Global Credit Outlook 2024
New Risks, New Playbook
Dec. 4, 2023
This report does not constitute a rating action.
Foreword
Dear reader,
Looking ahead at 2024 and after, it’s clear that the events since the COVID-19 pandemic have
brought on a profound transformation for the global economy and financial markets. While some
of the same challenges remain, other risks have emerged—all of which require a new playbook
for issuers and investors in the debt markets.
We are back to an environment of higher real interest rates, concluding an era of cheap money
that started in the wake of the Great Financial Crisis. With a durably higher cost of debt, a ramp-
up in maturities, and slowing economic activity in the cards for 2024, the focus comes back to
credit fundamentals and liquidity analysis. While still-robust employment levels and supportive
fiscal conditions should continue to underpin the resilience of stronger credits, we expect 2024
to come with additional credit deterioration and defaults for more vulnerable corporate and
government issuers.
Geopolitical risks have returned to center stage, with the war between Israel and Hamas, the
prolonged Russia-Ukraine conflict, and the ongoing U.S.-China tensions. This increased
geopolitical fragmentation affects corporates and governments in their strategies for supply
chain and energy security, with potential broader implications on food prices, global trade, and
inflation—while increasing the potential for event risk. New challenges are also emerging from
the necessity to accelerate the world’s transition to a low-carbon economy to limit the potential
dramatic consequences of climate change. At the same time, generative artificial intelligence (AI)
and an accelerating technological transformation, along with heightened risks from cyber
attacks, are forcing corporate and government entities to adapt their playbooks.
Against this backdrop, S&P Global Ratings’ Global Credit Outlook 2024 presents our credit and
macroeconomic outlooks for the year ahead, including our base-case forecasts, assumptions,
and key risks for what promises to be yet another challenging period for the global economy and
markets. Aligned with these risks, we address the questions that will shape 2024—about credit
headwinds; capital flows; geopolitical uncertainty; energy and climate resilience; and crypto,
cyber, and tech disruption—collected through our interactions with market participants.
This report harnesses the power of our regional and global Credit Conditions Committees (CCC),
which meet quarterly to review conditions in Asia-Pacific, Emerging Markets, Europe, and North
America, cascading into our global coverage. At the CCCs, we evaluate the trends affecting
economies, industries, and credit markets—to identify the base case and downside scenarios
and rank the exogenous risks that underpin our credit ratings and inform potential rating
changes across various asset classes. This publication also highlights the depth and breadth of
S&P Global Ratings’ analysts and the Credit Research & Insights team’s expertise on credit
markets.
Alexandra Dimitrijevic
Global Head of
Research
and Development
Co
-Chair, Global CCC
London
Gregg Lemos-Stein
Chief Analytical Officer,
Corporate Ratings
Co
-Chair, Global CCC
New York
gregg.lemos
Acknowledgements
We would like to thank the many
colleagues who have contributed
to this report to provide you with
S&P Global Ratings' essential
insights.
Special thanks to Ruth Yang, Molly
Mintz, Joe Maguire, Fatima Tomas,
Tom Lowenstein, Hilary Castle,
and
Nick Kraemer
.
Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 2
Contents
Global Credit Outlook 2024: New Risks, New
Playbook
4
Top Global Risks
14
Global Economic Outlook
16
Questions That Matter
21
Credit Headwinds
Corporates | Could interest rate and recession risks derail corporate credit?
22
Real Estate | Is the worst over for the global office sector and China’s residential market?
24
Capital Flows
Private Markets | How long can the golden age of private credit last?
27
Market Dynamics | How will the path of interest rates in 2024 affect corporate borrowing
strategies?
30
Geopolitical Uncertainty
Sovereigns | What are the credit implications of intensifying conflicts and political
disruption?
33
Emerging Markets | Which EMs are better positioned to outperform in 2024?
36
Energy and Climate Resilience
Physical Climate Risk | How will challenging credit conditions affect resiliency and
adaptation to more costly climate hazards in 2024?
39
Energy Transition | Can the shift to net-zero accelerate amid growing headwinds?
43
Cyber, Crypto, And Tech Disruption
Artificial Intelligence | What are the key credit risks and opportunities of AI?
46
Digital Assets | Will technological and regulatory developments unleash institutional
blockchain adoption?
49
Regional Credit Conditions
52
North America
53
Europe
55
Asia-Pacific
57
Emerging Markets
59
Contacts
61
Disclaimer
62
Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 3
Contacts
Alexandra Dimitrijevic
London
alexandra.dimitrijevic
@spglobal.com
Gregg Lemos
-Stein
New York
gregg.lemos
-stein
@spglobal.com
Ni
ck Kraemer
New York
nick.kraemer
@spglobal.com
Cont
ributors
Joe Maguire
New York
joe.maguire
@spglobal.com
Molly Mintz
New York
molly.mintz
@spglobal.com
Global Credit Outlook 2024
New Risks, New Playbook
This report does not constitute a rating action.
An environment of increasingly rapid change, which began with the onset of the global COVID-19
pandemic, requires financial market participants to adapt their playbooks. Conditions that
borrowers and investors could safely take for granted for a decade or more have been pushed
aside. Most importantly, perhaps, is that markets can no longer expect ultra-accommodative
monetary policy and low inflation will be the norm.
S&P Global Economics expects real interest rates to remain elevated through 2024, with the
Federal Reserve unlikely to begin a cycle of policy-rate cuts before June, assuming core
inflation approaches the central bank's target. We expect a series of four quarter-point cuts,
which would bring the federal funds target rate to around 4.6% by the end of the year and 2.9%
by end of 2025.
Similarly, eurozone key rates may have peaked, but could take a long time to come down. We
forecast the European Central Bank will gradually lower its policy rate starting in June—with
three quarter-point moves in the year before easing further toward neutral levels in 2025.
The Fed will influence the magnitude of easing by emerging market (EM) central banks.
Disinflation will likely continue across most EMs in the coming quarters, which we expect will
encourage central banks to start lowering interest rates or continue doing so for those that have
already started. However, swings in the Fed's policy expectations will matter. If the Fed's policy is
more hawkish than what is implied by the market, EM interest rate curves are likely to adjust
Key Takeaways
• Borrowers across all asset classes will need to adjust to tighter financing conditions and
softer economic growth. While long-term yields will likely peak around midyear, financing
conditions will likely stay tight in real terms in 2024. Borrowers have reduced near-term
maturities, but the share of speculative-grade debt coming due rises significantly in 2025,
making 2024 a pivotal year. Defaults will likely rise further, to 5% in the U.S. and 3.75% in
Europe, above their long-term historical trends.
• We expect additional credit deterioration in 2024, largely at the lower end of the ratings
scale, where close to 40% of credits are at risk of downgrades. Sectors exposed to a
decline in consumer spending are most vulnerable. Meanwhile, investment-grade credits
should generally continue to show resilience despite some margin compression—with the
exception of the real estate sector.
• The main risks that could derail our baseline expectations, leading to further credit
deterioration, include persistent tight financing conditions amid entrenched inflation; a
sharper-than-expected slowdown in global growth; elevated input-cost inflation and high
energy prices that squeeze corporate profits and pressure governments’ fiscal balances;
vulnerable commercial real estate; and amplifying geopolitical tensions.
• Looking ahead, heightened geopolitical risks, the need to accelerate the decarbonization
of the economy to address the rise in climate-related risks, and the technology revolution
will increasingly shape the future of credit.
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Dec. 4, 2023 4
upward, and central banks will likely proceed more cautiously with easing to prevent disorderly
capital outflows.
Global GDP growth is likely to slow significantly in 2024, to 2.8%, after a surprising resilience in
2023 fueled by strong employment, healthy consumer spending, and post-COVID tailwinds. As
the lagging effects of tighter monetary policy and diminished consumer purchasing power work
through major economies, we expect the U.S. to slip into a period of below-trend growth, with
Europe bordering on recession, and pain in China's property sector (along with high leverage on
corporate and local government balance sheets) dragging on economic activity. Given the
resultant hit to business and household confidence, we now expect China real GDP growth next
year of just 4.6%, and we think that could fall below 3% if the property crisis further deteriorates.
Overall, our base case is for a soft landing, but the risk of recession remains elevated (30%-35%
in the U.S.).
Chart 1
*Growth in debt due in 2025 as of Jul. 1, vs debt due in 2024 a year earlier. ECB--European Central Bank. IG--Investment
grade. ROW--Rest of world. SG--Speculative grade. Source: S&P Global Ratings.
On the back of a slowing economy and the high cost of debt, we expect further credit
deterioration in 2024, continuing the diverging trends of resilience at the investment-grade level
and downgrades largely at the lower end of the ratings scale. This is reflected in the 9.4% of
investment-grade credits with negative outlooks or on CreditWatch with negative implications
(below the historical average), and negative outlooks on speculative-grade (rated 'BB+' or lower)
and 'B-' and below credits, in particular, at 19.6% and 37.4%, respectively—indicating significant
downgrade risk ahead. For global nonfinancial corporate debt, the net outlook bias, which
indicates potential rating trends, is at negative 8.4%, back to pre-COVID levels (see chart 2).
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Chart 2
Global financial and nonfinancial corporate net bias (%)
Net bias--The difference between ratings with a positive outlook or on CreditWatch with positive implications and those with
a negative outlook or on CreditWatch negative. Source: S&P Global Ratings.
Sectors most exposed to a decline in consumer spending face higher risk of downgrades. The
consumer products sector has the highest negative bias—with 22.3% of issuers having a negative
outlook or on CreditWatch with negative implications. Two sectors, health care, and
homebuilders and real estate, suffered the highest deterioration in terms of increased negative
bias in 2023 (see chart 3). On the other side, the oil and gas sector has the highest positive bias,
at 17.5%, as energy cash flows remain strong despite geopolitical challenges and weaker prices.
Chart 3
Global negative bias by sector (%)
Q4 data as of Nov. 15, 2023. Source: S&P Global Ratings.
Defaults are poised to rise. Defaults have already picked up to above historical averages in the
U.S. and Europe, and are poised to increase further in 2024 as debt maturities ramp up and
competition for funding intensifies. S&P Global Ratings now expects the trailing-12-month
speculative-grade default rates in the U.S. and Europe to reach 5% and 3.75%, respectively, by
September, under our base case for a soft landing. In the U.S., the proportion of ‘CCC/C’ ratings
among all corporate borrowers is historically large, at 7%, with many of these firms suffering
-40
-35
-30
-25
-20
-15
-10
-5
0
Jan. 2020 Jul. 2020 Jan. 2021 Jul. 2021 Jan. 2022 Jul. 2022 Jan. 2023 Jul. 2023
0
5
10
15
20
25
Aerospace and defense
Automotive
Capital goods
Chemicals, packaging and
environmental services
Consumer products
Diversified
Financials (excl.
insurance)
Forest products and
building materials
Health care
High technology
Homebuilders/real estate
Insurance
Media and entertainment
Metals, mining and steel
Oil and gas
Retail/restaurants
Telecommunications
Transportation
Utility
Q1 2023 Q2 2023 Q3 2023 Q4 2023
Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 6
negative cash flows and large maturities due in 2024 and 2025. This signals a high level of
sensitivity to a drop in growth or a further rise in interest rates, which could push the default rate
to our pessimistic scenario of 7%. In Europe, too, debt coming due in 2024-2025 will force many
lower-rated borrowers to refinance at much higher rates than they enjoyed over the past five
years. This would further strain cash flows and could keep the default rate elevated into late-
2024 or beyond.
With no clear signs that long-term yields will fall materially any time soon, financing conditions
will likely continue to tighten in real terms in 2024, particularly given the steeper maturity wall
beginning in 2025. While borrowers globally have reduced near-term maturities—trimming
speculative-grade corporate debt due in 2024 by 34% in the past year—the share of speculative-
grade debt coming due rises in coming years, reaching a peak in 2028 (see chart 4). The U.S.
accounts for the bulk of upcoming debt maturities rated 'B-' and below (see chart 5).
For emerging markets, maturities start to ramp up in 2024 and increase further in 2026-2027. U.S.
dollar strength is compounding the pressures on many, given the $46 billion of rated dollar-
denominated debt coming due next year (excluding China).
Chart
4
Speculative
-
grade nonfinancial corporate maturities rise in
upcoming years
(bil. $)
Chart
5
U.S. accounts for most of the upcoming 'B
-' and lower
maturities
(bil. $)
Data as of Jul. 01,
2023. Includes nonfinancial corporate issuers' bonds, loans, and revolving credit facilities that are rated 'BB+' or lower by S&P Global Ratings.
Excludes debt instruments that do not have a global scale rating. Foreign currencies are converted to U.S. dol
lars at the exchange rate on Jul. 01, 2023. Source: S&P
Global Ratings Credit Research & Insights.
Borrowing Costs Are Likely To Remain Elevated Through 2024
Borrowers will need to adjust to tighter financing conditions (see chart 6). Long-term rates have
been elevated for most of the past 18 months, and even as central banks have paused rate hikes,
the bite of quantitative tightening has come alongside increased borrowing by the U.S. Treasury.
This has boosted Treasury yields, pulling most other governments’ benchmark rates up with
them. At the same time, corporate yields from the U.S. to Europe to Latin America have all risen
roughly 4% since the start of 2022.
0
100
200
300
400
500
600
700
800
900
1,000
2024 2025 2026 2027 2028
(Maturity year)
0
50
100
150
200
250
300
2024 2025 2026 2027 2028
(Maturity year)
US Europe Rest of world
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Chart 6
Higher-for-longer: corporate yields elevated globally (%)
EM--Emerging market. HY--High yield. Sources: ICE Data Indices, LLC, ICE BofAML yield indices effective yields, retrieved
from FRED, Federal Reserve Bank of St. Louis, S&P Global Ratings Credit Research & Insights.
And while bond spreads haven't tightened considerably this year, we estimate that current
spreads may be well narrower than what is appropriate—as has been the case through most of
the post-pandemic period. The speculative-grade bond spread in the U.S. was at 367 basis points
(bps) at the end of October, compared to our estimate of 604 bps; the European equivalent
spread was at 483 bps, compared to our estimate of 771 bps (see charts 7 and 8). It is more likely
that any widening of spreads ahead will be the result of even higher corporate yields rather than
a major decline in risk-free rates. And if a recession were to occur, spread widening would likely
be particularly acute.
Chart
7
Actual versus estimated spreads, U.S.
bps
--Basis points. SG--Speculative grade. Source: S&P Global Ratings.
Chart
8
Actual v
ersus estimated spreads, Europe
HY
--High yield. Sources: ICE Data Indices, LLC, ICE BofAML yield indices
effective yields, retrieved from FRED, Federal Reserve Bank of
St. Louis, S&P
Global Ratings Credit Research & Insights.
0
2
4
6
8
10
12
Dec. 2021
Mar. 2022 Jun. 2022 Sep. 2022 Dec. 2022 Mar. 2023 Jun. 2023 Sep. 2023
Asia EM
Latin America EM
Europe HY
U.S. 'B'
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
(bps)
SG spread Estimated spread
0
5
10
15
20
25
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
(%)
HY spread Estimated spread
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Corporate borrowers are already feeling the effects of elevated interest rates, and the erosion
of margins is also becoming evident, with almost two-thirds of industries globally seeing annual
margins decline in the third quarter, albeit from relatively high levels. Further margin erosion on
the back of weaker growth would likely have longer-term implications and feed into an increase in
unemployment.
At the same time, the resilience of consumers may not last much longer—particularly in the U.S.,
for those at the lower end of the income scale. Household savings, once fattened by COVID-
related stimulus, are shrinking, and consumers are becoming more wary of spending, especially
on discretionary goods. Spending on services is now back to its pre-pandemic trend, leaving little
pent-up demand. Moreover, real disposable income in the U.S. has declined four months in a row,
with the savings rate falling to a very low 3.4% in September.
By contrast, in Europe, notwithstanding higher mortgage costs in countries exposed to variable
rates, we anticipate the consumer will provide support to growth next year as real disposable
incomes rise on the back of relatively high wage growth and disinflation.
EM corporates will face increasing headwinds in 2024 as growth in major economies slows, cost
pressures linger, the effects of rapid monetary-policy tightening surface, and debt maturities pile
up. For many borrowers, this will mean falling revenues amid increasing financing costs as debt
comes due, resulting in weaker cash flows.
Nonfinancial corporates’ revenue growth has stalled, and EBITDA continues to decline. Third-
quarter results showed that, at an annual rate, global revenues were near-flat, rising just 0.3%
(and down 1.4% vs. the same quarter a year earlier), with EBITDA falling 4.4%. Moreover, the
pressure from surging cash interest payments is growing apace, up an aggregate 23% annually
overall and 27% for speculative-grade borrowers. Leverage is drifting higher, and interest-cover
continues to erode.
Our global and regional Credit Cycle Indicators (CCIs) suggest a credit correction will persist
through 2024. We believe the tailwinds from the post-pandemic recovery, stronger-than-
expected economic resilience in 2023, some degree of fiscal stimulus still in place, and pushed-
out debt maturities have delayed the peak in credit stress. While the CCIs show nascent signs of
a trough, a credit recovery looks unlikely to occur before 2025.
Chart 9
A credit upturn may not come until 2025
Global Credit Cycle Indicator (standard deviations)
Data as of Q1 2023. Note: Peaks in the CCI tend to lead credit stresses by six to 10 quarters. When the CCI’s upward trend is
prolonged or the CCI nears upper thresholds, the associated credit stress tends to be greater. Sovereign risk is not included
as a formal part of the CCI. Sources: Bank for International Settlements, Bloomberg, S&P Global Ratings.
-3
-2
-1
0
1
2
3
4
1995 Q1 1998 Q1 2001 Q1 2004 Q1 2007 Q1 2010 Q1 2013 Q1 2016 Q1 2019 Q1 2022 Q1
CCI
Household sub-
indicator
Corporate sub-
indicator
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Dec. 4, 2023 9
Amid steeper funding costs and more-selective lending, risks of further increases in
nonperforming loans and defaults could shape credit conditions in 2024. For banks, this could
mean increased credit losses. But while most asset-quality measures have been worsening, it is
generally more a normalization toward historical averages in most cases. Although we expect
further weakening in 2024, we believe that owing to decent pre-provision earnings, banks are
generally well-positioned to absorb associated credit losses.
