The Russia-Ukraine military conflict could have profound effects on macroeconomic prospects and credit conditions around the world. Leading up to, and during, the conflict, Western countries announced stringent sanctions on Russian entities and individuals. This raises the risk of restricted trade and capital flows, and could weigh on overall confidence and business conditions. In the longer term, the disagreements between Russia and NATO over security concerns will likely persist. The rising geopolitical risk can lead to broader ramifications (see chart 1).

Please see our macroeconomic and credit updates here: Russia-Ukraine Macro, Market, & Credit Risks.

Rating Actions

S&P Global Ratings is publishing a regularly updated list of rating actions it has taken globally on financial and nonfinancial corporates, sovereigns, and international public finance. These are public ratings where we cite the Russia-Ukraine conflict, energy prices, or both as factors driving the decision. The latest edition is: "Rating Actions Waypoint: The Russia-Ukraine Conflict," with data as of July 19, 2022.

We have also revised our country risk assessments on Russia, Ukraine, Belarus, and Eastern Europe and Central Asia since the start of the conflict. The latest is Country Risk Assessments Update: June 2023.

International sanctions increase operating and financial risks, and therefore the likelihood of a default, of entities affected, as do judicial actions, capital controls, and other payment restrictions. Failure to pay on time and in full can lead to a default even if the obligor's inability to pay stems from sanctions or other actions taken by governments outside the obligor's home jurisdiction. In the Credit FAQ "How Our Definition Of Default Takes Account Of Sanctions And Other Types Of Payment Restrictions," published April 14, 2022, we answer questions from investors about how it determines whether a default has occurred under such scenarios.

Key Takeaways From Our Relevant Published Reports

Credit conditions

1. Global Credit Conditions Q3 2023: Higher For Longer Will Fuel Ratings Divergence, June 29, 2023

• We expect slowing growth ahead and diverging credit performance. Investment-grade entities should remain resilient and more financially flexible while higher rates will continue to challenge those at the lowest end of the rating spectrum. This divergence is reflected in our negative bias, at 9.2% for investment grade and 35.4% for 'B-' and lower ratings.
• The full impact of sharply higher interest rates has yet to unfold. Defaults have picked up in recent months in light of increasing interest rates--a process we believe is going to continue to erode debt-servicing capacity for many lower-rated issuers. We forecast default rates to rise to 4.25% in the U.S. and 3.6% in Europe by spring 2024. Within emerging markets, we expect an increase in defaults from Latin America.
• Downside risks remain high. After avoiding numerous potential dangers so far in 2023, it is easy to have a false sense of calm. But, we believe that most of the downside risks to credit conditions remain as strong as ever and may materialize slowly over time. Higher borrowing costs, weakness in certain real estate markets, and weakening economies may lead to a bottoming of the credit cycle in the years ahead.

2. Credit Conditions Asia-Pacific Q3 2023: China Grapples With An Uneven Recovery, June 27, 2023

• Evolving risks: A desynchronized global economy in terms of growth, inflation and policy interest rate trends is complicating the region's credit outlook. The key export market of the U.S. seems headed for a soft economic landing, while the eurozone economy is in the grip of stagflation. Meanwhile, China--the region's growth engine--is struggling with an uneven post-lockdown recovery. The region's net rating outlook bias has slightly improved to negative 2% in May 2023 from negative 3% in February.
• High rates: With interest rates and inflation set to stay high for longer (except China), borrowers and customers are increasingly accustomed to higher financing costs and prices. We therefore see risk around access to financing as high and unchanged. However, if such conditions persist, asset values and risk pricing may recalibrate. Financial markets could stay volatile for longer.
• Slower exports: We assess the risk of a hard landing for the global economy as high and unchanged. While weaker global demand will slow export and manufacturing activities, the resumption of social mobility and consumption across the region will offset the drag. We've lowered Asia-Pacific's growth marginally to 4.5% in 2023 and 2024.
• China dims: China's recovery momentum post-COVID is ebbing, waylaid by weak business and household confidence. High youth unemployment and lingering property weakness further sour sentiment. The introduction of policy stimulus could limit the slowdown in growth. Consequently, we see the China recovery risk as high and improving. Meanwhile, terse ties with the U.S. could see global firms re-evaluating their expansion into China.

