QE and World Growth Buoy Global Rating Outlooks

September 22, 2017/Fitch Ratings

Global rating outlooks remain on an improving trend and are on balance less negative than at the start of the year across most rating sectors. However, the improving outlook for global credit quality is underpinned by years of loose central bank monetary policy, including quantitative easing (QE), as well as what are now the strongest world growth conditions since 2010.

Looking ahead in the rating cycle, the most benign credit market conditions in modern history will gradually begin to normalise as central bank assistance is withdrawn and world growth peaks in 2018. This could begin to temper the otherwise upbeat rating outlook trend.

Unwinding QE will pose challenges to both borrowers and lenders, including the many sovereigns with post-2000 high government debt-to-GDP levels. With a number of markets appearing to be approaching cyclical peaks, it may also expose potential asset bubbles, including those in buoyant housing markets such as Australia, Canada and some Nordic countries.

Macro-prudential restrictions have been implemented in some markets, including tighter mortgage underwriting requirements and increased capital requirements for specific asset classes, which could mitigate the credit effects.

Other risks to the rating outlook include US policy uncertainty and the potential for trade protectionism to develop, as well as political instability and corruption in Latin America, notably Brazil.

In China, the focus on controlling credit and shadow banking raises the potential for policy mistakes which could have unforeseen negative consequences such as undermining investor sentiment.

The average net outlook balance across all sectors globally improved to -3.7% by 30 June 2017 from -7.7% at 31 December 2016. However, net rating outlooks remain in negative territory for all sectors except structured finance. 

The greatest sector improvement took place in sovereigns where some developed market countries in particular are displaying improving fundamentals. This is supported by stronger global growth, recovery in global trade and stabilising commodity prices.  

Political risks remain high but confidence has grown in these being manageable. Emerging market sovereigns have also turned the corner, although downward rating pressure persists especially in Latin America and the Middle East and Africa. 

Both corporates and financial institutions are also on a modestly improving outlook trajectory and are following the pattern in sovereigns with net outlooks becoming less negative in both developed and emerging markets. Problems in Latin American corporate and banking sectors, notably Brazil, are gradually easing but political instability and corruption continue to pose risks.

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