All told, our outlook for global banks remains steady. As of Oct. 31, 79% of bank ratings outlooks
were stable, with this resilience largely due to solid capitalization, improved profitability, and still-
sound asset quality. Still, higher-for-longer interest rates and continuing stress in the office
sector may mean elevated commercial real estate (CRE)-related loan losses for debtholders,
such as U.S. banks—with regional banks more exposed as a percentage of assets than their
larger competitors.
Recovery prospects for corporate debt remain under pressure. Even before macroeconomic
concerns about higher-for-longer interest rates and uncertain economic growth, there was an
expectation that bloated debt structures with high debt leverage and concentrations of first-lien
debt and covenant-lite structures might weigh on recovery rates given default.
In the U.S., our average expectation for future first-lien recoveries (using the rounded recovery
percentages that are part of our recovery ratings) is 64%—well below the long-term historical
average of 75%-80% (see chart 10). Average recovery expectations for first-lien debt of issuers
rated ‘B,’ ‘B-,’ and in the ‘CCC’ category are lower still, at 61%, 59%, and 58%, respectively.
Further, out-of-court restructurings will likely push many first-lien recoveries lower and increase
dispersion.
Chart 10
Expected recovery on newly issued North America first-lien debt (%)
Data through Sept. 30, 2023, based on the rounded point estimates included in our recovery ratings for rated nonfinancial
corporate entities in the U.S. and Canada. Source: S&P Global Ratings.
For Europe, our average expectation for future first-lien recoveries is 59%--compared to the
long-term historical average of 70%-75%. Average recovery expectations for European first-lien
debt of issuers rated ‘B,’ ‘B-,’ and in the ‘CCC’ category are 63%, 58%, and 51%, respectively. The
generally lower European recovery expectations reflect a heavier concentration of first-lien-only
debt structures.
60
62
64
66
68
70
72
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2017 2018 2019 2020 2021 2022 2023
New 1L debt, average
recovery estimate
Average outstanding
recovery
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Will Sovereigns Unwind Their Fiscal Stimulus?
Much of the recent global economic resilience has been bolstered by governments' large,
expansionary fiscal stimulus. Given the associated increase in governments' debt leverage,
policymakers will eventually have to unwind at least some of this support—especially given the
cost of servicing debt in a higher-for-longer interest-rate environment.
The scaling back of stimulus will likely weigh on demand and dent economic activity, and is thus
complicated by upcoming national elections in more than 50 countries, both developed and
emerging.
Increased geopolitical strife threatens to disrupt the credit landscape. The escalating war
between Israel and Hamas adds another dimension to existing geopolitical tensions, already
intensified by the prolonged fighting between Russia and Ukraine. Any significant spread of the
fighting in the Middle East raises the potential for energy-supply shocks and the renewed
dislocation of supply chains that had more or less normalized once the worst of the pandemic
passed.
While we think there is a broad desire that the conflict remain contained and for other countries
in the region not to participate directly, the possible involvement of Hezbollah (a well-armed
Lebanese Islamist political and militant group with close ties to Iran) would risk drawing in Iran
and, conceivably, the U.S.
Against this backdrop, key potential channels of transmission to the rest of the world could
include: an energy-supply shock, as price pressures and volatility in the oil market would almost
certainly increase if the conflict escalated significantly; supply-chain disruptions, which could
underpin inflation at a time of increasing economic uncertainty; and a surge in social unrest, with
the possibility of protests or outbreaks of violence becoming politically destabilizing across the
Middle East and beyond.
From an energy-supply perspective, the Middle East conflict is especially concerning, given that
roughly one-third of the world's liquefied natural gas and almost one-quarter of its oil travels
through the 104-mile strait of Hormuz, which is the only shipping route from the Persian Gulf to
the open sea.
Meanwhile, there are elections (presidential and/or legislative) in more than 50 countries in
2024, many of which could have global ramifications (see chart 11).
Both Russia and Ukraine, mired in a war that will soon enter its third year, have presidential
elections in March.
Adding a layer of uncertainty to both the Middle East and Russia-Ukraine situations are the U.S.
presidential and legislative elections in November, given the different positions in Congress
regarding support for additional funding for Ukraine and Israel.
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Chart 11
Key elections in 2024
Source: S&P Global Ratings.
Real Estate Remains Under Pressure
Worries about real estate remain around the globe, albeit with varying dynamics. In the U.S. and
Europe, the focus has been on commercial real estate—in particular, the office space—while in
China, the ongoing downturn in residential real estate is dragging on the economy.
In the West, CRE concerns have shifted from how pandemic-prompted pressures hurt hotels and
retail properties to how hybrid and remote work patterns have depressed demand for office
space. Asset valuations have declined in many major cities across the U.S., U.K., and continental
Europe. The sharp rise in interest rates has weighed on borrowers’ interest coverage and raised
refinancing risk.
In both the U.S. and Europe, higher financing costs, falling asset values, and declining cash flows
mean that debtholders—including banks, insurers, and commercial mortgage-backed securities
(CMBS)—could suffer elevated loan losses. The need to upgrade properties to meet ever-
increasing energy-efficiency standards is putting additional pressures on landlords in many
European countries.
Pressures in the sector will likely be drawn out. Office leases can last 10 years or more and
lenders (of which the majority are banks) have been more willing to extend loan maturities in
anticipation of an eventual decline in interest rates. But almost four years past the onset of the
pandemic, it’s clear that the secular shifts mean the office sector may need years to recover
from the recent downturn.
In China, the focus instead is on residential real estate and property development, which has
been mired in a prolonged downturn since late 2021. Weak property sales, particularly in lower-
tier cities, are persisting despite stimulus measures from Beijing. Slowing residential sales, which
fell nearly 4% in January-October 2023 (compared to the same period in 2022), are hitting
property developers’ cash flows and land sales—which are a key source of revenue for local and
regional governments.
Egypt presidential Iran legislative Taiwan both Ukraine both
India legislative Mexico both U.K. legislative Venezuela presidential
Indonesia both Russia presidential U.S. both
Election types by location
50+
countries
70+
elections
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China Faces Stresses At Home And Abroad
This pain in the property market is dragging on China's economic rebound and driving downside
risk. While the worst may be over for China’s property developers, S&P Global Ratings expects
property sales to stay depressed amid the low number of construction starts, an inventory
overhang in lower-tier cities, and ever-tightening escrow restrictions.
We think a worsening of the property crisis (which assumes a further 20%-25% decline in 2024
property sales from 2022) could push China’s economy—long the engine of global GDP growth—
below 3% in 2024, compared to our base case of 4.6%.
At the same time, the U.S.-China relationship remains strained. With the U.S. presidential
elections set for November, bilateral tensions could intensify amid U.S. domestic political
posturing. Concurrently, the U.S.’ ongoing export curbs of advanced chips to China and limits on
investment in China’s advanced-tech sector, could cause renewed supply bottlenecks and crimp
capital flows for both—and other—countries.
More broadly, a partial decoupling of China from the West would reshape supply chains, which
carries significant costs and operational challenges.
Top Risks
While credit ratings reflect our base-case scenario, our regional and global Credit Conditions
Committees monitor top risks that could derail our baseline expectations, leading to further
credit deterioration. For 2024, these include the risks that:
• Tight and volatile financing conditions persist amid entrenched inflation, increasingly
pressuring debt-service capacity of more vulnerable borrowers;
• A deeper and longer-than-expected recession in the largest economies further damps global
growth;
• Persistent input-cost inflation and high energy prices, combined with weakening demand,
squeeze corporate profits and pressure governments’ fiscal balances;
• Stresses in global real estate markets result in materially higher credit losses and spillovers to
broader economies and markets; and
• Amplifying geopolitical tensions roil markets and weigh on business conditions.
Looking ahead at the structural risks that will shape the future of credit, we see greater pressure
on credit from the physical and transition risks associated with climate change, along with rising
systemic risks from cyberattacks.
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Global Credit Outlook 2024
Top Global Risks
An extended period of high real-interest-rate levels further strains the weakest borrowers
Risk level
Risk
trend
A prolonged period of historically elevated real interest rates could become more challenging as debt maturities increase in 2025, either locking out
the weakest borrowers or with most issuers facing higher debt-service costs. This could be exacerbated as revenues slow, raising the real impact of
higher borrowing costs. When faced with slower GDP growth, lenders typically become more selective or demand greater compensation for
increased risk. This could contribute to default rates reaching our pessimistic cases of 7% in the U.S. and 5.5% in Europe.
An economic hard landing leads to greater credit stress
Risk level
Risk trend
Most countries have entered a slower growth period. The U.S. economy has proven resilient, but signs of strain among consumers are growing. Most
of core Europe is already experiencing anemic growth, and in our base case for 2024 we expect most countries to slow further, including below-
trend growth in most emerging markets. Downside risks to these already slower growth projections are largely linked to any weakness in labor
markets, which in many countries are already tight. Consumer delinquencies are starting to rise and built-up savings from pandemic supports have
been deteriorating quickly, which will challenge economic resilience ahead. We currently project the U.S. has a historically high 35% likelihood of a
recession in the next 12 months, indicating increased downside vulnerability for the world's largest economy, which would have spillover effects
globally.
Stresses in global real estate markets result in materially higher credit losses and spillovers to broader economies and markets
Risk level
Risk trend
A combination of secular and cyclical factors--high interest rates, falling valuations and cash flows, hybrid work trends, increasingly stringent
environmental standards for buildings, and high leverage--are challenging established business models for commercial and residential real estate.
Beyond our base case assumptions, spillovers from these vulnerabilities could reverberate more broadly, whether through material losses for more
exposed banking systems (such as the U.S. and China), other non-bank financial sectors with real estate exposures, or through negative effects on
investor and consumer sentiment more generally.
China’s economic growth challenges cause ripple effects globally
Risk level
Risk trend
China’s economy could weaken on multiple fronts at once, with persistent weakness in the real estate sector, tepid household and business
confidence, high debt, and subdued exports already weighing on the country's growth momentum. Contagion risks within China from weaker
confidence could spill over from real estate and related sectors (such as local government financing vehicles) -- exacerbating credit stress for
banks. Lenders could restrict new debt given the corporate sector's already high leverage. Given China’s large proportion of global trade, its slump
could spread to multiple regions.
Structural risks
Geopolitical tensions threaten market and business confidence, trade, and a renewal of inflation
Risk level
Risk trend
The post-COVID era marks the return to geopolitical risks. The Israel-Hamas war adds another dimension to increasing geopolitical strife. The
potential for the war to escalate—and to affect the rest of the world through energy supply shocks, supply disruption, and risks to social
cohesion—is a key concern. Other tensions such as persistent U.S.-China frictions, the Russia-Ukraine conflict, and domestic issues in certain
emerging markets could curb business activity, trade, supply chains, and investment flows--as well as increase financial market volatility. 2024 will
also feature more than 70 elections in 50-plus countries whose outcomes could add complexity to already strained international and domestic
dynamics for many countries.
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 14
Increased financial, business, and human implications from climate physical and transition risks
Risk level
Risk trend
Larger and more frequent natural disasters increase the physical risks public and private entities face and threaten to disrupt supply chains, such
as for agriculture and food. This may quickly become a headline risk in the near term as the El Niño phenomenon is expected to disrupt agricultural
commodities this year, particularly in emerging markets. At the same time, the global drive toward a "net-zero" economy heightens transition risks
(such as policy, legal, technology, market, and reputation risks) across many sectors and will likely require significant investments. Concerns about
energy supply and security are adding uncertainty to this transition.
Cyberattacks and the potential for rapid technological change threaten global business and government infrastructure
Risk level
Risk trend
Amid increasing technological dependency and global interconnectedness, cyberattacks pose a potential systemic threat and significant single-
entity event risk. Criminal and state-sponsored cyberattacks are likely to increase, and with hackers becoming more sophisticated, new targets and
methods are emerging. A key to resilience is a robust cybersecurity system, from internal governance to IT software, all requiring additional costs.
Entities lacking well-tested playbooks (such as active detection and swift remediation) are the most vulnerable. Meanwhile, increased digitization
and the introduction of AI by public and private organizations will foster broader operational disruptions, and potentially increase market volatility
for short periods or even pose greater economic adjustments.
Source: S&P Global Ratings.
Risk levels may be classified as moderate, elevated, high, or very high. They are evaluated by considering both the likelihood and systemic impact of
such an event occurring over the next one to two years. Typically, these risks are not factored into our base case rating assumptions unless the risk
level is very high.
Risk trend reflects our current view about whether the risk level could increase or decrease over the next 12 months.
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 15
Contacts
Paul F Gruenwald
New York
+1
-212-437-1710
paul.gruenwald@spglobal.com
Global Economic Outlook 2024
2024 Is All About The Landing
E
ditor’s note: This is an abridged report. For the full version, see: "Global Macro Update: 2024 Is All About The Landing,"
published Nov. 29, 2023.
Rate Hikes Have Been Synchronized, Macro Outcomes Have Not
Major central banks (excluding Japan) have raised policy rates by about 400 to 500 basis points
(bps) since the first half of 2022 to slow inflation, which has surged to a four-decade high. The
effort to curb inflation appears to be succeeding, but macro performance has varied widely. This
reflects differing speeds of monetary transmission, differing fiscal impulses, and differing
external conditions and dependencies.
Chart 1
Major central bank policy rates
End period (%)
Sources: Central bank websites.
-1
0
1
2
3
4
5
6
U.S. U.K. Canada Australia Eurozone Japan
Dec. 2022
Nov. 2023
Key Takeaways
• Following a synchronized rise in policy rates, growth is now unsynchronized across major
economies. The U.S. is outperforming whereas in Europe activity is flat. The common
macro thread comprises strong labor markets and spending on services, fiscal tailwinds,
and lingering core price pressures.
• Inflation has likely peaked as have policy rates, but central banks are on guard against
declaring victory too early. Our higher-for-longer view applies both to policy rates and
market interest rates, real and nominal. Caution among developed market central banks
is constraining potential rate cuts in emerging markets.
• We have moved our GDP growth forecasts marginally higher in some key emerging
markets but are broadly unchanged elsewhere. We have again pushed any necessary
slowdowns into the future.
• The next macro challenge is to "stick the landing." The risks to our soft-landing baseline
look balanced. Strong labor markets and fiscal tailwinds are driving the upside, whereas
uncertainties about the lagged transmission of cumulative rate hikes since early 2022 are
driving the downside.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 16
Our macro summary for the major regions and groups is as follows (details and links appear
below):
• The U.S. economy continues to outperform, posting nearly 5% annualized growth in the third
quarter, led by strong consumer spending and an inventory rebuild. Fourth quarter GDP is
tracking close to potential growth of 2%. (For further details, see "Economic Outlook U.S. Q1
2024: Cooling Off But Not Breaking," published on Nov. 27, 2023.)
• Activity in Europe has flatlined. Services-based economies (Spain) have done better than
manufacturing-based economies (Germany). Monetary transmission works faster than it does
in the U.S. (For further details, see "Economic Outlook Eurozone Q1 2024: Headed For A Soft
Landing," published on Nov. 27, 2023.)
• China’s growth has stabilized, reflecting targeted government stimulus. But household
confidence remains weak, and the property sector remains under stress. High inflation has not
been an issue. (For further details, see "Economic Outlook Asia-Pacific Q1 2024: Emerging
Markets Lead The Way," published Nov. 27, 2023.)
• Emerging markets have proven resilient overall, led by domestic-driven economies (India,
Indonesia), or those linked to the U.S. (Mexico). Policy rates cuts are in part currently
constrained by the U.S. Federal Reserve. (For further details, see "Economic Outlook Emerging
Markets Q1 2024: Challenging Global Conditions Will Constrain Growth," published Nov. 27,
2023.)
Strong labor markets are a bright spot almost everywhere, despite diverging growth outcomes.
Low unemployment rates stem from strong spending on services and labor hoarding. Higher
frequency indicators, including payroll additions, quits, and hours worked, do show signs of
slower labor demand. Ongoing robust fiscal spending helps in many economies as well.
Chart 2
Unemployment rates
July 1990 through present
Sources: FRED. S&P Global Ratings Economics.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 17
Both headline and core inflation continue to decline following their peaks of late 2022. Headline
inflation rose to higher rates than core and is now generally lower, reflecting the recent declines
in food and fuel prices. However, core inflation remains stubbornly high--near 5% in several major
advanced economies--and well above central bank targets, typically 2% over the medium term.
This stickiness reflects strong labor markets and spending on services and other non-tradable
goods. By extension, sticky inflation also implies that demand growth is too strong and that the
pace of activity needs to fall to bring inflation lower.
Chart 3
Inflation--selected economies
End of period (%)
PCE--Personal consumption expenditure. HICP--Harmonized index of consumer prices. Sources: Country websites.
Major central banks are signaling that they will need to keep rates near current levels for a
sufficiently long time, interpreted by markets as until the middle of 2024, because core inflation
remains high and sticky. This stems from strong labor markets, which are driving services
spending. Also, having been surprised by the jump in inflation in 2021 and responded too late,
central banks are wary of getting burned again and are therefore leaning higher. Markets have
bought the higher-for-longer view for the most part.
Latest Forecasts And Regional Narratives
Our updated GDP growth forecasts for the advanced economies are broadly unchanged for the
U.S. and eurozone as a whole (see chart 4). Our global growth forecast is 0.2% higher this year
and is unchanged over 2024-2026. The main revisions were in the big emerging markets: China
and India. We have nudged Spain, France, and the U.K. higher and Italy lower, with all of these
moves less than 30 bps, mainly due to carryovers from revisions to 2022 GDP. The emerging
markets had somewhat larger revisions for key countries.
0
1
2
3
4
5
6
U.S. PCE U.K. Canada Australia Eurozone HICP Japan
Headline
Core
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 18
Chart 4
GDP growth forecasts
Annual percentage change
World GDP is in purchasing power parity terms, based on sample of 33 countries we cover (excluding Russia).
*Fiscal year, beginning April 1 of the reference calendar year. Sources: S&P Global Market Intelligence. S&P Global Ratings.