3. Credit Conditions Emerging Markets Q3 2023: Inflation Peaked, Risks Remain, June 27, 2023

• Overall: Credit conditions in emerging markets (EMs) show some improvement as inflation cools down, but economic activity is weakening, and the lagged effects of tight monetary policy are surfacing. Banks and domestic capital markets have provided critical financing, somewhat offsetting the tight financing conditions abroad. Corporations remain resilient as cost pass-through continues. Challenges remain, as activity slows down and challenging financing access and high rates will linger longer than initially expected.
• Risks: Risk trends for EMs have stabilized, though tight financing conditions continue clouding the outlook for EM issuers. Lower-rated entities continue to encounter difficulties in accessing capital markets, and recent refinancings show a steep increase in rates. We see two threats ahead: on the one hand, the Federal Reserve could further increase its rates if inflation doesn't cool down; on the other hand, we now expect that higher interest rates will linger for longer, which will be challenging for debt-laden businesses.
• Credit: We expect that the lagged effect of the rapid and significant monetary tightening, along with enduring high prices, will continue influencing EM rating trends. Lower-rated entities will remain vulnerable to these conditions, and we expect negative rating actions to dominate.

4. Credit Conditions Europe Q3 2023: The Slow Burn of Rising (Real) Rates, June 27, 2023

• Overall: Financing conditions are expected to continue to tighten as central banks maintain their laser focus on restoring price stability. As the COVID-19 recovery fades and higher (real) rates start to dampen demand, eurozone economic activity may contract modestly around the turn of the year under our base case.
• Risks: Credit risks are linked mainly to the lagged impact of unexpectedly high inflation (especially for consumers), and the historic rise in the cost of servicing debt. The outlook for key segments within European real estate is poor, although only a moderate systemic risk, in our view, given the role and strength of the larger European banks. Geopolitical risk relating to the war in Ukraine is a severe tail risk, as decision-making in Russia is so unpredictable.
• Ratings: The European banking sector remains on a stable outlook, as net interest margins support earnings and are expected to cover some increase in credit costs. While corporate earnings' momentum is stalling, strong financial performance has translated into a positive ratings transition, particularly for investment-grade companies. We continue to have concerns over the ratings outlook for more vulnerable speculative-grade issuers.

5. Credit Conditions North America Q3 2023: Risks vs. Resilience, June 27, 2023

• Overall: Credit conditions look set to remain tight, with benchmark interest rates unlikely to fall soon, price pressures persisting, and lenders becoming more selective. Still, credit spreads remain narrow, and the U.S. economy is proving resilient.
• Risks: With corporate earnings under pressure and the debt-maturity wall creeping into view, lower-rated borrowers could suffer liquidity constraints. Banks' tightening their lending standards will make it more difficult and costly for entities—especially small and midsize businesses, and households—to secure funding.
• Ratings: Downgrades continued to outpace upgrades, and the net outlook bias, indicating potential ratings trends, is at negative 9.3%—a two-year high. Defaults will likely rise, with consumer-facing sectors, many of which are in the 'CCC/C' categories, suffering most.

