Credit Risk Scenario Analysis Series: Global Pessimistic Scenario

This article is written and published by S&P Global Market Intelligence, a division independent from S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.

In today’s multifaceted and unpredictable financial environment, the significance of scenario analysis for credit risk management cannot be overstated. As institutions face a myriad of uncertainties, from economic fluctuations to geopolitical tensions, the ability to anticipate potential risks and their impacts on credit portfolios is essential for maintaining financial stability and resilience.

S&P Global Market Intelligence’s (Market Intelligence) Credit Analytics combines advanced models with robust data to deliver an end-to-end solution for credit risk assessment, scenario analysis and reporting. In this research series, the RiskGauge Model^[1] is applied to evaluate the probability of default (PD) of public companies in twelve countries, selected according to the number of constituents in S&P Global Broad Market Index, and the Macro-Scenario Model^[2] (MSM) is utilized to assess the evolution of credit risk over the next year, based on the macro-economic scenarios crafted by Market Intelligence’s economists via their Global Link Model (GLM).

In this analysis, we use the RiskGauge PD as of the end of January 2025, along with the latest GLM Baseline Scenario and a Global Pessimistic Scenario^[3], published in February 2025. The Global Pessimistic Scenario is characterized by:

1. Tighter financial conditions for the US economy.

2. Most emerging markets’ currencies underperformance.

3. Insufficient stimulus measures in mainland China.

4. Increasing tensions between Israel and Iran.

5. Substantial increase in the military expenses for European North Atlantic Treaty Organization (NATO) members.

6. A drag on European’s manufacturing and a re-emergence of inflationary conditions.

As shown in Figure 1, the median PD for publicly listed firms is expected to increase in most countries under the baseline scenario. Comparing the median PD under the baseline and pessimistic scenarios (Figure 2), Sweden, the United Kingdom, and South Korea are the most severely impacted; in contrast, China, Malaysia, and France are the least impacted:

• Sweden: the entertainment & media sector will be most impacted in the pessimistic scenario, primarily due to slower real GDP growth and a rising unemployment rate, which will lead to a decreased disposable income for consumers.
• United Kingdom: the worst-performing sector will be the utility sector. A decline in manufacturing and industrial activity will result in reduced demand for energy and utility services from businesses. Additionally, nearly doubled inflation and a high unemployment rate will lead to lower the household utility consumption, further deteriorating the operational environment for utility companies. The ongoing rise in oil prices, as per the scenario assumption, will also add pressure on this sector earnings.
• South Korea: the construction & materials sector is expected to be the most adversely affected due to a combination of a slower reduction in interest rates and a significant increase in inflation. The situation will discourage investments in new construction projects, as developers face higher financing costs. Additionally, the increased cost of living and interest rates will deter potential homebuyers, thereby reducing demand for residential properties.

Figure 1: Median PD by country