Risks To Our Soft-Landing Baseline
We continue to see a material risk that macro developments will turn out better than
anticipated. Indeed, this has been the pattern for the past year, and many of the contributing
elements remain in place. Labor markets remain tight across a wide swathe of economies even
though headline growth numbers are diverging. The other factor is fiscal policy, which remains
expansionary for this part of the cycle. This is also occurring across a wide number of economies,
boosting output, labor demand, and wages more than would otherwise be the case.
An upside growth scenario also implies that interest rates will need to stay higher for longer.
This is relative to our already higher for longer baseline. Downside risks to our baseline scenario
relate mainly to uncertainties around the transmission of higher policy rates to financial
conditions and the real economy.
Given the steep increase in policy and market rates since early 2022, these resets will not be
small. To the extent that the reaction to higher rates is not linear, these large rate increases pose
greater downside risks. Not surprisingly, this downside is larger where the resets take longer and
the rate adjustment is higher.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 19
Non-macro risks are inherently more difficult to quantify but must be recognized. In particular,
geopolitical factors are at play. Spillovers of the ongoing conflicts between Russia and Ukraine
and Israel and Hamas have so far been lower than we expected. But we can't rule out escalations,
which could potentially move the macro needle. Tensions around the U.S.-China rivalry have
manifested so far in some modest realignment of trade and financial flows, but also remain
largely bounded.
Sticking The Landing
The macro focus has shifted from watching inflation to watching the landing. Since the
transmission of monetary policy works with a lag, the next few quarters will be critical in
determining whether we soft land or not. But what does this elusive soft landing look like?
Growth needs to slow below potential in order for excess demand pressures to ease and
inflation to fall back to target. In a soft-landing scenario the necessary adjustment takes place
gradually. Critically, there is little or no undershoot of the level of GDP nor the rate of inflation,
and no undershooting of policy rates. The glide path allows for a slower and more calibrated
adjustment.
The soft-landing story mostly hinges on the labor market. If workers keep their jobs, or expect
to keep their jobs, then spending is likely to be maintained. No paradox or thrift here, or a sharp
drop in spending.
Real rates remain positive throughout. This can be seen as the cyclical manifestation of higher
for longer. Policy rates will fall, but only after inflation is on a clear downward path. Real rates are
likely to remain elevated, and even rise in the coming quarters. When landing is achieved, inflation
will be at the target of 2% and the policy rate will exceed inflation by r*, the real rate of interest.
We think r* has risen globally and could be as high as 1%.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 20
Questions
That
Matter
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 21
Primary Credit Analysts
Gareth Williams
London
+44
-20-7176-7226
gareth.williams@spglobal.com
Gregg Lemos
-Stein
New York
+1
-212-438-1809
gregg.lemos
-stein@spglobal.com
Corporates | Could interest rate and recession risks
derail corporate credit?
How this will shape 2024
Weaker economic growth and a rising interest burden will test corporate issuers globally. The
corporate sector proved surprisingly resilient in 2023, with sustained consumer spending, notably
in the U.S., and supportive tailwinds from capital investment. Still, difficulties are apparent with
default rates edging higher, net downgrades, and contracting annual revenues and EBITDA. The
challenges will grow in 2024, as higher interest costs continue to filter through to effective
interest rates, refinancing pressures start to build, and the economic backdrop remains difficult.
Corporate decision-making will likely amplify broader economic trends. Continued resilience
and a gradual rebound in profits would likely contain credit pressures to the most vulnerable.
This could start to unlock cash balances for M&A and investment. However, if the global economy
weakens more than our forecasts assume, companies will likely act quickly to protect cash flows
through layoffs and investment cuts, traditional harbingers of recession.
Chart 1
The long decline in financing costs is likely over….
Cash interest paid/total debt and three
-month U.S.
interbank rates plus 350
basis points
Median,
LTM, rated U.S. nonfinancial corporates
Chart 2
…and interest cover risks are building for weaker credits
EBIT interest coverage
Median,
LTM, 'B' rated U.S. nonfinancial corporates
Source: S&P Global Market Intelligence Credit
Pro®, Compustat, S&P Capital IQ, NBER, S&P Global Ratings. Shows data for the contemporaneous rated universe
through time. Financial data from Compustat from 1982 to 1994, and S&P Capital IQ thereafter. LTM data to Q3 2023, with last
two markers indicating S&P Global
Ratings estimate for end
-2023 and end-2024.
3
4
5
6
7
8
9
10
11
12
13
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24
(%)
U.S. recession
BBB
BB
B
U.S. 3-month interbank rate plus 350 basis points
-1.0x
-0.5x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
84 88 92 96 00 04 08 12 16 20 24
U.S. recession
B+
B
B-
Interest cost pressures and a difficult economic backdrop mean credit pressures
will remain acute for weaker borrowers.
Credit
headwinds
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 22
What we think and why
Interest rate and refinancing pressures will continue to bear down on corporates. Third-
quarter results to date show cash interest payments still surging, up 21% at an annual rate and
25% for speculative-grade entities overall. Refinancing conditions remain difficult, particularly for
weaker entities, with lending standards tightening and debt maturity pressures building next
year.
We think structural changes are at play that will put pressure on unsustainable capital
structures. The era of ever cheaper borrowing costs is over (see chart 1), as is the steady uptrend
in profitability wrought by globalization, muted labor cost inflation, and reduced energy intensity.
Trade and political tensions are unlikely to fade in the near term, although artificial intelligence
(AI) may be a productivity wildcard. Sustained higher financing costs will likely mean that credit
metrics such as interest cover, which had ceased to be of much relevance, will again be of value.
More broadly, the end of financial repression (defined as interest rates being held below the
inflation rate) may bring risks from unsustainable capital structures to a head.
Credit pressures are likely to be confined to the weakest credits. Despite these pressures, we
believe credit quality will remain robust in investment grade and the stronger parts of speculative
grade, absent a severe economic contraction, and allow a modest turnaround in the earnings
cycle (see chart 3). However, the weaker end of the credit spectrum is vulnerable. We estimate
median EBIT interest cover for U.S. 'B' rated nonfinancial corporates will drop below one by the
end of this year to 0.6x, its lowest level since Q3 2004, and remain below one in 2024 (see chart
2). Among U.S. 'B' category ratings, 11% have had EBIT interest coverage ratios of less than one
for three years or more (see chart 3), showing further evidence of fragility. For these reasons, we
expect default rates will continue to rise even if the broader story is one of recovery.
Chart 3
Avoiding rece
ssion should help global earnings rebound…
Data for global rated nonfinancial corporates.
Sources: S&P Capital IQ, S&P
Global Ratings.
Chart 4
…but weaker credits are struggling with interest costs
Source
s: S&P Global Market Intelligence CreditPro®, Compustat, S&P
Capital IQ, NBER, Refinitiv, S&P Global Ratings.
What could go wrong
Sustained inflationary pressures or a sharp economic contraction are the primary risks.
Prolonged or reignited inflation pressures would exacerbate the already significant impact of
higher interest rate costs, and likely be accompanied by intensified labor cost inflation and
margin pressure. A sharp economic contraction could entail a dangerous combination of falling
EBITDA and still elevated financing costs, with market volatility and higher risk premia likely to
overwhelm any benefit from the lower policy rates that would likely follow.
-15
-10
-5
+0
+5
+10
+15
+20
+25
+30
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Sales growth (YOY%)
EBITDA growth (YOY%)
Estimate
0
5
10
15
20
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23
(%)
U.S. recession
Share Of 'B' Category Ratings With EBIT Interest Cover
<1 For >= 3 Years
Read more
Corporate Results Roundup Q3
2023: Deterioration continues and
revenues disappoint
, Nov. 16, 2023
Interest
-
cover risks are growing for
vulnerable corporate credit
, Oct.
26, 2023
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 23
Primary Credit Analysts
Ja
mes Manzi
Washington D.C.
+1
-202-383-2028
Ana Lai
New
York
+1
-212-438-6895
ana.lai@spglobal.com
Franck Delage
Paris
+33
-14-420-6778
fra
nck.delage@spglobal.com
Edward Chan
Hong Kong
+852
-2533-3539
Real Estate | Is the worst over for the global office
sector and China’s residential market?
How this will shape 2024
As the real estate sector confronts credit headwinds globally, persistent and prevailing risks
differ across type of real estate, region, country. This is true even for office buildings that are
right next to each other based on asset quality, occupancy, maturity profile, and more. And while
high interest rates remain the key risk for real estate assets globally, remote working is hurting
U.S. office landlords more than in Europe and China—as demonstrated by average vacancy rates
(see chart 1). Homebuilders are also facing diverging paths, largely based on geography; the U.S.
housing market remains resilient due to limited supply of existing housing while Chinese property
developers are facing a prolonged slump in demand. We expect real estate issuers to face a
challenging operating environment in 2024 given our expectations for interest rates to stay higher
for longer while revenue is pressured from weaker economic growth. We expect rates to stay
elevated in the next year, with gradual cuts beginning in the second half of 2024.
Chart 1
Global office vacancy snapshot (%)
Source
s: JLL, Property Council of Australia, Colliers International, Miki Shoji,
S&P Global
Ratings.
Chart 2
U. S.
and EMEA office CPPI, 2007-present (index)
Source
: Green Street.
Stress on the office segment remains high. Across commercial real estate, higher interest rates
have reduced debt-service coverage and raised refinancing risk. Declining demand for office
space—particularly in major cities across the U.S., U.K., continental Europe, and Australia—is
weighing on asset valuations (see chart 2). Demand increasingly concentrates on the most
centrally located and energy efficient assets. Offices in particular are also generating lower levels
of cash flow given increasing financing costs and credit headwinds. Rising operating expenses as
well as leasing incentives (e.g., rent concessions) have made it that much harder to meet interest
obligations, resulting in increased delinquency rates. Still, the picture is far less negative for cash
flows/revenues from hotels, industrial, and multifamily properties, which have held up well to
0
5
10
15
20
25
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q2
2023
Europe U.S. Australia
Japan Hong Kong
0
20
40
60
80
100
120
140
160
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Q1 2014
Q1 2015
Q1 2016
Q1 2017
Q1 2018
Q1 2019
Q1 2020
Q1 2021
Q1 2022
Q1 2023
U. S. office EMEA office
Higher-for-longer interest rates remain the key risk for real estate assets globally.
The distress will likely be drawn out on the commercial side, and especially in the
U.S. where office vacancies are relatively higher. In China, as the property
downturn continues, we expect property sales will track an extended L-shaped
recovery in 2024.
Credit
headwinds
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 24
date. The stress in office will be drawn out for years, as office leases typically carry longer terms
– ten years or more.
Higher mortgage payments are hurting affordability. For residential real estate, the rapid rise of
mortgage rates is also dampening housing demand globally as buyers are adjusting to the highest
rates in almost two decades. We expect the U.S. and European housing markets to face pressure,
given worsening housing affordability. As steep increases in mortgage payments hurt home
purchasability, rental housing remains a cheaper option in many markets. We expect rental
housing demand in 2024 to remain healthy, albeit at slower pace. In Europe, residential rents will
remain supported by lagging indexation, falling supply, and higher demand from immigration.
Property sales in China will track an L-shaped recovery in 2024, after a decline of more than
one-third since the peak in 2021. As the property downturn enters into its third year, the
government’s continuous policy relaxations (including lowering mortgage rates) aimed at
stabilizing the sector will benefit the upper-tier markets, particularly the first-tier cities. Lower-
tier cities are contending with excess supply and depleted confidence. All developers will have to
manage slowing sales; in our view, their leverage will remain high for the next two years. In Hong
Kong, we expect residential property prices to fall in 2024, as leading developers will likely lower
prices to entice demand, as well as sacrifice margins to meet their contracted sales targets and
to gain market share.
What we think and why
Refinancing risk is growing. Higher-for-longer interest rates will continue to pressure asset
values and erode credit metrics in 2024, increasing refinancing risk across all property types.
Refinancing options remain more limited, given a pullback from bank lending while debt issuance
remain subdued due to steeper cost of borrowing. In the meantime, real estate transaction
volume remains low and will not likely recover until rates starts to decline (or at least stabilize),
perhaps toward the end of 2024.
Amidst challenging financing conditions, we expect an increase in downgrades and many loans
to be restructured or default if maturities are unable to be extended. We maintain a negative
rating bias for the REIT sector globally—with about 20% of U.S. ratings on negative outlook,
compared to 26% in EMEA and Asia-Pacific’s 21% negative rating bias. In the U.S., the office
REITs space saw four fallen angels in 2023, and almost 40% of office REITs were speculative
grade as of November 2023. Growing refinancing risk has led to a growing number of 'CCC' ratings
in the U.S.
Chart 3
Global REITs rating outlook bias
Source: S&P Global Ratings.
78%
19%
3%
North
America
69%
26%
3%
2%
EMEA
79%
21%
Asia-Pacific
Stable Negative Positive Watch Neg
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 25
“Higher-for-longer
interest rates
increase refinancing
risk across all
property types
.”
The effects on ratings are already evident in the U.S. CMBS market (with some 254 class ratings
lowered in the 12 months ended Oct. 31, 2023). Negative rating bias has also increased
significantly for rated REITs globally, and we have downgraded a growing number of issuers with
significant exposure to office assets. For banks, there have been increases in criticized
assets/loans (that is, showing a higher probability of default or deteriorating collateral values).
Across CRE loans and reserves, the impact seems muted for the larger entities that we rate. For
newer class-A offices with strong tenant rosters, or other types of CRE where the distress largely
stems from higher rates, lenders may extend loan maturities in the hopes that a decline in
interest rates and stabilization of property valuations will soon materialize. For example, we're
watching multifamily closely in the U.S. as some properties were underwritten at what might be
peak rents, thus having less margin for any corrections amid significantly higher rates.
Limited housing supply mitigates soft demand in housing. Despite sharp increases in home
mortgage payments, we expect demand for housing to remain resilient due to limited supply of
homes and relatively benign job markets in the U.S. U.S. homebuilders have gained share as
existing homeowners are reluctant to sell their homes at low mortgage rates, while European
homebuilders continue to face strong margin pressures due to significantly lower demand for
newly built residentials and elevated costs of constructions. Conditions for Chinese developers
remain challenging. We believe the spillover impact from China’s property market into other
property markets will likely be limited given the risks to Chinese banks are manageable. These
institutions have sufficient capital buffer to absorb the potential losses from property-sector
write-downs, while government policies are helping stabilize residential sales, particularly in
higher-tier markets.
What could go wrong
Higher for even longer could increase downside risk. The credit outlook for both global
commercial and residential real estate depends on the path of benchmark interest rates, likely
more so for commercial. While our macroeconomic base case does not call for a recession in
2024, weaker growth with higher unemployment and consumer spending could further pressure
real estate demand, particularly in a prolonged high-rate environment.
Loan distress could increase. Amid higher rates, declining asset values, and lower cash flows for
certain property types, elevated CRE-related loan losses may rise for debtholders including
banks, NBFIs, insurers, REITs, and CMBS. Reduced construction/new projects may also
contribute to slower macroeconomic growth, amid relatively lower demand for space.
A weaker macro landscape can slow demand further. If interest rates remain elevated for much
longer, residential investments could deteriorate significantly. If interest rates remain high or
move even higher, the already stressed market for refinancing would certainly worsen—and the
prospect of “higher-for-longer” loan rates could thwart any plans borrowers may have to simply
wait conditions out by extending their loans. While we expect benchmark rates to stay elevated in
the next year, our U.S. base case calls for gradual (policy) rate cuts beginning in the second half
of 2024, lowering mortgage rates from peak levels and supporting a recovery in housing demand
in 2024 and beyond. Persistently high mortgage rates could erode demand such that housing
could see more material pricing decline.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 26
Primary Credit Analysts
David C. Tesher
New York
+1-212-438-2618
david.tesher@spglobal.com
Paul Watters, CFA
London
+44-20-7176-3542
Evan Gunter
Montgomery
+1-212-438-6412
Luca Rossi
Paris
+33-6-2518-9258
luca.rossi@spglobal.com
"Credit is credit, and
these borrowers face
the same
fundamental risks as
rated issuers."
Private Markets | How long can the golden age of
private credit last?
How this will shape 2024
We expect opportunities for private credit and funds to remain robust in 2024, after booming
in 2023. After years of strong fundraising, private credit funds have amassed more than $400
billion in dry powder globally (as of September), leaving them with cash to deploy. While limited
partners (LPs) appear to be responding to restrictive, higher-for-longer interest rates by slowing
contributions to alternative assets--especially private equity funds--private credit allocations
have held up better. Whether 2024 will be another golden year for private debt investors will
depend on their risk appetites and strategic focus, as well as the economic backdrop.
The pool of private credit continues to expand. In the U.S., private credit is growing its capacity
through nontraded business development companies, interval funds, and middle-market
collateralized loan obligations (CLOs). Direct lenders have tended to target traditional middle-
market borrowers with $25 million-$100 million (or equivalent in euros) of EBITDA, but the growing
trend for club deals has extended private credit’s reach to larger and more diverse borrowers.
Additionally, distressed and special situations funds--which represent as much as one-third of
available capital--are waiting in the wings for rescue financing opportunities.
Challenges for borrowers may be opportunities for lenders. Given challenging public markets,
borrowers are looking for other sources of funding to meet upcoming maturities. Broadly
syndicated loan (BSL) issuance in the U.S. and Europe is down nearly 30%, to its lowest level
since 2010 (at $318 billion). Meanwhile, ‘CCC’ bond issuance has fallen to its lowest level since
2008 (around $2 billion). Private credit is looking to take up some of the slack as upcoming
maturities of nonfinancial corporate debt rated ‘B-' and lower (in the U.S. and Europe) doubles to
$169 billion in 2025, from $83 billion in 2024.
What we think and why
Credit is credit, and these borrowers face the same fundamental risks as rated issuers.
Financial risks weigh more on the credit quality of borrowers with weak business risk profiles or
high leverage. In particular, companies issuing floating-rate debt, such as from private lenders,
will be vulnerable to the higher cost of funding amid higher-for-longer interest rates.
We see this in rising default rates. We expect the trailing-12-month speculative-grade corporate
default rate to reach 5% in the U.S. by September 2024 (up from 4.1% in September 2023) and
3.75% in Europe (up from 3.1%) as companies grapple with higher interest rates.