Agribusiness

6. Brazilian Agribusiness Feasts On Booming Exports, May 4, 2023

• Brazilian agribusiness exports have reached a record of $159 billion in 2022, mainly because of skyrocketing prices, given steady demand and supply disruptions since the COVID-19 pandemic that were further exacerbated by the conflict between Russia and Ukraine.
• According to the Brazilian Ministry of Agriculture, agribusiness accounted for about 47% of Brazil's total exports in 2022 and is responsible for a trade surplus of almost $142 billion that more than offset the $80 billion deficit across other industries, resulting in an overall surplus of about almost $62 billion.
• The three agribusiness subsectors that S&P Global Ratings analyzes in this report--the producers of soy, corn, and cotton; beef, poultry, and pork; and sugar and ethanol--generated $114 billion in export revenues in 2022, or about 72% of the country's total agribusiness exports.
• In general, exports boosted cash flows of companies in those subsectors, offsetting weak domestic consumption and cost inflation.
• A depreciated Brazilian real, solid global demand for soft commodities, and generally adequate weather conditions boosting output will support the profitability and credit quality of these subsectors in 2023, despite weaker financing conditions in the country.

7. Russia-Ukraine Conflict Will Test Agribusiness Supply Chain Efficiencies And Consumers' Appetite For More Food Inflation, March 18, 2022

• Russia and Ukraine are major global exporters of wheat, sunflower seed meal and oil, barley, and potash, an important input to fertilizer.
• The military conflict poses significant risk to the region's 2022 commodity exports. Globally, future harvests could be crimped by fertilizer shortages.
• Direct operating exposure to Ukraine and Russia for most rated agribusinesses is limited. However, the ensuing trade disruption is likely to be credit positive for some, such as grain processors, and credit negative for others, such as protein processors.
• Inflationary pressures in consumer goods, food retail, and food service will be further exacerbated. For many companies in these sectors, preserving credit quality will hinge on the ability to continue to pass on costs to the consumer.

Autos

8. Energy Rationing Could Hit The Brakes On European Auto Production, Sept. 30, 2022

• The indefinite closure of the Nord Stream 1 pipeline is sparking concerns of gas shortages and energy rationing in Europe, which could disrupt the recovery of light vehicle production when supplies of semiconductors and other parts are expected to gradually improve into next year.
• Knowing that the consequences may substantially vary across European countries, automakers, and supply chains, this scenario analysis is a first step to gauge potential downside to our European auto production forecasts over 2023 and is subject to a series of assumptions.
• We estimate 0.8 million-0.9 million light vehicles are at production risk for each billion cubic meters of gas savings required, under our analysis of various energy intensity scenarios.
• Our scenario translates into 7%-15% lower auto production in Europe versus 2021 and 6%-11% lower versus 2019.

Building materials

9. How The Russia-Ukraine Conflict Affects European Building Materials Companies, March 29, 2022

• The Russia-Ukraine conflict, and the related governments' responses, have further intensified the inflationary and highly volatile cost environment that is threatening the profitability and cash flow generation of rated building material companies in Europe. Companies will be tested on their ability to pass through much higher energy and raw material costs in a context where demand will likely weaken.
• In this Credit FAQ, S&P Global Ratings addresses some of the most frequently asked questions we receive from market participants on this topic. Though the situation is still evolving fast, we outline our view on how rising energy costs, amplified supply disruptions, and renewed scarcity of specific resources will impact rated European building material companies.
• Questions that we answer include: What is the impact of the Russia-Ukraine conflict on the European building materials sector? Does S&P Global Ratings still anticipate construction volume growth in 2022? To what extent do the consequences of the conflict weaken the sector's creditworthiness? Despite the sector's resilience, why have you taken negative rating actions in March?

Chemicals

10. Inflationary And Natural Gas Supply Headwinds Challenge Global Chemicals Sector Stability, Sept. 14, 2022

• Our ratings for the majority of the global chemical companies are stable, benefitting from record operating performance in 2021, and in some instances in first-half 2022, allowing for some deleveraging that has provided rating headroom.
• However, there is growing negative bias for companies sensitive to inflationary pressures and natural gas shortages.
• In a recession, some cyclical subsectors, such as petrochemicals, could face margin pressure from demand destruction and meaningful supply additions. Other commodity sectors, such as fertilizers, should continue to demonstrate resilient performance given the likelihood of structural supply shortfalls stemming from the Russia-Ukraine conflict.
• An extended period of weakness could reduce existing cushions under credit metrics, with financial policy becoming an increasingly important credit factor for global chemical issuers.

