monetary easing has improved regional financing conditions by enabling policy rate cuts. Not all have benefitted; appetite for lower-rated issuers remains limited.

– Macroeconomic conditions: We have lowered our 2019 and 2020 growth expectations for major regional economies. This is due to ongoing weakness in domestic demand, adverse domestic political dynamics, and volatile external conditions.

– Sector themes: Weaker growth is likely to dent corporations’ profits and bank’s asset quality.

17

2. Increasing trade tensions undermine investment and global growth expectations

1. Regional Political Challenges are the main drag for domestic investor’s confidence

3. Lower interest rates in advanced economies provided some room for monetary easing

4. Commodity prices remain volatile, lower prices could hurt growth prospects

Latin America | Policy Uncertainty Prevails

Chart 1. Source: S&P Global Economics. Chart 2. Source: World Bank. Chart 3. Source: Central Banks. Chart 4. Source: Bloomberg

02468

10121416

2011 2012 2013 2014 2015 2016 2017 2018 2019

Brazil Chile Colombia Mexico Peru

-4.0 -3.0 -2.0 -1.0 0.0 1.0

ArgentinaBrazilChile

ColombiaMexico

PanamaPeru

UruguayLatAm 6

Changes in baseline GDP forecast from 2Q 2019

2019 2020

40

60

80

100

120

140

160

180

1/15 6/15 11/15 4/16 9/16 2/17 7/17 12/17 5/18 10/18 3/19 8/19

Brent Copper Iron Ore Softs Grains

0%5%

10%15%20%25%30%35%40%

Total Exports Exports to the U.S. Exports to China

Share of exports to U.S. or China from Latin American Countries (% of GDP)

North America | Rising Recession RiskAdds To Trade, Rate Uncertainty

18

Key Takeaways

– Overall: As U.S.-China trade tensions fuel fears of a recession, American consumers have so far propped up the world’s biggest economy. Also, U.S. financing conditions have generally improved over the course of the year.

– What's changed: The chance that the U.S. will slip into recession is increasing. Of the 10 leading indicators of near-term U.S. GDP growth we look at, three are now negative.

– Risks and imbalances: Trade and geopolitical tensions are leading to more frequent and intense bouts of market volatility.

– Financing conditions: Borrowing conditions remain broadly supportive, but there has been a divergence between conditions for investment- and speculative-grade borrowers.

– Macroeconomic conditions: While the U.S. expansion is now the longest in history, the economy is showing signs of slowing. Our assessment puts the risk of a recession starting in the next 12 months at 30%-35%—more than twice what it was a year ago.

– Sector themes: Stalemate in trade negotiations has hurt business confidence, as evidenced by slumping capital expenditure growth and a contraction in manufacturing. Meanwhile, declining borrowing costs are pressuring lenders’ net interest margins and weighing on profitability.

Source: S&P Global Ratings

19

U.S. & China Trade Dispute

Quarterly Changes

Negative Stable to Negative Stable Stable to Positive Positive

Tobacco Timeshares; Small business; Transportation

CLO

Structured Credit

Negative Stable to Negative Stable Stable to Positive Positive

Healthcare services; Retail; Pharmaceutical; Consumer Durables

Aerospace and Defense; REITs; Transportation; Unregulated (merchant) power; Building materials; Oil Refineries; Homebuilders; Midstream Energy

Chemicals; Capital Goods, Technology; Oil and Gas; Leisure and Sports; Metals and Mining

North America Corporate Sector Trends – U.S.

Telecom; Media and entertainment; Regulated Utilities; Consumer non-durables; Forest Products

Auto OEMs and Auto suppliers

Related Research

– Credit Conditions Asia-Pacific: China Slows, Trade Tensions Blow, Sept. 30, 2019

– Credit Conditions EMEA: Lingering in the Lowzone, Sept. 30, 2019

– Credit Conditions Latin America: Policy Uncertainty Undermines Growth Prospects, Sept. 30, 2019

– Credit Conditions North America: Rising Recession Risk Adds To Trade, Rate Uncertainty, Sept. 30, 2019

– Asia Pacific Economic Quarterly: Confidence Is Shaken But Policy Is Stirred, Oct. 1, 2019

– Economic Research: Will Trade Be The Fumble That Ends The U.S.'s Record Run?, Sept. 30, 2019

– Economic Research: Low Growth And Lower Rates: The Eurozone In 2020, Sept. 26, 2019

– China Credit Spotlight: The Great Game And An Inescapable Slowdown, Aug. 29, 2019

21

Analytical Contacts

22

Paul GruenwaldAlexandra DimitrijevicGlobal Head of Research

London

[email protected]

Jose Perez-GorozpeTerry Chan, CFA

Chief Global Economist

New York

[email protected]

Head of Credit Research, APAC

Melbourne

[email protected]

Head of Credit Research, Emerging Markets

Mexico City

[email protected]

Paul Watters, CFADavid TesherHead of Credit Research, North America

New York

[email protected]

Head of Credit Research, EMEA

London

[email protected]

Gareth WilliamsGlobal Head of Digital Research Strategy

London

[email protected]

23

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SP Global Credit Conditions Q3 2019 Final · Global Credit Conditions Q3 2019 Ebbing Growth, Rising Risks ... Number of relevant natural loss events worldwide 1985-2018 Widespread