Cash flow metrics are regaining their importance as a key driver of credit quality, alongside
measures of leverage. We see many borrowers laser focused on maximizing cash flow through
various measures, including: cutting expenses, protecting margins, trimming inventories and
working capital, selling assets, reducing dividends and share buybacks, or raising equity. Cash-
constrained borrowers are also using payment-in-kind instruments on their balance sheets and
choosing to build cash buffers rather than repay debt.
Whether private or public, credit is credit. And with interest rates likely to remain
higher for longer, weaker borrowers and their lenders are paying far more attention
to cash flow metrics and borrowers' ability to service debt.
Read more
Testing Private Debt's Resilience
Through The Credit Estimate Lens
,
Nov. 2, 2023
Middle
-Market CLO And Private
Credit Quarterly: Strong CLO
Growth, But Weakening Underlying
Credit
, Oct. 20, 2023
Capital flows
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 27
“Even a moderate
stress could
diminish
the credit quality of
private credit
borrowers
.”
For businesses that require significant investment, the need to prioritize liquidity could come at
the expense of longer-term growth. In addition, some financial sponsors--facing the reality of
higher funding costs, lower valuations, longer hold times, and fewer exit routes for portfolio
companies--are resorting to new arrangements to raise debt, often hoping to bridge to a more
favorable business climate.
Tighter financing conditions will test financial vulnerabilities. In our base case, we expect
policy interest rates to only start easing in the second half of 2024, meaning financing conditions
will remain restrictive for a while. This is likely to pressure the credit quality of the more than
2,000 U.S. middle-market borrowers for which we have credit estimates. In the year to August
2023, a significant minority were already struggling to generate positive free operating cash flow
(FOCF), and 78% had a low 'b-' score, with 13% in the 'ccc' category. In comparison, about 30% of
global speculative-grade issuers are rated 'B-' or lower.
What could go wrong
Even a moderate stress could diminish the credit quality of private credit borrowers. Our
analysis highlights that many companies with 'b-' credit estimates could be at risk of a
downgrade from higher interest rates and lower earnings. We assume a moderate stress scenario
of SOFR rising 1 percentage point over our current base case of about 5%, together with a 20%
fall in EBITDA. In such a case, only about 35% of this set of middle-market borrowers would likely
generate positive FOCF, and about 28% of those with 'b-' credit estimate scores would be
vulnerable to a downgrade.
Interestingly, 55% of these credit estimates are for companies in the business and consumer
services, health care services, and technology software and services sectors. Technology
appears most vulnerable in our stress scenarios, with materially weaker interest coverage ratio
and covenant headroom.
Information asymmetry is more problematic for credit investors than equity providers.
Lenders are always more sensitive to downside risks than equity investors. One such risk is the
considerable information asymmetry in the private credit market, which is exacerbated by the
influx of less-sophisticated retail investors into the asset class.
While tighter documentation and close working relationships help to facilitate an open flow of
information between borrowers, lenders, and sponsors, LPs and institutional investors have a
more indirect flow of information. Disclosures about borrowers' operational and financial
performance, credit quality, and asset valuations may vary between funds and intermediaries.
Illiquidity could reveal contagion risk. Without a sizable secondary market, private credit assets
are largely illiquid buy-and-hold investments held in vehicles with capital that is typically locked
up for at least five years. We think the scale of private debt is unlikely on its own to threaten
financial stability in the U.S. or Europe, as it accounts for only about 4% and 1% of total
nonfinancial corporate debt in each region, respectively.
However, a material shock in this opaque, illiquid, and unregulated market could expose
vulnerabilities elsewhere in the financial system. For instance, there could be some contagion
risk to banks, insurance companies, and pension funds. Banks often provide private credit
lenders with some of the capital they use to extend loans--in some cases to companies the banks
themselves would consider uncreditworthy. Banks could therefore be indirectly exposed to
troubled borrowers, but without the oversight they have in the BSL market. Pension funds and
insurance companies invested in private credit funds are exposed in much the same way.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 28
Chart 1
Debt maturities will pressure funding demands
Annual maturities of nonfinancial corporate debt rated 'B-' and lower in the U.S. and Europe rise rapidly after 2024
Includes nonfinancial corporate issuers' bonds, loans, and revolving credit facilities that are rated 'B-' and lower by S&P
Global Ratings. Data as of July 1, 2023. Source: S&P Global Ratings Credit Research & Insights.
Chart 2
The funding costs of smaller borrowers have climbed
rapidly
Interest rates on small business loans are approaching 10%
*Net percent
--"Higher" minus "lower" compared to three months ago.
Sources: Small Business Economic Trends, Sept. 2023, NBIF Research Centre,
and S&P Global Ratings Credit Research & Insights.
Chart 3
Higher interest rates weigh on the cash flow of sm
aller
borrowers
Nearly 45% of
companies with credit estimates are now
generating negative free operating cash flow (FOCF)
FOCF
--Free operating cash flow. Source: S&P Global Ratings.
0
50
100
150
200
250
2024 2025 2026 2027 2028
(Bil. $)
Europe
US
-25
-15
-5
5
15
25
35
0
2
4
6
8
10
12
2018 2019 2020 2021 2022 2023
Net percent (%)
(%)
Relative interest paid survey* (right scale)
Actual rate paid on small business ST loans
0
10
20
30
40
50
Less
than $0
$0-$5 $5-$10 $10-$15 $15-$20 Greater
than $20
(% of credit-estimated
companies)
FOCF (mil. $)
2021 2022 H1 2023
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 29
Primary Credit Analyst
N
ick Kraemer
New York
+
1-212-438-1698
Market Dynamics | How will the path of interest rates
in 2024 affect corporate borrowing strategies?
How this will shape 2024
Times have changed—quickly. A protracted period of exceptionally low borrowing costs,
combined with longer tenors on new debt during the pandemic period, provided corporations the
best financing conditions we’ve ever seen. And this was preceded by more than a decade of
falling interest rates compounded by central bank asset purchases and backstops, coaxing
investors into ever riskier debt.
Sky-high inflation created a new landscape for lending conditions. The onset of the highest
rates of inflation in more than four decades forced central banks into sharp monetary-policy
tightening in the past two years. The response by corporations was a 35% global reduction in
overall bond issuance in 2022, with a 10% growth rate this year still keeping 2023’s total below
2019’s. And the majority of debt that has been issued has been largely limited to refinancing
rather than more growth-oriented ends.
Central banks have entered a new, post-pandemic phase of tighter monetary policy. Barring a
major economic collapse, this will force corporations to reconfigure their balance sheets and
financial planning, given that more income will need to be used to service debt. Our initial
projections for overall corporate bond issuance in 2024 calls for very modest 3% growth—but
given expectations for the path of policy rates by the Federal Reserve, this otherwise modest
(but positive) annual total may fluctuate considerably throughout the year (see chart 1).
Chart 1
Issuance growth could be limited amid stubbornly higher rates
Note: Includes rated and unrated long-term debt. f--Forecast. Source: S&P Global Ratings.
Many companies already appear to be postponing coming to market in the hopes that interest
rates will start to fall in the next six months. While we feel current rates and slowing growth will
keep 2024’s bond issuance growth lower than this year’s pace, some issuance that we expected
in late 2023 may be pushed deeper into 2024, thus boosting our 3% growth projection.
-40
-30
-20
-10
0
10
20
30
40
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2018 2019 2020 2021 2022 2023f 2024f
(%)
(Bil. $)
Corporate bond issuance
YOY growth rate (right
scale)
With central bank policy rates likely at or near their peak, how quickly borrowers
can expect a U-turn toward rate cuts is of paramount importance to their
refinancing strategy.
Capital flows
Read more
Global Financing Conditions:
Stubborn Rates Portend Slower
Issuance Growth In 2023 And 2024,
Oct. 26, 2023
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 30
While market sentiment may be optimistic amid increased hopes for central banks to pivot,
we’ve been here before—at the same time a year ago, in fact. And for borrowers, waiting is a
gamble. Rates may not fall as far or as fast as some hope, investors will prefer higher-yielding
assets if rates do fall, and the timeframe to address large refinancing needs in 2025 is running
thin.
The pain won’t be felt evenly across sectors. At the lowest rating levels (‘B-’ and below), there
are five sectors globally that have more than $100 billion in debt outstanding (see chart 2). And of
the $790 billion among these five, roughly 82% comes due in 2024-2028. Four of these five
sectors—high technology, health care, media and entertainment, and consumer products—are
the largest in terms of their presence in the leveraged loan market and have (aside from high
tech) been the largest contributors to global defaults this year. In contrast to bonds, leveraged
loans have felt rate hikes more immediately since they typically have floating rates with
benchmarks very tightly tied to moves in policy rates.
Chart 2
The riskiest debt is not evenly distributed across sectors
Source: S&P Global Ratings.
What we think and why
Even with a pivot by central banks, effective long-term rates look set to remain historically
high. While we think the Fed will start a cycle of interest-rate cuts in June, we think the federal
funds rate will be at 4.7% at the end of 2024 and average roughly 5.25% for the year. We also
expect the European Central Bank to start cutting rates in the second half of 2024, albeit at a
slower pace.
Changing supply and demand dynamics are influencing benchmark U.S. Treasury rates. (And
Treasury rates have pulled other non-U.S. government bond yields up with them). There’s been a
substantial $2 trillion increase in Treasury supply since December 2022, alongside reduced
Treasury holdings among some of the largest buyers—including the Fed, via quantitative
tightening. So, while short-term policy rates might decline next year, the transmission
mechanism to lower rates in the long term may run into some obstacles, keeping effective
borrowing costs elevated.
0
50
100
150
200
250
Health care
High technology
Media and entertainment
Consumer products
Telecom
Chemicals, packaging and
environmental services
Retail/restaurants
Capital goods
Forest products and
building materials
Automotive
Aerospace and defense
Oil and gas
Transportation
Financial institutions
Insurance
Utility
Homebuilders/real estate
Metals, mining and steel
(Bil. $)
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 31
What could go wrong
We see a potential lose-lose situation. Given the high level of uncertainty for the path of
economic growth and what has already proven to be “sticky” inflation, there’s a potential lose-
lose situation ahead for corporate borrowers.
If inflation lingers amid robust economic activity and tight labor markets, central banks will
need to keep policy rates high. On the other hand, if rate cuts happen faster than we expect, it
will likely be because the economy stumbles—perhaps into recession.
Economic downturns always hit credit harder than higher rates do. This is because they erode
top-line (revenue) growth, making all expenses—including interest rates—more cumbersome.
And for corporations, history has shown that recessions come with rapidly rising market yields
and wider spreads, even if risk-free benchmarks fall (see chart 3).
Chart 3
Corporate and benchmark yields diverge during stressful periods
Sources: FRED, S&P Global Ratings.
0
1
2
3
4
5
6
0
5
10
15
20
25
30
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
(%)
(%)
Recession
U.S. 'B'
Europe HY
5-year treasury
(right scale)
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 32
Primary Credit Analysts
Christian Esters
Frankfurt
+49
-693-399-9262
christian.esters@spglobal.com
Roberto Sifon
-Arevalo
New York
+1
-212-438-7358
roberto.sifon
-
arevalo@spglobal.com
Jose Perez
-Gorozpe
Madrid
+34
-91-423-3212
jose.perez
-gorozpe@spglobal.com
“Governments and
private
-sector
borrowers could
continue to face
elevated funding
costs while interest
rates remain higher
for longer.”
Sovereigns | What are the credit implications of
intensifying conflicts and political disruption?
How this will shape 2024
The Russia-Ukraine and Israel-Hamas wars are extending into 2024 and continue to dominate
much of the regional and global agendas. The continuation of these conflicts will keep
geopolitical uncertainties high.
Intensifying U.S.-China diplomatic and trade frictions, and disputes over the South China Sea,
will remain a risk. After the pandemic exposed supply chain vulnerabilities, the U.S. is likely to
continue diversifying trading partners, to the benefit of Mexico, Vietnam, and other economies.
Policymakers, like the leaders of the BRICS countries, have been advocating a move away from
using the U.S. dollar for trade among their countries. Making supply chains more resilient to
geopolitical uncertainty could boost investment locally, or in politically stable or aligned
countries, while leading to economic costs that could stoke inflation.
At the same time, more than 50 countries will hold national elections in 2024. Most prominent
will be the U.S. presidential elections in November. The U.K. general elections will likely occur in
late 2024 or early 2025. Across emerging market economies, national elections will take place in
India, Indonesia, South Africa, India, and Mexico, among many others.
What we think and why
Geopolitical uncertainties affect consumer and investor confidence, trade, and capital flows.
The active military conflicts could lead to upward pressure on energy and other commodity
prices, and consequently affect global growth and inflation--keeping interest rates even higher
for longer. Governments and private-sector borrowers could continue to face higher funding
costs. At the same time, elevated energy prices would weigh on the balance of payments of
energy importers. Energy suppliers, by contrast, would likely benefit. At the same time, the
sticking points of U.S.-China relations will continue to be trade, technology, and security. This
geopolitical disruption, alongside other tensions, could reinforce trade fragmentation and the
relocation of supply chains.
We think that the impact, including on economic growth, of the war in the Middle East can
largely be contained to Israel and its nearest neighbors--for the time being. However, the
situation is fraught with risk, particularly if the ground offensive into Gaza provokes a military
response from Iran-backed militant groups. We believe the conflict could increase tensions
within the region, and between communities and governments around the world.
We expect the active phase of the Russia-Ukraine war to continue at least until the end of
2024. Ukrainian forces have so far largely struggled to retake substantial swathes of territory as
part of their ongoing counteroffensive. We think that the prospect of any negotiated peace plan
Geopolitical uncertainties will affect global growth and inflation, consumer and
investor confidence, trade and supply chains, and overall capital flows. These
uncertainties come against a backdrop of the continuing Russia-Ukraine and Israel-
Hamas wars, disputes over the South China Sea, and upcoming national elections
in more than 50 countries in 2024. Government and corporate borrowers alike
could continue to face elevated funding costs while interest rates remain higher for
longer.
Read more
CreditWeek: What Are The Credit
Ramifications Of The War In The
Middle East?
, Nov. 2, 2023
Global Sovereign Rating Trends:
Third
-Quarter 2023, Oct. 16, 2023
Challenges To Trading Oil In
Renminbi Remain Significant
, Oct.
5, 2023
Geopolitical
uncertainty
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 33
“Of our 137 sovereign
ratings, 14 have
negative outlooks
and 11 have positive
outlooks.”
appears almost nonexistent, and that a military stalemate remains the most likely scenario as
both sides resign themselves to an extended war.
Intensifying conflicts and geopolitical disruption have implications for credit quality. Of our
137 sovereign ratings, 14 currently have negative outlooks and 11 have positive outlooks (see chart
2). Most non-stable outlooks on sovereign ratings are in EMEA (Europe, the Middle East, and
Africa), and some of them reflect those geopolitical risks, including the outlooks on Latvia,
Lithuania, Estonia, and Israel. The negative outlook on Israel, for example, reflects the risk that
the Israel-Hamas war could spread more widely or affect Israel's credit metrics more negatively
than we expect.
Global geopolitical positioning, domestic preelection controversies, and election outcomes
could affect each other. Although election years often go hand in hand with extra fiscal
spending, this could be exacerbated by the rising cost of living, as well as the vulnerabilities in
access to public health services that the pandemic exposed. As the electorate has likely become
more sensitive to such shortcomings, we could see fiscal slippage while government funding
costs are high. These conditions would be detrimental for government finances but could
temporarily create some extra demand.
Government spending could focus on garnering short-term electoral support rather than
infrastructure spending that supports long-term growth. At the same time, if a preelection
phase comes with heightened polarization or uncertainties, that could affect local consumer and
investor confidence.
Chart 1
2024 national election statistics by month
Note: Some election dates not fixed yet. Some countries have two national elections in 2024 (e.g. legislative and
presidential). In such case, the data only counts the legislative election. European Parliament elections June 2024 not
included. Source: CIRCA People In Power, S&P Global Ratings.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 34
“An escalation of the
Russia
-Ukraine war
could lead to
renewed shocks on
energy and food
markets.”
What could go wrong
In the Middle East, the key risk is the potential for the conflict to escalate and spread more
widely in the region. Hezbollah, for instance, could intervene more, which could risk drawing in
the U.S. if Iran is viewed as having directed Hezbollah's actions. Such escalation would have
significant repercussions that could extend globally, for instance on energy markets.
The tail risk for energy markets and supply chains relates to the possibility of Iran impeding
transit through the Strait of Hormuz. Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, and
Iran ship most of their oil exports--or the equivalent of about one-fifth of global oil consumption--
and chemical product exports through Hormuz, while Qatar sends almost all of its liquefied
natural gas through the strait.
Protests or refugee flows could be politically destabilizing across the Middle East, and
beyond. They could also lead to more polarized public debates on migration in Western
countries, which could add to anti-globalization movements.
We also think some risk of escalation in the Russia-Ukraine war remains. Escalation could
include the use of nonconventional means, unforeseen accidents, or direct confrontation with
NATO countries. An escalation would lead to renewed shocks on energy and food markets and,
consequently, on inflation and growth.
Heightening disputes over the South China Sea could damage investment, trade, and supply
flows within and outside the area, since some 20%-30% of global trade passes through it.
Taiwan accounts for about 60% of global semiconductor production. Given mutual dependencies
between the U.S. and China, an escalation could disrupt financial markets globally. The U.S.
sanctions on Russia raised questions on whether the U.S. could bring similar measures against
Chinese banks. China, on the other hand, is the largest holder of U.S. Treasury bonds.
The strength of institutional frameworks could be affected if election campaigns lead to
increased political polarization. The increase in the cost of living and low growth could set the
agenda of election campaigns in some countries, and lead to more lax fiscal policies and growing
government debt, amid high interest rates. Leadership changes--in particular, in the U.S.--could
have global repercussions, for example if the U.S. were to take a more isolationist approach.