11. The Russia-Ukraine War Is Reshaping The Fertilizer Industry, Sept. 12, 2022

• Phosphate, urea, and potash prices have climbed about 190%, 170%, and 280%, respectively, over the past two years, driven to historical and unsustainable highs by supply disruptions post the COVID-19 pandemic, and exacerbated by the Russia-Ukraine war and Chinese export restrictions.
• This is boosting fertilizer companies' profits and credit quality for now, but has also destroyed demand from farmers unable to afford fertilizers and, in turn, increased food insecurity worldwide. It also highlights the need to reduce dependence on Russia, the world's largest fertilizer exporter.
• Yet, investment required to end dependence on Russian and Belarussian fertilizers is being hampered by high inflation, supply shortages, and--in the case of nitrogen fertilizers--uncertainties over the shape of further regulation to decarbonize the industry.

Credit trends and market liquidity

12. 2022 Annual Asia Corporate Default And Rating Transition Study, June 27, 2023

• 18 companies rated by S&P Global Ratings, including eight confidential issuers, defaulted in Asia in 2022, triple the defaults from 2021.
• Asia's speculative-grade default rate doubled to 6.4% in 2022, from 3.2% in 2021. Globally, the 2022 speculative-grade default rate was 1.9%, from 1.7% in 2021.
• The one-year weighted average Gini coefficient for Asia was 90.2%, the three-year was 84.8%, and the five-year was 79.4%.

13. Default, Transition, and Recovery: 2022 Annual Emerging And Frontier Markets Corporate Default And Rating Transition Study, May 23, 2023

• The number of corporate defaults in emerging and frontier markets increased to 25--representing an all-time-high 30% of the global total--in 2022 from 14 in 2021.
• Defaults mainly stemmed from two major sectors, consumer/service and real estate/building products/homebuilders, and were concentrated in Asia-Pacific.
• Distressed exchanges accounted for 40% of defaults and missed interest or principal payments for 36% amid a deteriorating economic outlook and tightening financing conditions.
• Credit quality deteriorated in 2022 relative to 2021, with a higher downgrade rate (5.44%, versus 5.18%) and lower upgrade rate (7.34%, versus 9.52%).

14. Emerging Markets Credit Ratings: Strength And Struggles Amid Global Shocks, April 17, 2023

• For emerging markets (EMs), COVID-19's shock weighed heavily on utilities, banking, and transportation credit quality in the earlier stage of the pandemic (March 2020-February 2022). Then from February 2022, real estate and consumer products and nonbank financial institutions (NBFIs) were hit more severely, mainly because of the strong link between credit quality and sovereign ratings in EMs as well as pre-existing idiosyncratic credit weaknesses.
• In terms of geography, Latin America saw the greatest effect on credit quality during the early COVID-19 period, whereas in the more recent period (February 2022-January 2023), Greater China has seen the bigger impact.
• Metals, mining, and steel proved the most resilient sector throughout the early COVID-19 period, because it could exploit raw material price inflation. Meanwhile, since March 2022, banks and utilities have begun to see more positive rating actions, thanks to similar actions on sovereigns, higher net interest margins, improvement in risk-adjusted capital (RAC) ratios, and surging energy demand.
• Looking ahead, we expect real estate and capital-intensive sectors to be more at risk. Internal and external mitigants, policy support, external dependency, and sovereign rating evolution will be key to the future of corporate credits in EMs.

