Looking ahead at 2024, some of the same challenges remain and other risks are emerging—all of which require a new playbook for issuers and investors in the debt markets.
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.
Aligned with our Top Global Risks, we answer the pressing Questions That Matter for 2024 on the uncertainties that will shape the coming year, collected through our interactions with investors and other market participants.
Credit HeadwindsWe 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. Borrowers across all asset classes will need to adjust to tighter financing conditions and softer economic growth. 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.
Capital FlowsWith the era of easy money over, investors are rebalancing their portfolios to adjust for shifting risks and returns. Borrowers (especially those at the lower end of the ratings ladder facing tighter access to credit) will need to adapt to the reshuffling of capital flows from long-duration speculative assets to safer havens—as well as adapt to the knock-on implications for overall market liquidity, foreign exchange reserves, and investment in emerging markets.
Geopolitical UncertaintyGeopolitical risks have returned to center stage, with the war between Israel and Hamas, the prolonged Russia-Ukraine conflict, and 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.
Energy & Climate ResilienceNew 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. 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.
Crypto, Cyber, & Tech DisruptionThe transformation of global and regional financial systems amid the adoption of new technologies—from generative artificial intelligence to blockchain and beyond—is accelerating an era of growth and discovery while also heightening single-entity and systemic cyber risk, forcing corporate and government entities to adapt their playbooks.
S&P Global Ratings’ Global Credit Outlook 2024 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, our senior researchers, economists, and analysts from around the world evaluate the trends affecting the current and future states of 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 impacts across various asset classes.