Chart 2
Outlook distribution across regions
Americas
EMEA
APAC
Positive outlook
Barbados
Albania
Brazil
Andorra
Benin
Bulgaria
Croatia
Cyprus
Portugal
Ras Al Khaimah
Turkiye
Negative outlook
Argentina
Estonia
Bangladesh
Bolivia
Ethiopia
Chile
France
Panama
Israel
Peru
Kenya
Latvia
Lithuania
Ukraine
Source: S&P Global Ratings.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 35
Primary Credit Analysts
Jose Perez
-Gorozpe
Madrid
+34
-914-233-212
jose.perez
-gorozpe@spglobal.com
Elijah Oliveros
-Rosen
New York
+1
-212-438-2228
elijah.oliveros@spglobal.com
Eunice Tan
Singapore
+65
-6530-6418
eunice.tan@spglobal.com
V
ishrut Rana
Singapore
+65
-6216-1008
Emerging Markets | Which EMs are better positioned
to outperform in 2024?
How this will shape 2024
EMs will face tough global macroeconomic conditions in 2024. A soft landing in the U.S. (with
an elevated risk of a hard landing), persistent weakness in the eurozone, soft Chinese demand,
and two major wars (Russia-Ukraine and Israel-Hamas) will act as a drag on growth in EMs. These
dynamics are taking place amid global interest rates that are likely to remain high. Therefore, we
expect most EMs to grow below trend next year, with risks mostly on the downside.
There are bright spots in EMs’ complex panorama. Many EMs are noticeably better positioned
than their peers to thrive despite these challenges. Structural trends, such as nearshoring, will
allow them to offset some of the impact from global economic woes. In the medium term, energy
transition will also benefit many EMs that produce or hold large reserves of key metals.
What we think and why
Supply-chain relocation will remain a key trend that could benefit many EMs. Nearshoring and
friendshoring have gained attention as supply-chain disruptions during the COVID-19 pandemic
made a case for manufacturers to diversify locations of their operations to minimize production
disruptions. Tensions between the U.S. and China, especially over technology, may have also
encouraged companies to move some manufacturing production out of China. Mexico's long-
standing manufacturing linkages with, and access to, the U.S. market make it an obvious
potential beneficiary for nearshoring. Since then, the nearshoring activity in Mexico has picked
up, as seen in the robust construction pace of industrial parks in the northern part of the country,
as well as an uptick in foreign direct investment (FDI) so far this year (see chart 1). Given high
external financing costs, having strong FDI inflows will be particularly important for external
account stability.
Chart 1
Nearshoring is already changing tides for Mexico's FDI
FDI as % of Mexico's GDP
FDI--Foreign direct investment. Sources: Haver and S&P Global Ratings.
0
1
2
3
4
5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
H1-2023
Many emerging markets (EMs) are bound to navigate the challenging global
macroeconomic backdrop in 2024 better than their peers. Structural trends that
will allow these EMs to mitigate the impact from global headwinds are nearshoring
(Mexico, India, and Vietnam) and energy transition (Indonesia, Chile, and the
Philippines, among others).
Read more
Economic Outlook Emerging
Markets Q1 202
4: Challenging
Global Conditions Will Constrain
Growth
, Nov. 27, 2023
Indonesia
Counts On Batteries To
Power Exports And Taxes
, Aug. 24,
2023
For Mexico, Nearshoring's
Potential Benefits
--And Obstacles-
-
Are Significant, April 4, 2023
Geopolitical
uncertainty
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 36
“Despite difficult
global
macroeconomic
conditions in 2024,
nearshoring and
energy transition will
benefit many
emerging markets.
”
Vietnam has also been a key beneficiary of changing trade dynamics and supply-chain
relocation. The country's trade ties with the U.S. have been quickly expanding even before the
pandemic. Vietnam's exports to the U.S. have jumped fourfold since 2013 (see chart 2) and
accelerated following the Trump administration's imposition of tariffs on China in 2018. The
country has recently become the sixth-largest trading partner of the U.S. And Vietnam will remain
one of the fastest growing EMs in the next three years, supported by policies that favor global
trade integration to foster domestic economic growth. Nevertheless, maintaining a strong global
supply-chain presence will require sustained investments and reforms. Vietnam confronts
significant challenges, considering its infrastructure, labor, and resource constraints. Insufficient
expansion of power generation capacity means that the country could face electricity shortages
especially during summer seasons.
India is set to become the third-largest economy by 2030, and we expect it will be the fastest
growing major economy in the next three years (see chart 3). A paramount test will be whether
India can become the next big global manufacturing hub, an immense opportunity. Developing a
strong logistics framework will be key in transforming India from a services-dominated economy
into a manufacturing-dominant one. Unlocking the labor market potential will largely depend
upon upskilling workers and increasing female participation in the workforce. Success in these
two areas will enable India to realize its demographic dividend. A booming domestic digital
market could also fuel expansion in India’s high-growth startup ecosystem during the next
decade, especially in financial and consumer technology. In the automotive sector, India is poised
for growth, building on infrastructure, investment, and innovation.
Overall, Mexico is not the only EM that could benefit from the reconfiguration of global-supply
chains. Countries with strong and stable trade ties with the U.S., such as Vietnam and India, are
also gaining attention in this area. Outside of Asia, EMs with wide access to the eurozone market
and with developed manufacturing sectors, such as Poland, are also bound to benefit from that
trend.
Chart
2
Vietnam has boosted its trade potential
Vietnam's exports to the U.S.
Sources: WITS, UN Comtrade, IIF.
Chart
3
India and Vietnam will be the fastest growing EMs
Average forecasted growth 2024
-2026 (%)
Source: S&P Global Ratings forecasts.
0
5
10
15
20
25
30
35
40
0
20
40
60
80
100
120
140
160
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
(%)
(Bil. $)
Exports to U.S.
Exports to U.S. as percentage of Vietnam GDP (right scale)
0
2
4
6
8
India
Vietnam
Philippines
Indonesia
China
Malaysia
Saudi Arabia
Thailand
Poland
Hungary
Peru
Turkiye
Chile
Colombia
Mexico
South Africa
Brazil
Argentina
Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 37
The energy transition will position some key EMs in the spotlight. Ongoing global efforts to
accelerate energy transition and the achievement of sustainable development goals will boost
the demand for key metals. In particular, copper, cobalt, nickel, and lithium are critical in
electrical vehicle (EV) and battery production and performance. Currently, the leaders in mining
and processing these metals are mostly EMs, including China (copper, cobalt, nickel, and lithium),
Chile (copper and lithium), and Indonesia (nickel; see charts 4 and 5). However, there are
initiatives across advanced economies to ensure supply diversification and strategic access to
these metals, which will likely boost investments in other EMs with large reserves of these
metals. This is a major opportunity for key EMs such as Chile, Peru, Mexico, Indonesia, Argentina,
The Democratic Republic of Congo, and the Philippines, which hold some of the world's largest
reserves of these metals. Particularly, we view Indonesia's substantial reserves of nickel, a key
material needed to make EV batteries, as well placed to turn its EV battery manufacturing into a
major export industry. The Indonesian government's supportive policies (ranging from lower
value-added tax on EVs to labor liberalization and reduction in corporate tax) foster a more
favorable landscape for foreign investors.
Chart
4
EMs play a relevant role in critical metals for transition
Share of top three producing countries in mining of selected
minerals in 2022
Source: Internation
al Energy Agency, Paris, 2022.
Chart
5
China dominates key metal processing
Share of top three producing countries in processing of
selected minerals
in 2022
Source:
International Energy Agency, Paris, 2022.
What could go wrong
Many EMs will hold elections in 2024. Low levels of policy predictability can undermine
investor sentiment and derail existing investment potential. EMs that will have elections next
year include Indonesia, India, South Africa, and Mexico, among many others. EMs, about which
we discussed above, still have work to do to reap a bonanza from the abovementioned structural
opportunities. For instance, enhancing policy visibility will be critical in attracting investments
into these developing trends.
Structurally high interest rates, in the absence of structurally greater growth expectations,
will constrain investment growth. A sharp rise in investments will be hard to justify amid higher
average cost of capital and interest rate burden--as interest rates are likely to remain higher than
normal for some time--and without larger average expected returns (growth).
0% 20% 40% 60% 80% 100%
Rare Earths
Graphite
Lithium
Cobalt
Nickel
Copper
U.S. China Australia Mozambique
Madagascar Chile DR Congo Indonesia
Philippines Peru Others
0% 20% 40% 60% 80% 100%
Rare Earths
Graphite
Lithium
Cobalt
Nickel
Copper
Japan China Finland Canada
Argentina Chile Malaysia Indonesia
Estonia Peru Others
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 38
Primary Contacts
Marion Amiot
London
+44-20-7176-0128
marion.amiot@spglobal.com
Sarah Sullivant
Texas
+1-415-371-5051
Nora Wittstruck
New York
+1-212-438-8589
Physical Climate Risk | How will challenging credit
conditions affect resiliency and adaptation to more
costly climate hazards in 2024?
How this will shape 2024
Global, extreme weather conditions will continue to increase and influence credit
fundamentals. According to the World Meteorological Organization, there is now a 66%
probability the global temperature will exceed the 1.5 C Paris Agreement threshold over the next
five years. S&P Global Ratings believes that surpassing this threshold could result in increasingly
frequent and severe physical climate hazards, such as heat waves, floods, storms, and wildfires,
that could destroy physical capital, lower labor productivity, and increase mortality without
additional investment in adaptation and resiliency measures. We believe the physical impact
from climate hazards can weigh on the credit quality of some entities more than others.
Therefore, we generally analyze these risks against an entity's exposure (location and
concentration), comprehensive risk management strategies, financial liquidity and reserves, as
well as its capacity for planning and adaptation that could help preserve credit quality.
Higher incidences of heat days and water stress will require additional resiliency and
adaptation measures and could affect long-term economic growth. We find that lower- and
lower-middle-income countries are disproportionally at risk of economic losses from physical
climate risks under a slow transition scenario (see charts 1 and 2; "Lost GDP: Potential Impacts Of
Physical Climate Risks," published Nov. 27, 2023). Developed economies may have resources to
cope, but lower- and lower-middle-income countries are most vulnerable to physical risks where
exposure is high. More frequent climate risks could pose an additional barrier to economic
development while interest rates remain higher for longer, proving that access to funding may be
more difficult when considered against a backdrop of slowing global growth. This includes the
U.S., which has had 25 events year to date through Nov. 8, 2023, an increase from 18 events in
2022 and 22 in 2021, and losses of at least $1 billion according to the National Oceanic and
Atmospheric Administration.
A slowing economic environment and higher interest rates could challenge planning and
preparation. Interest rates are now set to be higher for longer, not only slowing growth as central
banks fight inflationary pressures, but also tightening budget constraints for companies and
governments. We believe allocating resources in this environment might come at the expense of
adapting to climate change, when the focus returns to balancing the books and creating
pecuniary value. Deprioritizing investments in adaptation and resilience could increase credit
headwinds for entities most exposed to physical climate hazards, including certain governments,
in utilities, and transportation-sector entities, as extreme weather events and natural disasters
become more frequent and damaging.
Extreme weather conditions and worsening physical risks continue to increase and
influence credit fundamentals. However, we believe companies' and governments'
readiness to address these risks, in large part, remains low and could become even
more challenging to overcome in an environment of slower growth and tighter
financing conditions.
Read more
Lost GDP: Potential Impacts Of
Physical Climate Risks
, Nov. 27,
2023
A Storm Is Brewing: Extreme
Weather Events Pressure North
American Utilities' Credit Quality
,
Nov. 9, 2023
California’s Evolving Insurance
Market Has Mixed Impacts:
Spotlight On U.S. Public Finance,
Spotlight Off U.S. RMBS
, Aug. 2,
2023
More Mexican States Could Face
Water Stress By 2050
, April 4, 2023
Weather Warning: Assessing
Countries’ Vulnerability To
Economic Losses From Physical
Climate Risks
, April 27, 2022
ESG Credit Indicator Report Card:
Regulated Utility Networks
, Nov.
18, 2021
Energy and
climate resilience
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 39
“Deprioritizing
investments in
adaptation and
resilience could
increase credit
headwinds for
entities most exposed
to physical climate
hazards.
”
What we think and why
Reduced availability of insurance coverage and evolving risk-sharing arrangements could
leave some entities more exposed. Rising global insured losses have pressured insurers’
profitability and, in some cases, has led to difficulty in obtaining insurance at affordable prices
(see chart 3). The recent move by a few major insurers to discontinue writing new homeowners'
business policies in California highlights this trend (see "California’s Evolving Insurance Market
Has Mixed Impacts: Spotlight On U.S. Public Finance, Spotlight Off U.S. RMBS," published Aug. 2,
2023). To the extent insurance coverage becomes less available, it could limit our view of entities'
financial resiliency and preparedness for physical climate hazards. Similarly, public-sector
disaster recovery arrangements (such as the U.S. Federal Emergency Management Agency and
Canada's Disaster Financial Assistance Arrangements) could come under pressure to absorb
increasing losses and costs of recovery and to promote enhanced risk mitigation and resilience.
As a result, local and regional governments globally could bear a greater share of risk, including
the potential for less financial support following an acute event.
Private and blended finance could play an increasing role to lower institutional risk and help
fill the funding gap for adaptation and resilience measures. Financing adaptation to and
recovery from physical risks is more difficult for economies with fewer resources and more
restricted access to finance. Private capital can help fill this gap but is often deterred by
concurrent political and institutional risks. For example, the Cauchari solar farm in the Argentine
province of Jujuy was financed through a provincial green bond and a loan from the Export-
Import Bank of China despite the province's fragile fiscal and liquidity positions and limited
experience in global markets. Similarly, we may see more financing for adaptation projects where
climate finance also targets pro-growth investments (e.g. irrigation systems in agriculture).
Multilateral development institutions have a significant role to play in providing concessionary
and bridge financing and building capacity to access private capital.
The fixed location of assets operated by utilities and transport infrastructure may be less able
to adapt to physical risks in the near term. Despite generally above-average preparedness,
utilities’ electric overhead networks are more exposed than other utilities to physical risks,
including wildfires, hurricanes, and storms. This increases replacement and insurance costs and
affects their safety and reliability (see "ESG Credit Indicator Report Card: Regulated Utility
Networks," published Nov. 18, 2021). Power generators, airports, and ports also have elevated
vulnerability to physical risks due to their localized, fixed-asset nature; S&P Global Ratings has
downgraded more investor-owned utilities due to physical risks over the past six years nearly 10
times more than across the previous 13 years (see "A Storm Is Brewing: Extreme Weather Events
Pressure North American Utilities' Credit Quality," published Nov. 9, 2023). While benefiting from
generally protective regulated revenues, higher interest rates and insurance premiums could
crowd out or delay big-ticket investments in infrastructure replacement, adaptation, and
resilience in these sectors, leading them to remain exposed to physical risks for longer.
What could go wrong
The adaptation gap could widen due to tighter financing conditions. According to the United
Nations’ 2023 report, the adaptation finance gap is 10–18 times above current international flows.
Estimated annual adaptation needs range from $215 billion-$387 billion (i.e. 0.6%-1% of
developing countries' GDP) per year for this decade. Higher interest rates are already set to
weigh on investments in emerging markets and developing markets (the most vulnerable to
physical risks) as the growth outlook remains subdued. At the same time, higher yields in
advanced economies, especially the U.S., could lead to stronger outflows from emerging
markets, which are mostly in the higher-risk speculative-grade ratings category. As a result,
Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 40
vulnerable countries could continue to fall behind their higher-rated and wealthier counterparts,
leaving their population and economic development efforts exposed to accelerating physical
climate risks.
Extreme weather and natural disasters could disrupt supply chains and dampen growth.
Acute physical risks often have a localized impact, but heat waves, storms, and wildfires can
hamper output and mobility of goods, cascading through global supply chains. Many large
companies have a moderate degree of diversification in their operating assets and can
potentially divert supply chains through alternative channels to avoid sizeable operating
disruptions; however, more frequent and severe physical climate hazards may require greater
adaptation efforts of our rated issuers, regarding their own assets and supply chains, to minimize
disruptions. To the extent tighter financing conditions and slow growth lead companies to
postpone adaptation efforts, the risk of supply chain disruption could continue unabated.
Credit quality could diverge. We could see credit quality deteriorate for sovereigns and
governments in places where worsening physical risk exposure coupled with a lack of resources,
capacity, or support to adapt erodes our view of their fiscal performance, economic strength, and
growth prospects. For example, high and increasing exposure to water stress in some Mexican
states poses risks to public health and economic growth, and the cost of investing in adaptation
and resilience could weigh on state finances and credit quality (see "More Mexican States Could
Face Water Stress By 2050," published April 4, 2023). Places with already-vulnerable economic
and fiscal assessments coupled with high exposure to physical risks could be the most
susceptible (see "Weather Warning: Assessing Countries’ Vulnerability To Economic Losses From
Physical Climate Risks," published April 27, 2022). For corporate entities with exposure to physical
risks, a lack of insurance or changing liability landscape could make these risks more financially
material to creditworthiness.
Chart 1
Chronic risks dominate potential losses in Asia-Pacific and MENA
Annual GDP at risk by 2050 by climate hazard and region, under a slow transition scenario
(SSP3-7.0) absent adaptation (%)
Note: Upper income = Upper middle and high income; Lower income = Low and lower middle income, based on World Bank
data. GDP at risk represents the share of GDP that could be lost annually due to high exposure to physical climate risks, in
the absence of adaptation to climate risk, without accounting for changes in the economic geography and structure and
assuming all hazards occur every year. SSP3-7.0--Moderate to high emissions scenario. Sources: Sustainable1; S&P Global
Ratings.
0 2 4 6 8 10 12 14
South Asia
Middle East and North Africa
Sub-Saharan Africa
Central Asia
East Asia and Pacific
Latin America and Caribbean
North America
Europe
World
Lower income
Upper income
Chronic hazards
Sea-level rise
Water stress
Acute hazards
Fluvial flood
Pluvial flood
Wildfire
Storms
Extreme heat
Chronic hazards
Acute hazards
Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 41
Chart 2
Temperature increases could have a permanent impact on relative GDP levels
GDP per capita response to a 1-degree C annual average temperature rise, by temperature starting point
AE--Advanced economies. EM--Emerging economies. Note: The results describe the relationship of the variable shown
with average annual temperature using a panel model estimation with country fixed effects and regional time fixed
effects. We derive impulse response functions using local projections and controlling for lags and forwards of the
temperature. Source: S&P Global Ratings.