15. Risky Credits: Reshuffling Credit Risk In Emerging Markets, Feb. 1, 2023

• The number of emerging market issuers rated 'CCC+' and lower slightly decreased to 22 as of Dec. 31, 2022, from 23 as of Sept. 30, 2022, which constitutes 13% of the speculative grade universe.
• The latter has progressively declined to 168 as of year-end 2022 from 210 at year-end 2021, mainly as a consequence of China-based rating withdrawals.
• Downward transition risk is moderating, with 36% of issuers rated 'CCC+' and lower on either a negative outlook or CreditWatch, with the highest concentration in the financial industry.
• Issuance was muted in 2022, with refinancing risk mostly concentrated in the utility industry and Latin America region, although the high interest rate environment is paving the way for more distressed exchanges over the coming quarters.

16. Default, Transition, and Recovery: 2022 Annual European Corporate Default And Rating Transition Study, May 25, 2023

• In 2022, the number of defaults in Europe increased to 17 (of those, 12 were in the second half of the year) from 14 in 2021.
• Distressed exchanges accounted for more than 50% of these defaults, while missed interest and principal payments, and bankruptcy filings (Chapter 11) each contributed four defaults.
• All defaulters with active ratings at the start of the year held speculative-grade ratings, with 11 of them in the 'CCC'/'C' category.
• Upgrades outnumbered downgrades last year, but the proportion of issuers with 'B-' and lower ratings that are speculative grade remains historically high, indicating persistent credit risk from 2020.

17. Default, Transition, and Recovery: The European Speculative-Grade Corporate Default Rate Could Rise To 3.6% By March 2024 As Stressors Mount, May 15, 2023

• We expect the European trailing-12-month speculative-grade corporate default rate to reach 3.6% by March 2024, from 2.8% in March 2023. The combination of rising interest rates, slowing growth, and still elevated input costs could lead to falling earnings and more defaults, particularly distressed exchanges and other out-of-court restructurings.
• A prolonged growth slowdown or recession could push the default rate higher--to 5.5% in our pessimistic case. And if core inflation remains elevated, central banks may need to tighten beyond current expectations, cutting further into spending, investment, and cash flow.
• Much will depend on how inflation and economic growth evolve in the next few months. Although not in our base-case assumptions, if recent declines in headline inflation translate into lower core inflation, interest rates could fall, opening up market demand for riskier debt, even if not to 2021 levels.

18. Risky Credits: Downgrades Of European Issuers In Q4 2022 Top Pre-Pandemic Levels, Feb. 1, 2023

• Downgrades of European risky credits increased by 13% to 54 in the fourth quarter of 2022, more than 1.5x higher than the pre-pandemic level.
• Three sectors--consumer products, media and entertainment, and capital goods--account for a material 47% of all risky credits by number, while the U.K. has the highest volume of risky debt, around 46% as of Dec. 31, 2022.
• Of the risky credits, 57% had negative outlooks at the end of 2022, meaning we can expect more defaults in 2023. This is due to persistent inflation, slower growth, tighter financing conditions, and continuing geopolitical tensions.
• In our base-case scenario, we expect the European speculative-grade default rate to rise toward the long-term average of 3.25% by September 2023.

19. 'BBB' Pulse: Rising Stars And Fallen Angels Pick Up Amid Economic Uncertainty, May 18, 2023

• Tighter headroom for some 'BBB' issuers prompted a recent spike in fallen angels, but mounting macro pressures haven't slowed additions to the list of rising stars, with seven new issuers added in the first quarter and five in April.
• The risk of additional potential fallen angels is higher in the U.S. than in EMEA, while real estate and consumer products are the sectors to watch in both regions.
• We expect debt associated with U.S. and EMEA nonfinancial fallen angel downgrades will increase to $98 billion in the next year, up from $33.7 billion in the year to end-March 2023.

