S&P Global Ratings believes 2023 will begin as a journey through intensifying credit pressures, leading to (if all goes well) more stable financing conditions by year-end.
New risks are constantly emerging, and well-known risks will evolve.
Against this backdrop, we will be closely watching how market participants confront credit headwinds, deal with reshuffling capital flows, navigate geopolitical uncertainty, seek energy and climate resilience, and manage crypto and cyber disruption.
The capacity of these trends to instantly disrupt our interconnected world—and the credit markets that underpin it—is evident.
Confronting Credit HeadwindsSlower economic growth and rapidly rising interest rates are defining the role of debt across markets. On top of the rising cost of capital in primary markets, corporate borrowers are facing the headwinds of sticky inflation, a potential global economic downturn, eroding customer demand, and still-shaky supply chains. We expect this combination to lead to credit deterioration as fundamentals for many corporates and some sovereigns deteriorate further, although unevenly, across industries, rating levels, and geographies.
Bond issuance in 2023 has remained resilient and in line with our general expectations so far, despite headwinds earlier in the year.
Most major central banks are likely near the end of their rate hike cycles, but we expect policy rates to stay higher for longer than markets have been anticipating.
A large refinancing wall ahead will compete with rising longer-term yields and slowing growth, likely slowing new issuance growth in 2024.
In a pessimistic case, issuance could decline next year if rates become--or stay--higher than currently expected or a recession occurs, causing investors to pull back on demand for new debt.
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Reshuffling 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.
In the first 30 years of the EU's single market, while the movement of goods and workers between EU member states has increased, capital flows have continued to lag. They have stagnated since the 2008-2009 global financial crisis, and their geographic scope has narrowed, moving from the east and south of the EU to the core and north.
One encouraging development is that the COVID-19 pandemic has not led to a decrease in capital flows between EU countries. The bold and coordinated policy response to the pandemic has helped maintain private risk sharing.
Also positive is the rise of Luxembourg and Ireland, both small economies in terms of EU GDP, as large hubs for cross-border funds.
In terms of non-EU capital flows into the EU economy, we see that U.S. investment in European equities has grown significantly over the past decade. Meanwhile, the U.K.'s financial claims on the EU economy have stagnated, which is mainly due to the European Central Bank buying bonds from foreign investors as part of its quantitative easing program, rather than the U.K.'s exit from the EU in 2020.
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Navigating Geopolitical UncertaintyInternational and domestic flashpoints--the COVID-19 pandemic, the Russia-Ukraine war and associated energy and commodities crises, U.S.-China tensions over the South China Sea and technology supply chains, and social unrest unfurling from Iran to Brazil and beyond--have undoubtedly fueled geopolitical fragmentation recently. The regionally divergent outcomes of geopolitical tensions on financial markets and global trade may result in the reshoring of supply chains to improve resilience and to the revamping of business models as global demand patterns change.
Mainland China has a large mature-chip industry, but it remains unable to make cutting-edge chips without imported technology.
This dependence means recent U.S.-led bans on the export of advanced chips and equipment to China will pose significant challenges to China's efforts to catch up.
The country will channel its considerable resources across the public and private sectors to close the gap; the recent trade restrictions have only made that call more urgent.
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Seeking Energy and Climate ResilienceThe conundrum of balancing decarbonization with energy supply security and affordability is one not easily managed. The energy crisis in Europe, global supply-chain bottlenecks, and emerging markets' growth are limiting reductions in greenhouse gas emissions, despite countries' implementation of decarbonization policies. Europe's ability to meet its energy needs while continuing to lead the world toward net-zero--with either regulation or technology as the key driver--may set the tone for the year.
Our credit ratings are forward-looking opinions that reflect the ability and willingness of debt issuers, like corporations or governments, to meet their financial obligations on time and in full. Our environmental, social, and governance (ESG) factors concern an entity's effect on and impact from the natural and social environment and the quality of its governance. However, not all of these factors influence creditworthiness and, thus, credit ratings.
We define ESG credit factors as a subset of ESG factors which, by applying sector-specific criteria, we believe could materially influence the creditworthiness of a rated entity or issue and for which we have sufficient visibility and certainty to include in our credit rating analysis. Increasing frequency and severity of climate-related risks could result in environmental and social factors becoming more material, influential, and certain in our credit analysis over time.
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Managing Crypto and Cyber DisruptionThe transformation of global and regional financial systems amid the adoption of new technologies--from artificial intelligence to cryptocurrencies, tokenization, distributed ledgers, and beyond--is accelerating an era of growth and discovery. It is also heightening single-entity and systemic cyber risk. Entities with weaker cyber governance and risk management will be more exposed to rating implications this year.
The popularity and development of generative AI will spur heavy AI investment over the next three years and boost demand for related tech hardware.
Foundry leader Taiwan Semiconductor Manufacturing Co. Ltd., memory chip producer SK Hynix Inc., and chip designer NVIDIA Corp. will be among the chief beneficiaries of the investment boom. To a lesser degree, server vendors should also benefit from AI server sales, which is incremental to conventional server business.
The longer-term implications for rated tech firms are less clear, and depend on whether each firm can adapt to an evolving AI-induced shift. Accurately pacing, timing, and executing AI-related investments will be key determinants.
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