Chart 3
Rising global insured losses are leading to changing insurance coverage
Tropical cyclones remain primary climate hazard underpinning losses
Source: Aon PLC.
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
0 1 2 3 4 5 6 7 8
Difference in GDP per capita
versus initial period (%)
Time (years)
15 C (AE)
22 C (EM)
24 C (low income)
0
20
40
60
80
100
120
140
160
180
200
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
(Bil. $)
Other perils
Severe convective storm
Wildfire
Drought
Flooding
Tropical cyclone
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 42
Primary Contacts
Marion Amiot
London
+
44-20-7176-0128
marion.amiot@spglobal.com
Pierre Georges
Paris
+
33-14-420-6735
pierre.georges@spglobal.com
Energy Transition | Can the shift to net zero
accelerate amid growing headwinds?
How this will shape 2024
Higher-for-longer interest rates and input-cost inflation could slow the energy transition. As
funding and the economic environment dramatically change after a decade of supportive
monetary policy, the cost of the energy transition has also increased and will continue to tighten
in 2024. Higher funding costs affect renewables investments more so than for fossil fuels, given
the upfront capital needs. Additionally, supply-chain bottlenecks and the resulting inflationary
effects on critical materials for the energy transition remain key issues as demand for clean
technologies increases globally, especially for wind and battery storage. Governments and
companies will navigate these risks as they progress on decarbonization.
Tighter budget constraints put pressure on environmental policies. Even though heat pumps,
energy-efficiency retrofits, and electric vehicles (EVs) are becoming more cost-competitive in
relation to their fossil-fuel alternatives, higher borrowing costs are likely to slow the uptake
among households—especially as households' real disposable incomes are only just recovering
from the recent inflation surge. Looking to 2024, consumers may be confronted with difficult
choices between what is most cost-effective for their families, or what is better for the planet.
Companies confronting credit headwinds may also take into account new considerations when it
comes to their plans for energy reliance and resilience. At the policy level, tighter resources can
give rise to a growing backlash from certain political constituencies to slow climate action. This
translates into climate policy back-and-forth, and results in a more uncertain business
environment as governments and companies face pressures on both sides.
Innovation could support faster decarbonization, while slower economic growth in 2024
reduces the need to add more fossil-fuel capacity. Rapid technological change could also
surprise on the upside as initiatives to decarbonize the economy spread, especially in the context
of broader government subsidies and support. After the passage of the Inflation Reduction Act in
the U.S., the likely upcoming response from the EU, and China's 14th five-year plan, we will be
watching for the next climate policy shifts in 2024. At the same time slower growth, in part driven
by global manufacturing weakness, reduces the need to compensate so-far insufficient
renewable-capacity additions with fossil fuels.
What we think and why
With slower economic growth and higher financing costs, priorities might shift away from
tackling climate change. While climate change is likely to remain a top risk for many
governments and corporates, more short-term pressures—such as lower growth prospects,
rising pressures to tighten spending and related social tensions, or access to liquidity—could
divert their attention away from investing in decarbonization and preparing for climate change.
This means some countries and businesses are more likely to fall behind in their transition if they
reduce their climate-mitigation efforts.
While climate change remains recognized as a key global risk, any acceleration to
decarbonize might face challenges—from higher costs, geopolitical disruptions,
and environmental policy backlash—that divert climate mitigation priorities. Credit
risk is higher in an abrupt transition, and the disruption potential for carbon-
intensive sectors remains both high and difficult to predict.
Read more
China's IPPs Can Speed Energy
Transition As Power Demand
Tapers
, Nov 07, 2023
Will Oil and Gas Producers Lose
Access to External Financing as
Lenders Decarbonize?
Nov 16, 2023
Economic Research: Climate
Change Will Heighten Output
Volatility
, Jan 2023
Energy and
climate resilience
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 43
“Implementing
comprehensive and
coordinated climate
policies and strategies
remains a challenge
for governments and
companies.”
Credit risk is higher in an abrupt transition. Implementing comprehensive and coordinated
climate policies and strategies remains a challenge for governments and companies. As climate
actions progress faster for a given sector or a region, this could reshuffle sector-specific
competitiveness, potentially leading to negative side effects across local supply chains. This
could, for instance, result in weakened business positions or profitability for certain players, or
ongoing regulatory adjustments that reduce stability and visibility and jeopardize investment
decisions.
However, the higher carbon-emitting sectors are not yet feeling a lot of credit pressure.
Carbon pricing remains relatively low worldwide. The oil and gas sector has not faced any notable
deterioration in its financing conditions so far, even though the IEA projects that demand for
fossil fuels will have peaked by 2025. Sectors such as cement, airlines, and chemicals currently
do not face very binding climate policies. As scalable technology alternatives remain scarce, we
believe policymakers might still avoid stricter environmental policies for hard-to-abate sectors.
Chart 1
Total greenhouse gas emissions
S&P Global Commodity Insights global scenarios, NDC targets, and net-zero pledges (MtCO2e)
Note: The Commodity Insights Energy and Climate scenarios set out how emissions could evolve under five cases.
Inflections is a base case. Discord assumes a worsened geopolitical future with weak climate policy. Green Rules assumes
rapid reduction in fossil fuel dependence and a more sustainable energy system. ACCS and MTM represent net zero cases
with differing assumptions on energy use and clean technologies. NDC--Nationally determined contribution. ACCS--
Accelerated carbon capture and storage. MTM--Multitech mitigation. Source: S&P Global Ratings.
What could go wrong
Markets might not be sufficiently prepared for disruption. Failure to comply with fast-changing
climate policies and regulations in some markets could pose significant business risks and future
liabilities. Market dynamics might also evolve rapidly, with new and disruptive competitors
growing their market shares. We could see this in the automotive sector, for example, with new
EV players. But lack of preparedness could also stem from weak resilience to climate physical
risks and unaddressed adaptation needs. Such risks are still largely unaddressed by many
governments and companies, when looking at the adaptation gap.
More radical climate policies would increase transition risks. Most economies lag both their
intermediary pledges (2030) and the well-below 2°C pathway set by the Paris Agreement. While
these gaps will be hard to close, more constraining climate regulations on certain sectors,
including stricter industry norms or sanctions, could be considered by policymakers. The visibility
and materiality of such risks remain challenging to foresee, however.
0
10,000
20,000
30,000
40,000
50,000
60,000
1990 2000 2010 2020 2030 2040 2050
History
Inflections
Discord
Green rules
ACCS (net-zero)
MTM (net-zero)
Min NDC
Max NDC
Net-zero pledges
Stated COP28 Target
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 44
Geopolitical uncertainty could prevent necessary global coordination. Ongoing conflicts, such
as the Russia-Ukraine and the Israel-Hamas wars, might make it harder to attain the global
coordination required to truly mitigate climate change. In addition, trade disputes in the clean
technology space could become more prominent (including with China in relation to EV subsidies)
and add to the collective action problem. Additional pressure points include the unresolved
funding of the transition for countries in the Global South, which would need to increase
investments by more than five times to meet the IEA's net-zero scenario.
Chart 2
Power demand growth will affect the timing for carbon peak
Mil. tons
CAGR--Compound annual growth rate. Source: S&P Global Ratings (China's IPPs Can Speed Energy Transition As Power
Demand Tapers, Published Nov 07, 2023)
4,000
4,500
5,000
5,500
6,000
6,500
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Power demand CAGR
over 2024-2030 = 4.8%
Power demand CAGR
over 2024-2030 = 4.3%
Power demand CAGR
over 2024-2030 = 3.3%
Power demand CAGR
over 2024-2030= 2.8%
Power demand CAGR
over 2024-2030 = 3.8%
(base case)
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 45
Primary Credit Analysts
Sudeep Kesh
New York
+1
-212-438-7982
sudeep.kesh@spglobal.com
Miriam Fernández, CFA
Madrid
+34
-917-887-232
Simon Ashworth
London
+44
-20-7176-7243
simon.ashworth@spglobal.com
Artificial Intelligence | What are the key credit risks
and opportunities of AI?
How this will shape 2024
Generative AI use will continue maturing in 2024. Companies have begun rapidly developing,
acquiring, and integrating generative AI into their operations. This promises to dramatically
transform global markets, particularly as corporations expand their understanding of the
nuances, options, and capabilities of AI-based technologies. As adoption continues to mature
next year, it will likely result in an expansion of AI's capacity to generate content and perform
complex tasks with relative autonomy, interactively, and in real time. But such expansion will
come with increased data input requirements and the need to understand the effects of AI
adoption on customer demand.
While efficiency gains should emerge, technical challenges will be key. Improvements in
productivity due to generative AI applications may meaningfully materialize next year in the form
of cost savings and scalability benefits--particularly at large technology companies that made
swift and focused investments in 2023. Productivity enhancements could reduce operating
expenses and improve efficiency, though near-term benefits will be offset by investment
requirements. Conversations about how AI influences operations-level success will gradually
clarify and help define the technologies' benefits and how they are measured. Over the next few
years, we expect AI to deliver a combination of efficiency gains (that may improve financial
performance), stronger product differentiation, and shifts in competitiveness. These changes will
demand thorough evaluation, not least to avoid technical pitfalls such as hallucination (where AI
generates incorrect information that appears to be correct), exacerbating bias (where algorithms
contribute to unfair discrimination), and risk management issues, including relating to data
privacy and cyber risk.
Chart 1
The generative AI market is expected to grow significantly
*Revenue forecasts for AI vendors. Source: 451 Research, Generative AI Market Monitor, S&P Global Market Intelligence.
0
100
200
300
400
0
10
20
30
40
2023 2024 2025 2026 2027 2028
(%)
(Bil. $)
Total market revenue
Cumulative growth
(right scale)
Artificial Intelligence's (AI) potential to replace, transform, and regenerate human-
work processes promises significant efficiency and productivity gains. While this
could be a boon for companies’ financial and operating performance it comes with
dangers linked to data privacy, cyber security, and AI safety that could exacerbate
operational and reputational risks if not properly governed and managed.
Read more
Artificial Intelligence Insights
Making Sense of Artificial
Intelligence
The AI Governance Challenge
AI in Banking: AI Will Be An
Incremental Game Changer
AI for Security, and Security for AI:
Two Aspects of a Pivotal
Intersection
Gen AI Is Writing A New Credit
Story For Tech Giants
Crypto, cyber, and
tech disruption
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 46
Developed regions will enact AI-focused regulations. New rules focused on education,
governance, and protection are likely to be developed and deployed in 2024 as major economies
react to the widespread adoption of AI technology. There is already evidence of this rapidly
evolving regulatory environment. The European Union’s 'AI Act' will set rules that establish
obligations for providers and users, varied in risk level as defined by the law. In August, China
introduced a similarly groundbreaking law targeting the regulation of generative AI. The U.S. is
taking a more decentralized approach, though elements of privacy legislation include provisions
and protections applicable to AI,notably due to a combination of data privacy laws and
algorithmic accountability and fairness standards. On Oct. 30, 2023, US President Joe Biden
issued an executive order on the "Safe, Secure, and Trustworthy Development and Use of
Artificial Intelligence" to create safeguards. Similar regulations and policies are being developed
or discussed in Canada and some Asian countries.
What we think and why
The opportunities offered by AI will vary across sectors, geographies, and company sizes. Early
adopters of AI technology will primarily be larger companies with deep pockets and the
motivation to invest in custom technology stacks (though small- to medium-sized enterprises
that are able to leverage open source technologies will also lead adoption).This will be most
prominent in developed economies, where capital spending capacity is higher, and where
companies can take advantage of AI’s various open-source models, frameworks, and
applications. Sectors with more flexible business models (including high-tech, banking, medical
devices, education, media and entertainment, and telecommunications) and those with greater
discretionary capital spending will likely yield earlier benefits from AI in terms of cost efficiencies,
profitability, and competitive positioning. Sectors characterized by capital-intensive
infrastructure demands and fiscal and operational rigidity are likely to prove laggards.
Companies confronting manufacturing and supply chain issues could turn to an incremental use
of AI for analytical solutions to enhance their competitivity--potentially deepening AI usage
among automakers and other manufacturing sectors, many of which already use machine
learning and telemetric instrumentation in their processes.
Chart 2
Code, image and video generators will gain market share
in
generative AI over the next five years
Text generators' and foundation models' markets will mature
f
--Forecast. Source: TMT Research, S&P Market Intelligence.
Chart 3
AI's productivity and cost efficiency are the primary
benefits identified by SMEs
Survey respondents using or planning to use generative AI (%)
*Respondents were asked: Which of the following benefits is your
organization experiencing (or would like to
experience) from utilizing
generative AI tools? Survey sample: 206 respondents that use or plan to use
generative AI. Source: 451 Research's Voice of the Customer: Macroeconomic
Outlook, SME Tech Trends, Cloud and Generative AI Adoption 2023.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2023f 2028f
Segment share
Numeric / structured
data generators
Audio generators
Video generators
Code generators
Image generators
Text generators
Foundation models
0 20 40 60
Increased workforce productivity
Lower operational costs
Customer experience enhancements
Performance monitoring
Improved data security, integrity…
Improved employee collaboration
Scalability
Sales forecasting and enablement
Business continuity
Don't know
Other
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 47
“We expect AI will
deliver efficiency
gains, lead to
stronger product
differentiation, and
power shifts in
competitiveness
.”
AI will have replacement, transformative, and regenerative effects on labor productivity.
Replacement, or job displacement, seems the most prominent fear related to AI's adoption but is
likely overstated and will largely be limited to automation of manual and repetitive cognitive
processes. The transformative (and disruptive) effects of the technology will typically offer
possibilities to augment people's workplace efficiency and effectiveness. This should develop
further in 2024 as companies discover advancements in machine learning and analytics, and
implement more and better telemetric instrumentation. The regenerative implications of AI
refers to the technologies' ability to intelligently redesign processes and create new types of
jobs. Generative AI should continue its early experimental development of regenerative
innovation in 2024, but we believe that significant impacts likely remain some way off.
AI is likely to contribute to sustainability and social goals in the longer-term. We expect AI will
progressively realize its potential to deliver social benefits, beyond financial gains. Companies
and public organizations will increasingly look at AI technologies as a sustainable tool to reduce
the adverse effects of issues including climate change, supply chain disruption, and gender,
social and wealth imbalances. For example, in developing economies, the use of digital data
coupled with advanced, machine-driven analytics and robotics could significantly widen access
to healthcare through remote diagnosis, surveillance, and telemedicine, and promises
improvements to agriculture production, through automatic irrigation and pest control.
What could go wrong
AI-related risks could worsen in the short-term. Data privacy and security risks, including cyber
risk, could increase with the rapid growth in accessible data stored across the digital ecosystem.
Additionally, threat actors can be expected to adopt new techniques, including sophisticated
social engineering. Amplified by technologies that power “deep fakes”, AI could have negative
implications for businesses, nation-states, and society if the technology is used illegally and
unethically to power misinformation.
Unequal access to AI could increase the digital divide. Utilization of AI technologies will remain
unbalanced and could exacerbate digital inequalities based on geography and socioeconomic
differences. Access to education and digital infrastructure will significantly determine the extent
to which AI helps or hinders a company's operating efficiency and revenue growth, and could
thus weigh on its financial performance and creditworthiness.
Inadequate AI adoption may lead to nonfinancial risks for companies. As adoption of AI
technologies becomes more widespread, companies' operational and reputational risks may
increase if development lags in education, governance, and protection. Depending on the
consequences (e.g., regulatory breaches), nonfinancial risks have the potential to evolve into
financial risks and hurt companies' financial health.
Regulatory complexity will likely increase. AI regulations are rapidly evolving and vary
depending on region, meaning companies are facing an evolving and increasingly complex
environment that heightens regulatory risks.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 48
Primary Credit Analysts
Andrew O'Neill, CFA
London
+44
-20-7176-3578
andrew.oneill@spglobal.com
Alexandre Birry
Paris
+
33-7-8104-7038
alexandre.birry@spglobal.com
“Crypto markets have
endured a rough 18
months,
but
technological
progress has
continued at a steady
pace
.”
Digital Assets | Will technological and regulatory
developments unleash institutional blockchain
adoption?
How this will shape 2024
Consolidation of technological developments will set the scene. Although crypto markets have
endured a rough 18 months, technological progress has continued at a steady pace to address
key inhibitors to institutional adoption of blockchains in financial markets. In 2023, innovations in
interoperability solutions have supported increasingly elaborate institutional test cases across
different private and public blockchains. The growth of layer 2 roll-ups (a blockchain network built
on top of a layer 1 blockchain that aims to add functionality and speed) within the Ethereum
ecosystem, and in particular roll-up chains using zero knowledge proofs--a cryptographic
technique that verifies a statement is true without revealing the statement's contents--shows
some promise in addressing scalability and privacy limitations that have inhibited adoption thus
far, and may begin to be tested in institutional use cases.
Regulatory progress will be uneven despite coordination efforts. In July, the Financial Stability
Board published its global regulatory framework for crypto-asset activities. The
recommendations are high-level, and we think policy choices and their timing may vary
considerably across jurisdictions. In the U.S., we expect progress will still be partly hampered by
the fragmented regulatory framework and increasingly partisan political divide. In contrast,
regulatory frameworks in other jurisdictions are progressing, often starting with stablecoin
regulation. In the EU, the provisions for stablecoin regulation in the Markets in Crypto-Assets
(MiCA) are set to apply from July 2024, while rules for other service providers will apply in January
2025. Meanwhile, in Asia, the Monetary Authority Of Singapore finalized a comparable regulation
on stablecoins in August 2023.
Institutional testing of new use cases will accelerate. We think incumbent financial institutions
will continue adopting blockchain technology to optimize or automate processes or create new
tools for institutional users, partly supported by regulatory "sandbox" schemes in key
jurisdictions. We see examples of this in the trial launch by a number of banks across regions of
stablecoins or tokenized deposits. Other examples of institutional use cases include collateral
mobility, foreign exchange, and cross-border payments. That said, we expect commercialization
to retail clients of crypto assets will continue to progress more slowly until regulatory frameworks
have greater clarity. A spot bitcoin exchange-traded fund (ETF) received regulatory approval in
the EU in 2023, while several spot bitcoin and ether ETFs are currently under review in the U.S.