20. Default, Transition, and Recovery: 2022 Annual Global Sovereign Default And Rating Transition Study, April 28, 2023

• Five sovereigns defaulted in 2022, up from one in 2021. Three defaults were related to the Russia-Ukraine conflict.
• The foreign currency rating on Russia was lowered by 12 notches to 'SD' from 'BBB-' at the beginning of the year, making this the steepest sovereign rating decline in a 12-month period on record.
• 2022 saw mixed results for aggregate sovereign credit quality: there were 11 downgrades and 13 upgrades, from 12 and 5, respectively, in 2021.
• Rating actions, positive and negative, mainly took place in emerging and frontier market countries during 2022.
• At the end of 2022, eight sovereigns were rated at the lowest rating levels of 'CCC+' and below, suggesting high near-term default risk.

21. This Month In Credit: Downgrades Are Back, With Divergence Across Regions, April 27, 2023

• Downgrades surged in March to 77, their highest monthly total since 2020, including seven fallen angels. Investment-grade downgrades reached their highest level since March 2022.
• The global negative bias rose to 15% (from 14%), with the U.S. and Latin America showing more notable increases while Europe and other regions showed declines.
• The number of weakest links (issuers rated 'B-' or lower with negative outlooks or on CreditWatch negative) increased in March to a two-year high, likely adding to future default pressure.
• Year-to-date global corporate defaults rose to 37 in the first quarter (with nearly half of them being distressed exchanges), tying 2016 for the most first-quarter defaults since 2009.

22. Default, Transition, and Recovery: 2022 Annual Global Corporate Default And Rating Transition Study, April 26, 2023

• The number of rated global corporate defaults rose to 71 in 2022 from 60 in 2021.
• Consumer/service led the global default tally for a second straight year, accounting for 25% of defaults.
• Of the defaulters that were rated at the start of the year, all were rated speculative grade and 80% began the year rated 'B-' or lower, which contributed to a one-year global Gini ratio of 83.2%.
• For a second straight year, credit quality broadly improved--with an upgrade rate of 8.3% versus a downgrade rate of 6.2%. While credit quality improved for the full year, downgrades began to rise and outpaced upgrades in the second half of 2022.

23. Global Financing Conditions: Tumultuous March Cuts Into Full-Year Issuance Projections, April 26, 2023

• The year started strong for global bond issuance, but given the turbulence in the banking sector in March, most sectors finished the quarter with declines of 20% or more relative to the same time last year.
• As a result, we have slightly lowered our full-year projections for all sectors except nonfinancial corporates, where we believe issuance will expand this year.
• We believe backstops by various authorities should limit contagion within or from the bank sector. This, combined with favorable technical factors--such as weak second-half totals in 2022, a likely stabilization in interest rates, and expectations for a weaker U.S. dollar--could result in healthy issuance totals in the second half of 2023.
• Still, the first-quarter shortfall is large, and potential sources of volatility remain, including a still unresolved debt ceiling debate in the U.S., over $1 trillion of outstanding leveraged loans facing LIBOR's end in June, and lingering uncertainties about the health of U.S. regional banks.

24. Global Refinancing: Pandemic-Era Debt Overhang Will Add To Financing Pressure In The Coming Years, Feb. 7, 2023

• Maturities in 2023 and 2024 appear broadly manageable after companies extended maturity profiles in 2020 and 2021.
• However, borrowers may start to seek financing this year to manage this overhang of pandemic-era debt, which will begin to mature in 2025.
• The speculative-grade share of maturing debt is rising, and funding to refinance could be limited--driving costs higher--if prolonged volatility and uncertainty disrupt financing conditions.
• Speculative-grade borrowers, which have more shorter-duration and floating-rate debt, are more vulnerable to rising benchmark interest rates--and thereby higher funding costs--in the near term.

