The 2024 global credit outlook is driven by four key themes, Fitch Ratings says in a new report. The first is a continued feedthrough of sustained higher interest rates on demand, liquidity, funding and asset quality. Second, an expected sharp slowdown of the US economy. Third is global asset-quality deterioration. Finally, heightened financial market and cross-asset tail risks from potential liquidity events, elevated leverage and geopolitics.
The ratings agency expects global macroeconomic growth to slow in 2024 as the monetary transmission to the real economy in the US takes greater effect, the property crisis weighs on consumption and investment in China, and European growth only marginally improves. This general macroeconomic deceleration, combined with elevated interest rates underscores what will continue to be a challenging environment for global credit. the houses’ base case includes a monetary policy pivot in the US and eurozone in 2H24, but with policy rates only being cut to 4.75% and 3.75%, respectively.
Credit pressures will be disproportionately felt by leveraged issuers at the lower end of the rating spectrum. Fitch says it expects leveraged loan and high-yield default rates to rise and lower-rated emerging market sovereigns are likely to see further defaults. Most structured finance asset performance outlooks are deteriorating and over a third of sectors (weighted by size of issuance) have deteriorating 2024 sector outlooks.
Despite the persistent challenging macro-credit environment, the outlook for ratings at the portfolio level has improved. The net Outlook balance has risen for the third consecutive year for both investment-grade and sub-investment-grade credit. Structured finance is a good example, where there is a divergence between our expectation for continued deterioration in asset performance and ratings resilience, with most of the portfolio on Stable Outlook.
Asia-Pacific
Slower Growth in China to Weigh on Exposed Sectors. Problems in China’s property sector will persist – the outlook for property developers remains deteriorating – weighing on economic growth. Weaker growth, lower rates and a shifting policy
environment will also add to challenges for Chinese financial issuers. The house has lowered the outlook for the China banking and leasing company sectors in 2024 to deteriorating from neutral. In contrast, Fitch expects a pick-up in operating revenues and transfers from the central government to support the outlooks for China’s local and regional governments and their financing vehicles, which both move to neutral from deteriorating. However, risks to these two sectors remain prominent.
Economic Tailwinds Remain Supportive for Sector Outlooks in Much of APAC
Despite China’s slowing expansion, economic growth in the wider region will generally remain strong, supporting sector outlooks across the region. Real GDP growth should remain at or above 5% in India, Indonesia, the Philippines and Vietnam. This has contributed to a reduction in the number of deteriorating sector outlooks. For example, the house expects a recovery in the semiconductor sector after a severe downturn in 2023 is reflected in its neutral outlook for the sector.
APAC technology sector, compared with the deteriorating outlook last year.
Diverging Prospects for Emerging and Developed Market Banking Sectors. Growth in APAC emerging markets should buoy loan demand and limit the potential adverse effects on asset quality from interest rates, which Fitch believes have largely peaked across the region. The ratings agency have moved the outlook for the emerging market APAC banking sector to improving from neutral, reflecting stronger prospects for banks in India, Indonesia, Sri Lanka, Thailand and Vietnam.
The peaking of the regional interest-rate cycle will tend to affect APAC developed market banking sectors more than emerging markets, the latter benefitting from broadly stable net interest margins (NIMs). Fitch expects NIMs and non-performing loan (NPL) ratios to come under pressure in developed markets in 2024, but we expect the degree of weakening will generally be modest, with asset-quality deterioration being most marked in Australia and New Zealand. This is reflected in deteriorating outlooks for both the Australian and New Zealand banking sectors, and for structured finance asset performance in both countries.