What we think and why
The evolution and growth of digital bond issuance is credit neutral. Digital bonds aim to
automate segments of fixed-income markets leveraging blockchain technology. We expect that a
small but growing universe of rated issuers will experiment further with digital bonds. But
progress on widely accepted digital currencies and know-your-customer solutions is required for
bonds to become fully digital and exchangeable on the blockchain. Experimentation with fully
digital bonds will remain contained within regulatory pilot schemes, limiting issuers' exposure to
Institutional interest in and adoption of digital assets and blockchain technology
will continue to grow in 2024, supported by technological advances. We expect
regulators to firm up their stances in key jurisdictions before activity volumes and
related risks represent a key risk for traditional finance.
Read more
See our
Capital Markets: Digital
Assets
coverage
Crypto, cyber, and
tech disruption
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 49
“A lack of banking
partners creates
difficulties for U.S.
crypto firms
.”
new operational and technological risks. For example, the Swiss National Bank has announced
that a pilot for fully digital bond issuances using a wholesale central bank digital currency (CBDC)
will take place in the first half of 2024.
Regulated stablecoins will further some rated issuers' experimentation with applications
financing the real economy. CBDCs remain a long-term prospect in the EU and U.K., and a
remote one in the U.S. Their absence has thus far inhibited the issuance of fully digital bonds and
on-chain financing of fiat-denominated real-world assets. As regulatory frameworks for
stablecoins come into play in 2024, the emergence of regulated stablecoins could address this
issue. We expect that real use cases at scale remain some years away, and therefore that ratings
will not be affected by shifts in the competitive landscape for now. In 2024, we may see test
cases emerge from those financial institutions leading research and development in this area.
The boundaries between centralized and decentralized finance (DeFi) will become
increasingly blurred. As use cases emerge that aim to provide financing to the real economy
through decentralized protocols, the centralization of some functions (for example, credit
underwriting) will be necessary because of regulatory hurdles and a need for accountability when
offering financial products. Regulators have thus far focused on addressing centralized crypto
finance entities, but in some jurisdictions are turning their attention to DeFi. They will need to
strike a balance between achieving the same levels of investor protection as in traditional finance
and recognizing the unique features of DeFi. The development of regulatory frameworks should
eventually create opportunities for incumbent financial institutions to participate and take on
new roles in innovative projects with decentralized elements. Meanwhile, centralized crypto
businesses that aim to operate globally will need to comply with emerging regulatory frameworks
in key jurisdictions. That said, we do not expect that shifts in competitive dynamics will
meaningfully affect credit risk in 2024.
What could go wrong
The sparse landscape of banking partners could cause issues for U.S. crypto businesses and
stablecoins. In March 2023, regulators closed two of the crypto industry's main banking
partners, Signature Bank and Silvergate, and major U.S. banks appear to have no appetite to pick
up that mantle due to regulatory uncertainty. Crypto businesses such as exchanges or stablecoin
issuers need banks to support on- and off-ramps between the fiat and crypto economies. The
closure of Signature Bank and Silvergate was a meaningful factor in the March 2023 depegging of
the USDC stablecoin, and limited banking rails could lead to issues with other stablecoins.
Market conditions heighten any contagion risk between crypto players. Monetary policy
tightening raises the risk of accidents and an abrupt reversal in market sentiment, also
compounded by prevailing geopolitical risks. In this environment, regulatory changes--or rumors
thereof--can also have material effects on crypto asset pricing, as illustrated by the recent
Bitcoin price volatility on rumors of the regulatory approval of a spot Bitcoin ETF established by
institutional players. However, crypto asset price volatility is likely to present a credit risk only for
specialized crypto businesses rather than financial institutions, whose exposure will remain
minimal: adopting blockchain technology for traditional financial market use cases does not in
itself create exposure to crypto asset prices.
Fragmented regulations can trip large players. Within the U.S., different policy stances between
states, and between regulatory bodies, can lead to the risk of belated litigations or fines when
financial institutions engage in activities with unclear regulations. For global firms, the cross-
border nature of crypto activities also raises the risk of litigations in specific jurisdictions in the
event of hasty forays in certain activities, especially if marketed to retail customers.
Chart 1
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 50
Recent examples of blockchain use cases by major institutions
Digital bond issuance
Asset tokenization and
collateral mobility
Cross-border payments
The Swiss National Bank
has announced a pilot scheme for
2024 for Swiss financial institutions
to issue fully digital bonds using
a wholesale CBDC.
SWIFT has successfully concluded
a pilot scheme operating the transfer
of tokenized assets across multiple
private and public blockchains.
J.P. Morgan has tokenized a
Blackrock money market fund and
used this as collateral for a
transaction with Barclays on its Onyx
blockchain.
Visa has enabled cross-
border payments using the USDC
stablecoin on both the Ethereum and
Solana blockchains.
CBDC--Central bank digital currency. Sources: S&P Global Ratings, public reports.
Chart 2
Total
value locked has not recovered from the "crypto
winter
"…
TVL
on Ethereum (bil. $)
TVL
--Total value locked. Source: DeFiLlama.
Chart 3
…
But the emergence of scalability solutions supports new
use cases
Daily transactions on Ethereum mainnet and selected layer 2
roll
-ups (mil.)
Source:
Dune (@blockworks_research, @tk_research, @dashagubaha).
0
20
40
60
80
100
120
Jan. 2021 Jan. 2022 Jan. 2023
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Nov. 2021 Nov. 2022 Nov. 2023
Ethereum mainnet Arbitrum
Optimism Base
ZkSync
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 51
Regional
Credit
Conditions
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 52
Regional Credit
Conditions Chair
David Tesher
New York
+1
-212-438-2618
david.tesher@spglobal.com
Credit Conditions North America Q1 2024
A Cluster Of Stresses
Editor’s note: S&P Global Ratings' North American Credit Conditions Committee took place on Nov. 20, 2023.
Credit stresses are growing for borrowers in North America, and near-term relief seems unlikely,
as all-in borrowing costs look set to stay elevated, investors become more cautious, and U.S. GDP
growth looks set to slow.
We expect the Federal Reserve to raise its policy rate once more and then wait until June to
begin a cycle of rate cuts, assuming inflation approaches the central bank's target. The Fed
has paused its cycle of interest rate hikes, holding the benchmark federal funds rate at 5.25%-
5.50% at its November meeting, but the “longer” part of higher-for-longer has taken center stage.
Against this backdrop, the costs of debt service and/or refinancing could be overly
burdensome, especially for lower-rated borrowers. Borrowers have reduced near-term
maturities—trimming speculative-grade corporate debt due in 2024 by 34%. However, the share
of spec-grade debt coming due rises in coming years, especially for those rated 'B-' and lower.
As higher interest rates and inflation erode financial cushions, more subdued business
investment and/or a sharper pullback in consumer spending could lead to a recession, causing
more credit stress. Consumers are already showing signs of weakness. American households
(especially in the lower-income cohort) have been tapping more into their credit cards, with
delinquencies on the rise. If consumers become more frugal than expected this holiday season, it
could lead to downgrades in the retail and consumer products sectors. Meanwhile, mortgage-
payment shocks are pushing Canada's household debt-service ratio close to its historical high.
The Israel-Hamas war adds another dimension to the geopolitical strife. The potential for the
conflict to escalate and spread—and to affect the rest of the world through energy supply
shocks, risks to social cohesion, and/or supply chains—is a key concern, as the U.S.-China
strategic confrontation and the Russia-Ukraine war continue.
Downgrades continue to outpace upgrades, and the net outlook bias, indicating potential
ratings trends, for North American corporates was at negative 10.9% as of Nov. 15. This is a
worrisome level given that we rate 20% of the region's corporates 'B-' or below. Health care,
telecom, and consumer products are the sectors with the highest negative bias.
Defaults are rising, and credit quality could erode further. S&P Global Ratings Credit Research
& Insights expects the U.S. trailing-12-month speculative-grade corporate default rate to reach
5% by September—above the 4.1% long-term average. If, as we expect, unemployment rises and
discretionary spending declines, consumer-reliant sectors, which make up roughly half of
borrowers in the ‘CCC/C’ categories, will suffer most.
Key Takeaways
• Credit stresses are growing, and borrowers will need to adjust to a new playing field in
which financing conditions could become even tighter. The costs of debt service and/or
refinancing could be overly burdensome, especially for lower-rated borrowers.
• Other high risks include the chance of recession in the U.S. and persistent cost pressures.
• The net outlook bias for North American corporates was negative 10.9% as of Nov. 15. We
expect the U.S. trailing-12-month speculative-grade corporate default rate to reach 5% by
September.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 53
Top North American Risks
Tight financing conditions pressure borrowers’ liquidity
Risk level
Risk trend
If interest rates rise further or remain elevated for even longer than we expect, and investors become more selective, the costs of debt service
and/or refinancing could be overly burdensome for some borrowers. Increased volatility in the U.S. Treasury market could add to credit stress. With
earnings under pressure and debt maturities approaching, lower-rated borrowers may feel more severe liquidity strains.
U.S. suffers a recession and rising unemployment, hurting demand
Risk level
Risk trend
Higher interest rates and inflation continue to erode financial cushions and purchasing power. More subdued business investment and/or a sharper
pullback in consumer spending could lead to a recession and a jump in unemployment, causing more credit stress. This comes amid slowing global
growth, which could have deleterious second-order effects in the U.S. through a hit to business and financial market sentiment.
Cost pressures squeeze profits, erode credit quality
Risk level
Risk trend
For many corporate borrowers, input prices—including wages and energy costs—remain high, and some are finding it more difficult to pass along
costs to consumers and customers. If profit erosion becomes more widespread and steeper than we expect, credit quality could suffer further.
Falling asset values and cash flows, plus high financing costs, exacerbate CRE losses
Risk level
Risk trend
Higher financing costs are weighing on commercial real estate valuations and heightening refinancing risk. Declining demand for office space--the
focus of CRE markets right now--is further weighing on asset valuations. This may ultimately lead to elevated loan losses for debtholders.
U.S. bank failures erode sentiment, add to credit strains
Risk level
Risk trend
Market conditions for U.S. regional banks remain challenging, and any renewed fears around profitability and equity levels could accelerate deposit
outflows. As banks have become more selective in lending, commercial and consumer customers may find it harder to gain funding.
Structural risks
Escalating geopolitical tensions impede trade and investment, weighing on growth
Risk level
Risk trend
The Israel-Hamas war adds another dimension to the geopolitical strife already intensified by the Russia-Ukraine conflict. The potential for the war
to escalate—and to affect the rest of the world through energy supply shocks, supply disruption and risks to social cohesion—is a key concern.
Meanwhile, any further worsening of U.S.-China tensions could also kink supply chains, and disrupt trade, and investment and capital flows.
Climate risks intensify, energy transition adds to costs
Risk level
Risk trend
More frequent natural disasters increase the physical risks that public and private entities face and threaten to disrupt supply chains, such as for
agriculture and food. The global drive toward a net-zero economy also heightens transition risks across many sectors, requiring large investments.
Accelerating tech transformation disrupts business models, cyberattacks threaten operations
Risk level
Risk trend
Cyberattacks pose a systemic threat and significant single-entity event risk as new targets and methods emerge—with geopolitical tensions raising
the prospect of major attacks. Businesses may need to incur more costs to adapt to technological advances. The accelerating digitalization of
business and economic activity also adds potential market volatility.
Source: S&P Global Ratings.
Risk levels may be classified as moderate, elevated, high, or very high. They are evaluated by considering both the likelihood and systemic impact of such an event
occurring over the next one to two years. Typically, these risks are not factored into our base case rating assumptions unless the risk level is very high.
Risk trend reflects our current view about whether the risk level could increase or decrease over the next 12 months.
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 54
Regional Credit
Conditions Chair
Paul Watters, CFA
London
+44
-20-7176-3542
Credit Conditions Europe Q1 2024
Adapting To New Realities
Editor’s Note: S&P Global Ratings' Europe Credit Conditions Committee took place on Nov. 21, 2023
We expect corporate resilience to gradually erode as slow growth and higher funding costs
squeeze earnings and free cash flow. We anticipate higher financing costs will become an
increasing burden as 2025 and 2026 maturities are addressed, bringing coverage ratios back into
focus and putting financial policies (especially discretionary expenditure including capex) under
greater scrutiny. So, for lower rated nonfinancial corporates, generating cash flow, protecting
liquidity, and managing down debt levels will be important to underpin debt sustainability and
credit quality. Vulnerable segments include commercial real estate (CRE; mainly office), where
there is a potential €93 billion funding gap between 2023-2026; and lower rated corporate
sectors, particularly consumer products, media and entertainment, chemicals, and capital goods
sectors that comprise about 50% of entities rated in the 'CCC/CC' categories. Given the
demonstrated resilience of corporates to recent systemic shocks, we characterize the outlook as
one of gradual deterioration in credit quality, reflected in the default rate ticking up to 3.75% by
September 2024 from 2.9% currently. Credit deterioration among lower-rated corporates would
put potential downward rating pressure on CLOs backed by leveraged loans.
Ratings prospects for European banks remain broadly stable, with earnings able to cover a
normalization in credit costs comfortably. Strong European labor markets should underpin the
performance of the residential mortgage market (albeit with some potential issues around legacy
buy-to-let and adverse credit borrowers evident in some RMBS transactions). However,
unsecured consumer borrowers will come under greater pressure, similar to corporate borrowers
(primarily SMEs), owing to tighter debt and affordability metrics. Restrictive financing conditions
are likely to continue to weigh on valuations in the CRE segment and expose banks to losses, all
the more so in systems such as Germany, the Netherlands, and the Nordics that have a higher-
than-average share of customer loans to CRE. However, EBA stress tests point to potential credit
losses being contained at about 2% over a three-year period, even in a very adverse scenario.
Slow growth, higher cost of funding, and weakened public finances will increase pressures to
restore greater fiscal discipline. 2024 will see the reimposition of the EU’s stability and growth
pact in some form. This, together with the higher cost of debt service, slow growth, and slowing
inflation, will induce European governments to adopt more restrictive fiscal policies. Further
pressure comes from central banks now shrinking their balance sheets significantly, requiring
increased gross funding to be raised from public markets. Government interest payments will
rise, in general. But the overall increase will be gradual due to the long-dated average maturity of
sovereign debt and the relatively low average rate of interest on outstanding debt.
Geopolitics is a key downside risk. The crisis in the Middle East threatens to undermine the
strength and cohesion of the Western Alliance that has coalesced in support of Ukraine. And that
is even before the U.S. election next year that could see the Republican Party readopting an
isolationist policy to the detriment of NATO. This could be unnerving for governments,
businesses, and citizens in Europe if security concerns eclipse other priorities.
Key Takeaways
• 2024 looks set to be a year of adaptation to the hangovers from high inflation, high rates,
and high debt, against a more uncertain and volatile geopolitical backdrop.
• Geopolitical conflicts spilling over to Europe, a sharp rise in unemployment dragging
Europe into recession, and a protracted period of higher rates exposing financial
vulnerabilities are the key risks.
Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 55
Top European Risks
Escalating geopolitical conflicts could spill over to Europe
Risk level
Risk trend
With two wars now being conducted in the region, geopolitical risk is heightened, with touchpoints ranging from potential military escalation in both
theaters to protests or outbreaks of violence that could be politically destabilizing across the Middle East and beyond, especially where migration
has become a divisive political issue. To varying degrees, this runs the risk of disrupting supply chains and triggering extreme flight to quality/risk
aversion, excessive volatility, and the freezing up of some financial markets (at least temporarily).
Recession in Europe remains a downside risk
Risk level
Risk trend
With the region already experiencing a borderline recession, the risk is that a combination of high rates, still elevated energy prices, weaker business
and consumer confidence, and a slowing fiscal impulse translates into a more extended downturn, with rising unemployment. Given elevated public
debt, few European governments have sufficient fiscal space to launch contra-cyclical support for the economy, should things get worse.
Tighter financing conditions will test financial vulnerabilities
Risk level
Risk trend
High short-term nominal interest rates in restrictive territory and, as headline inflation subsides, an extended period of positive real rates could
expose financial vulnerabilities for issuers that are finding access to financing restricted and the cost of debt service prohibitive. Tightening credit
standards for bank lending and central banks aiming to shrink their balance sheets could exacerbate the situation. This is a particular credit
challenge for companies needing to refinance and generating minimal FOCF where interest coverage ratios are falling below 2x.
Real estate downturn heightens risk of spillovers to the broader economy
Risk level
Risk trend
High interest rates, declining demand in some sectors, and falling valuations continue to pressure credit quality in European real estate. A clear risk
is that interest rates and associated financing costs could remain at their current high levels over an extended period. For residential property,
higher mortgage rates and softening prices feed through to existing borrowers and new transactions. These pressures could spill over to the
broader economy, transmitted through negative effects on consumer confidence, spending, and employment (especially in the construction sector),
as well as damaging the asset quality of European banks more than anticipated.
China's structural economic slowdown amplifies potential spillovers from international trade tensions
Ri
sk level
Risk trend
Further increases in trade tensions and protectionist sentiment, or any unexpectedly sharp economic slowdown in China, would be detrimental to
the operating performance of European companies with material country risk exposure to China.
Structural risks
Disruptions linked to climate change and the energy transition could increase
Risk level
Risk trend
Growing tension between the widening stretch goal of reducing net emissions in the EU by 57% by 2030 and the challenges of implementing all
aspects of the European Green Deal raises the risk of abrupt, and potentially contradictory, changes in climate policy that could disrupt industries
and business models, notably in the automotive, building, cement, steel, chemicals, transportation, and utilities sectors.
Cyber risks may rise
Risk level
Risk trend
The pace of digitalization, including artificial intelligence, in the global economy, and heightened geopolitical discord in EMEA, exposes corporates
and countries to mounting cyber risks, with targets ranging from utilities to insurers and government agencies. This can weigh on credit quality,
result in substantial monetary losses, and undermine public confidence in key institutions and infrastructure.
Source: S&P Global Ratings.
Risk levels may be classified as moderate, elevated, high, or very high. They are evaluated by considering both the likelihood and systemic impact of such an event
occurring over the next one to two years. Typically, these risks are not factored into our base case rating assumptions unless the risk level is very high.
Risk trend reflects our current view about whether the risk level could increase or decrease over the next 12 months.