Cross-sector

25. Sub-Saharan Africa's Fading Tailwinds And Missed Opportunities, May 30, 2022

• Sub-Saharan Africa's (SSA) growth will weaken this year before likely rebounding in 2024, albeit with large variations. Sustaining rapid growth will be challenging due to weaker global expansion and a reluctance to invest due to high interest rates.
• Selected SSA sovereigns will continue to grapple with structural weaknesses. But the end of the pandemic, the reopening of tourism and services sectors, and falling food and fuel prices should support growth and bring some fiscal relief, although we see limited upside for ratings absent relevant structural reforms.
• Long term corporate growth has slowed due to persistent elevated inflation and interest rates (exacerbated by softer non-oil commodity prices), which have weighed on margins and discouraged capital investment. Limited debt-issuance needs offset the impact of risk averse capital markets, for now.
• Tighter credit conditions due to inflationary pressures and interest rates will restrict lending and exacerbate already elevated credit risk at Sub-Sahara African banks, leading to somewhat higher credit losses.

26. Asia-Pacific Sector Roundup Q3 2023: Managing An Uneven Recovery, June 28, 2022

• Stabilizing funding access: With the U.S. banking crisis contagion largely contained, financing access has stabilized. However, challenges remain. With rates staying high for longer, costlier funding persists. Concurrently, a slower economic outlook could see financiers turning risk averse, limiting credit availability. Meanwhile, domestic funding channels (including bank loans) remain supportive.
• China's recovery slows: China's post-COVID economic recovery is under way, despite slow momentum. Still subdued property market and softening external demand have hit household and business confidence. Sectors dependent on consumption or export (such as auto, chemicals, retail, and technology) could see stresses.
• Growth continues: We expect Asia-Pacific's real GDP to grow 4.5% in 2023 and 2024. However, the ongoing global economic slowdown could curtail this growth, which would weigh heavily on the export-centric region.
• Net rating outlook bias: The region's net rating outlook bias improved slightly to negative 2% as of end-May 2023 (end-Feb.: negative 3%). We see bright spots in a narrow clutch of sectors, but vulnerabilities stemming from a soft economic outlook and declining confidence largely remain.

27. Ukraine Conflict Divides Asia's Energy Haves And Have-Nots, March 9, 2022

• For Asia-Pacific, the biggest risk of the Ukraine conflict is market volatility and higher commodity prices; emerging economies with large energy imports are most at risk.
• Most rated issuers in Asia-Pacific have little direct exposure to Russia or Ukraine in terms of revenues, assets, investments, or supply chains.
• A widening of the conflict or further sanctions could push investors to haven positions, involving capital outflow from emerging markets, hitting assets and currencies.

28. Emerging Markets Monthly Highlights: Resilience To Diverging External Trends, June 15, 2022

• In most cases, Q1 GDP growth across Emerging Markets (EM) was better than expected. Domestic demand was resilient across most of less dynamic in EM EMEA and LatAm, as high real interest rates and inflation take a toll on fixed investment and consumption. Soft indicators are pointing to some improvement in external demand, which could support continued resiliency in GDP growth in the coming quarters.
• Trajectory of external demand will be key for EM's growth in the coming quarters. Exports have been mixed across EMs, with some agricultural exports benefitting from strong harvests (in Brazil, for example), but most manufactured goods exports seeing slower growth than in previous quarters. As domestic demand growth is cooling in many EMs, the evolution of external demand will be increasingly more important for the overall GDP growth trajectory for those economies.
• Infrastructure spending in China is becoming more targeted. S&P Global Ratings expects infrastructure investments to ease alongside with the economic performance and focus more on larger key projects that have sustainable payoffs. Weaker-than-previously expected infrastructure investments in China will likely weigh on industrial metal prices, particularly for iron ore and copper, which are important export commodities of LatAm, and to lesser extent, EM EMEA.
• Financing conditions remain tight, with yields and spreads generally muted across regions. An elevated level of yields is hindering access to external markets, especially for speculative- May and will turn to international financing only if forced by stringent refinancing concerns.