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 56
Regional Credit
Conditions Chair
Eunice Tan
Singapore
+65
-6530-6418
eunice.tan@spglobal.com
Credit Conditions Asia-Pacific Q1 2024
China Slows, India Grows
Editor's Note: S&P Global Ratings' Asia-Pacific Credit Conditions Committee took place on Nov. 21, 2023.
Despite stimulus, China's property sector remains stressed. China's recent approval of a
Chinese renminbi (RMB) 1 trillion sovereign bond issue and allowance for local governments to
partially frontload 2024 bond quotas, contributed to our real GDP growth forecast of 5.4% for
2023 and 4.6% for 2024. However, real estate challenges persist. Demand for new properties
remains lackluster, affecting developers' cash flows and land sales (a revenue source of local and
regional governments). Amid constrained liquidity, highly indebted local government financing
vehicles (LGFVs) could see credit stresses intensify and hit Chinese banks' capital positions.
Costlier borrowing. We expect regional interest rates are likely to stay high, given the U.S.
Federal Reserve will maintain tight monetary policy to rein in inflation to target. Meanwhile, gaps
in policy rates between global and regional central banks could intensify capital outflows and
domestic currency depreciation. For borrowers with impending or sizable refinancing needs, high
borrowing costs and tighter credit availability from lenders are prominent risks. While onshore
funding remains accessible, often cheaper than offshore, these too could turn selective.
Global obstacles. Although we anticipate the U.S. and Europe will see a soft landing in 2024, the
risk of a hard landing could affect business and households' propensity to spend, slowing
demand and hurting revenues. Meanwhile, a sudden shift in the Bank of Japan's monetary policy
could introduce capital market volatility and reversal of the yen carry trade.
Geopolitical tensions. The risk of a widening Middle East conflict is compounding geopolitical
tensions. This comes alongside ongoing U.S.-China friction and the Russia-Ukraine war. While we
see the likelihood of an energy shock as remote, pricier energy and potential disruption of supply
chains could reignite inflationary pressures and slow trade. The net energy-importing status of
Asia-Pacific underlines its susceptibility to high energy prices. Businesses may find it harder to
fully pass through costs to customers (see "Asia Pacific Sector Roundup Q1 2024: Slowing
Dragons, Roaring Tigers," Nov. 7, 2023).
Longer-term risks. Climate change and rapid technological advancements are disrupting
business models. To prepare for these risks, businesses are incurring higher capex investments
(notably in the oil and gas, aviation, and utilities sectors for the energy transition), leading to
rising debt leverage. Concurrently, increasingly extreme weather (flooding and high temperatures
across Asia) could render some assets uninsurable; it could also threaten agriculture production
and affect energy supply.
Key Takeaways
• Shift in regional growth pattern. We expect Asia-Pacific's growth engine to shift from
China to South and Southeast Asia. We project China's GDP growth to slow to 4.6% in
2024 (2023: 5.4%), edge up to 4.8% in 2025, and return to 4.6% in 2026. We see India
reaching 7.0% in 2026 (6.4%); Vietnam, 6.8% (4.9%); Philippines, 6.4% (5.4%); and
Indonesia remaining steady at 5%.
• High rates and inflation. With Asia-Pacific's central banks likely to keep interest rates
high, the region's borrowers will see costlier debt servicing. Concurrently, a widening
conflict in the Middle East could drag global supply chains and raise energy costs, fanning
inflation. High input costs dilute corporate margins, while high prices weaken demand.
• Energy and demand shock risk. Asia-Pacific's growth is susceptible to energy shocks
(widening Middle East conflict) and slower global demand (risk of U.S. hard landing). We
lowered our projection for the region's growth (ex-China) in 2024 from 4.4% to 4.2%. The
prospects for industries also differ, with export-centric manufacturing faring worse.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 57
Top Asia-Pacific Risks
China's economy: Deepening property sector woes, weak confidence, and high debt levels to weaken China's growth momentum
Risk level
Risk trend
Spreading contagion from China's real estate crisis (to local governments and real estate-related sectors) is curbing the country's economic growth
momentum. Risk of financiers curtailing lending amid China's very high corporate leverage could exacerbate credit stresses for borrowers.
Financing: High rates for longer to exacerbate interest burdens and worsen prospects of weaker credit issuers
Risk level
Risk trend
Asia-Pacific could see rates stay high for longer, amid global and regional central banks' concerted efforts to contain inflation. Higher borrowing
costs could strain borrowers' liquidity, while slowing economies could hit revenue growth and margins, denting borrowers' credit quality.
Global economic downturn: U.S. and Europe risk a hard landing, further depressing aggregate demand and exports
Risk level
Risk trend
Slower household consumption and corporate investment activity could exacerbate soft demand from Western economies. For Asia-Pacific, exports
and manufacturing activities face hits. Capital outflows for some economies could intensify, compounding recessionary headwinds.
High prices: Inability to fully pass-through high prices could risk increasing cost pressures faced by borrowers
Risk level
Risk trend
While inflation has eased, rising food and fuel prices could cause core inflation to spike. While businesses had raised prices to pass through higher
input costs, slowing consumption could limit the momentum. Meanwhile, soft domestic currencies add further risk of imported inflation.
Japan's monetary policy: Bank of Japan's further monetary tightening triggers short-term volatility
Risk level
Risk trend
If investors perceive that the Bank of Japan could embark on significant monetary policy normalization, abrupt portfolio adjustments and capital
market volatility may occur. This could lead to significant asset and derivative repricing, hurting economic recovery and financing conditions.
Real estate: Cash flow tests abound amid low new-sales volume and higher interest burdens
Risk level
Risk trend
Higher mortgage rates (except China), a still-weak global commercial real estate (CRE) sector and low new sales could risk property devaluation,
spilling into real-estate related segments (e.g., banks). Costlier mortgages will slow consumption and growth, while developers' narrowing cash flows
intensify liquidity stresses. If CRE liquidity strains intensify, investors (such as private debt) face the likelihood of substantial write-downs.
Structural risks
Geopolitics: Intensification of geopolitical tensions could hit business confidence, worsen trade and investment conditions
Risk level
Risk trend
Risks of deepening or widening of political tensions and conflicts, such as U.S.-China geopolitical frictions, Russia-Ukraine war, and Israel-Hamas
conflict could spill over into regional trade and investment flows. In the region, the key risk is disputes with China. A further reduction in supply chain
reliance on China by Western and other importers could push up costs over the next few years, adding to inflation pressures. An escalation of
international disputes over the seas and lands in the south and south-east China seas would damage economic activity.
Climate change: Extreme weather and energy transition to threaten supply and costs
Risk level
Risk trend
More extreme weather and costs of climate-change policies could worsen physical and financial effects. A rapid phase-out of fossil fuels could
disrupt industries and strain credit quality. Meanwhile, disruptions in agriculture and energy supply could fan inflation and social unrest.
Technology: Accelerating technological advancement and mounting cyber-attacks to disrupt business operations
Risk level
Risk trend
While technology advancements could enhance productivity and competitive positioning, businesses may need to incur additional ongoing and rising
costs to keep up with new technologies. Critical infrastructure and issuer operations may be prone to cyber-attacks amid increasingly
interconnectedness of economic activities.
Source: S&P Global Ratings.
Risk levels may be classified as moderate, elevated, high, or very high. They are evaluated by considering both the likelihood and systemic impact of such an event
occurring over the next one to two years. Typically, these risks are not factored into our base case rating assumptions unless the risk level is very high.
Risk trend reflects our current view about whether the risk level could increase or decrease over the next 12 months.
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 58
Regional Credit
Conditions Chair
Jose Perez Gorozpe
Madrid
+
34-914-233-212
jose.perez
-gorozpe@spglobal.com
Credit Conditions Emerging Markets Q1 2024
Not Getting Easier
Editor’s Note: S&P Global Ratings' EM Credit Conditions Committee took place on Nov. 20, 2023.
Credit conditions in EMs will likely erode in 2024, as major economies slow down (the U.S.,
China, and the eurozone), the effects of rapid monetary tightening surface, and debt maturities
pile up. For many corporations, this will mean falling revenues upon increasing financing costs as
debt comes due, resulting in pressured cash flows. EM banks have largely benefited from higher
interest rates, reflected in higher margins, but EMs' sluggish economic growth will slow credit
expansion and weaken asset quality. EM sovereigns will continue struggling given the trade-off
between keeping key prices under control and avoiding social strife, while maintaining fiscal
accounts balanced on rising debt burdens and high financing costs. Moreover, there is a heavy
electoral calendar for key EMs in 2024, which will shape the political landscape for years to come.
EMs face difficult political dynamics, which have been exacerbated by the pandemic and
geopolitical conflicts. Thirty emerging and frontier economies will hold elections next year. All
these countries grapple with various challenges, and issues are highly idiosyncratic. For most of
these countries, a critical issue is providing a predictable and stable political environment that
fosters sustainable economic growth and improving living conditions. Most EMs also confront
substantial fiscal challenges after boosting debt during the pandemic, so pursuing fiscal
consolidation in an election year will prove tricky. On the positive side, many EMs could benefit
from developing structural global trends, such as supply-chain relocation and energy transition.
Policy predictability and investments in critical infrastructure will be key in benefiting from
unfolding opportunities.
Financing conditions may improve as economic trends stabilize and there is more visibility
about the peak of interest rates across advanced economies. However, financing costs will
remain elevated for all EM issuers, especially for the lower-rated ones. Debt refinancing will likely
complicate the picture, as the global maturity wall is building up with sizeable amounts coming
due in 2024 and 2025. EM issuers will be at a disadvantage as investors will likely ask for
additional returns, given comparatively higher country risk premia. For many issuers, the new
interest-rate environment could be unsustainable, leading to defaults and bankruptcies. Access
to primary markets could also be impeded if geopolitical risks were to rise further.
Adverse weather events are becoming more frequent and taking a heavy toll on EMs. El Niño
phenomenon has had uneven effects during the year with many EMs suffering from either severe
droughts or abnormal rains. An intense hurricane hit Mexico's Pacific coast, causing significant
physical damage and human losses. The severe drought is affecting the Panama Canal's transit,
the reduction of traffic on which could mean a considerable hit to freight fees and influence
supply chains. Full effects of El Niño phenomenon are yet to be seen, but past occurrences have
caused food prices to jump and other supply shocks.
Key Takeaways
• Credit conditions in emerging markets (EMs) will likely deteriorate in 2024, as major
economies slow down (the U.S., China, and the eurozone), the effects of rapid monetary
tightening surface, and debt maturities pile up.
• The balance of risks for EM credit conditions remains on the downside, given an extended
period of high interest rates, the potential for further inflationary pressures, and weaker-
than-expected growth in the largest economies. Debt refinancing will likely complicate
the picture, as the global maturity wall is building up with considerable peaks in 2025.
• Credit quality across key EMs will likely be strained as risks unfold.
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 59
Top EM Risks
Higher interest rates amid increasing refinancing risks
Risk level
Risk trend
Uneven global monetary policy trajectories still pose risks for EMs. As inflation eases, many EMs are now in position to lower their policy rates and
some have begun an easing cycle, including Brazil, Chile, Hungary, Peru, and Vietnam. However, despite recent inflation readings in the U.S., mixed
signals remain over the path of the Federal Reserve's approach to interest rates. While the peak of U.S. rate is certainly near, or perhaps already
occurred, we expect the Fed will take much longer to lower interest rates, and more importantly, the terminal rate will likely be higher than the past
decades' average. Financing conditions may improve as economic trends stabilize; however, financing costs will remain high for all EM issuers,
especially for the lower-rated ones with refinancing needs in 2024 and 2025. Access to primary markets could also narrow if geopolitical risks were
to continue rising. For many issuers, the new interest-rate dynamics could be unsustainable, leading to defaults and bankruptcies.
A sharper-than-expected downturn in advanced economies impedes global trade
Risk level
Risk trend
Once again, EM economies will be facing tough external conditions as advanced economies slow down. The key question is if domestic demand
resilience will be able keep EM economies afloat in 2024. The lagged effects of the rapid monetary tightening are still yet to be seen. Our base-case
scenario assumes an economic slump across key advanced economies, and the risk for a recession in the U.S. and eurozone remains considerable.
China's economy is also struggling, and expected growth for 2024 is far below levels in previous years that were supportive for many EMs. We expect
these factors will be a drag on trade and will hurt EM exporters. A deeper-than-expected downturn could depress exports from key EMs by reducing
trade volumes, portfolio flows, and foreign direct investment. Slower economic activity could imperil their corporate sectors' fundamentals and
banks' asset quality. Unemployment could rise, hitting households already burdened by inflation.
Weakening economy and increasing financing costs squeeze corporate fundamentals
Risk level
Risk trend
EM corporations will be facing growing headwinds in 2024. Our economic growth baseline for EMs already points to a below-trend expansion across
the board, which will be much pronounced for major exporters. This will likely reduce revenues for most sectors, with only a few ones to be spared.
Cost pressures continue, especially as workers demand higher salaries to cope with the rampant inflation and high prices that accumulated over the
past few years. Moreover, we expect financing costs will remain high, unbearable for low-rated issuers. Sooner or later, EM corporations will need to
refinance at higher costs, likely leading to credit deterioration.
Geopolitical tensions and difficult domestic socio-political conditions erode credit fundamentals
Risk level
Risk trend
The eruption of war between Hamas and Israel brings back another disturbing focal point to an existing global geopolitical strife. While not
underestimating the human tragedy that's unfolding in Gaza and Israel, our assessment is that the geographic and credit impact can largely be
contained to Israel and its nearest neighbors—for the time being. The key risk is the potential for the conflict to escalate and spread more widely in
the region with significant repercussions that could extend globally. The Russia-Ukraine conflict will drag into 2024. Ongoing hostilities, and both
countries' large role in key commodity markets increase the risk for energy and food prices to rise, which could undermine confidence and growth in
EMs. In addition, the political landscape across many EMs remains complicated amid a heavy electoral year. Overall fragile institutions, along with
fragmentation and polarization at the legislative level, are making it difficult to carry out relevant reforms to support long-term growth. The
disenchantment with politicians and democracy is growing, which could in the long run erode policy predictability and sovereigns' ability to deal with
fiscal challenges and to support economic growth.
China's economy: Deepening property sector woes, weak confidence, and high debt levels to weaken growth momentum
Risk level
Risk trend
The spreading contagion from China's real estate crisis (to local governments and real estate-related sectors) is curbing the country's economic
growth momentum. Risk of financiers curtailing lending amid China's very high corporate leverage could exacerbate credit stresses for borrowers.
China's weakening economy could filter into the region's economies and EMs reliant on China for tourism, exports, imports (product components),
finance, or the supply chain.
Structural risk: Climate change and rising adaptation costs
Risk level
Risk trend
Larger, more frequent natural disasters increase physical risks for public- and private-sector entities and threaten to disrupt supply chains such as
for agriculture and food production in some EMs. El Niño phenomenon has had uneven effects during the year with many EMs suffering from either
severe droughts or abnormal rains. Full effects of El Niño phenomenon are yet to be seen but past occurrences have caused food prices to jump and
other supply shocks.
Source: S&P Global Ratings.
Risk levels may be classified as moderate, elevated, high, or very high. They are evaluated by considering both the likelihood and systemic impact of such an event
occurring over the next one to two years. Typically, these risks are not factored into our base case rating assumptions unless the risk level is very high.
Risk trend reflects our current view about whether the risk level could increase or decrease over the next 12 months.
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Moderate Elevated
High Very high
Improving Unchanged Worsening
Global Credit Outlook 2024: New Risks, New Playbook
spglobal.com/ratings/outlook2024
Dec. 4, 2023 60
Contacts
Alexandra Dimitrijevic
London
alexandra.dimitrijevic
@spglobal.com
Gregg Lemos
-Stein
New York
gregg.lemos
-stein
@spglobal.com
Nick Kraemer
New York
ni
ck.kraemer
@spglobal.com
Joe Maguire
New York
joe.maguire
@spglobal.com
Molly Mintz
New York
molly.mintz
@spglobal.com
Marion Amiot
London
marion.amiot
@spglobal.com
Simon Ashworth
London
simon.ashworth
@spglobal.com
Alexandre Birry
Paris
alexandre.
birry
@spglobal.com
Edward Chan
Hong Kong
edward.chan
@spglobal.com
Vincent Conti
Singapore
vincent.conti
@spglobal.com
Franck Delage
Paris
franck.delage
@spglobal.com
Christian Esters
Frankfurt
christian.esters
@spglobal.com
Miriam Fernández
Madrid
miriam.fernandez
@spglobal.com
Pierre Georges
Paris
pierre.georges
@spglobal.com
Paul F Gruenwald
New York
paul.gruenwald
@spglobal.com
Evan Gunter
Montgomery
evan.gunter
@spglobal.com
Christine Ip
Hong Kong
christine.ip
@spglobal.com
Sudeep Kesh
New York
sudeep.kesh
@spglobal.com
Ana Lai
New York
ana.lai
@spglobal.com
James Manzi
Washington D.C.
james.manzi
@spglobal.com
Andrew O'Neill
London
andrew.oneill
@spglobal.com
Elijah Oliveros-Rosen
New York
elijah.oliveros
@spglobal.com
Jose Perez-Gorozpe
Madrid
jose.perez
-gorozpe
@spglobal.com
Vishrut Rana
Singapore
vishrut.rana
@spglobal.com
Luca Rossi
Paris
luca.rossi
@spglobal.com
Nicole Serino
New York
nicole.serino
@spglobal.com
Roberto Sifon-Arevalo
New York
roberto.sifon
-arevalo
@spglobal.com
Sarah Sullivant
Texas
sarah.sullivant
@spglobal.com
Eunice Tan
Singapore
eunice.tan
@spglobal.com
David C. Tesher
New York
david.tesher
@spglobal.com
Paul Watters
London
paul.watters
@spglobal.com
Steve Wilkinson
New York
steve.wilkinson
@spglobal.com
Gareth Williams
London
gareth.williams
@spglobal.com
Nora Wittstruck
New York
nora
.wittstruck
@spglobal.com
Yucheng Zheng
New York
yucheng.zheng
@spglobal.com
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Editing:
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Global Credit Outlook 2024: New Risks, New Playbook
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Dec. 4, 2023 62