29. Russia-Ukraine Conflict: Implications For European Corporate And Infrastructure Sectors, March 16, 2022

• Rising energy costs globally and risks of energy supply interruptions in Europe. Some electricity prices have risen more than 1,000% in just over two years.
• Risk of supply disruptions and counter sanctions. Russia, Belarus, and Ukraine are major industrial raw material and mineral producers, a key source of fertilizers, and important food growers, supplying a quarter of world wheat exports.
• The conflict represents the second global supply shock this decade after COVID-19, with disruptions and bottlenecks due to scarcity of specific raw materials, parts, and port closures, even as China's zero-COVID policy continues to affect trade and supply chains.
• Already significant cost input inflation pressures have been amplified, notably for oil, power prices, and some key raw materials (lithium, nickel, palladium, and wheat).
• Profit margin pressure will start to ratchet up in 2022. Companies will increasingly face the dilemma of raising wages to compensate for cost-of-living increases while maintaining profitable operations.
• Few sectors will benefit from the current situation.
• Slower profits growth and downward margin pressure suggest credit risk premiums need to rise.

30. Key Themes 2023: What We're Watching, Jan. 31, 2023

• Disruptions of the recent past--a global pandemic, a war and energy crisis in Europe, wide macroeconomic swings with supply chains and inflation taking center stage--show just how fast the world can radically transform. And this new pace of change is reshaping credit markets. While some of the tumult has eased, a number of shocks are still reverberating across economies and markets. Slowing global economic growth will continue to create complications for rated credit, private markets, and the future of money.
• 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.
• New risks are constantly emerging, and well-known risks will evolve. Despite the mixed optimism that has marked the start of this year, fundamental changes such as higher-for-longer interest rates, more permanently elevated inflation, and volatile liquidity, combined with exogenous climate and digital risks, will disrupt patterns and solidify new market dynamics for years to come. As this extremely dynamic risk environment continues to challenge borrowers in 2023, our analytical frameworks and expertise will enable us to quickly assess and quantify emerging challenges and credit trends as part of our ongoing ratings surveillance.

31. Energy Transition And Energy Security On The Path Toward Net-Zero, July 26, 2022

• Despite the intensifying urgency to make progress on the path to net-zero emissions, economies are now facing tough choices about how to balance their immediate energy security needs with longer-term energy transition plans.
• These trade-offs will likely have implications for decades to come, especially as the physical impacts of climate change are more pronounced in lower and lower-middle-income countries.
• Markets can play a key role in shaping the path to net-zero, but companies will need to address several intersecting pressures and challenges related to their transparency, disclosures, and actions.

32. Geopolitical Shifts Are Exacerbating Credit Risks, May 31, 2022

• Disruptions stoked by the global pandemic and Russia-Ukraine war are increasing risks of a more divided and unstable global system—and worsened credit conditions.
• Widening systemic inequalities and ideological polarization will likely fuel nationalistic and populist policies that threaten economic inefficiency, credit quality, and social stability. Emerging markets, in particular, are exposed to risks linked to higher interest rates and inflation.
• If the first half of this year has been defined by disruption, the next six months will likely be shaped by increasing fragmentation and ongoing reorientation.

33. How The Russia-Ukraine Conflict Is Affecting Ratings And The Global Economy, March 23, 2022

• Beyond the devastating human costs, the Russia-Ukraine conflict is disrupting economic conditions and financial and credit markets--with implications for our credit ratings.
• The prices of energy, metals, and food have soared--in some cases to record highs--as sanctions and the conflict itself disrupt the key trade flows of Russia's and Ukraine's oil and gas, palladium and nickel, wheat and corn, and other commodities. Energy supply disruptions have countries (particularly in Europe) scrambling to identify new trading partners to secure their energy security and supply chains. Many companies have ended operations or pulled projects in Russia.
• To date, we have taken a substantial number of rating actions on financial and nonfinancial corporations, sovereigns, and international public finance entities in which we cite the Russia-Ukraine conflict, energy prices, or both as direct or indirect factors driving the decision.
• This FAQ addresses frequently asked investor questions on the implications of the Russia-Ukraine conflict on ratings actions and the global economy.

34. Latin American Entities To Largely Skirt Fallout From Sanctions On Russia, April 5, 2022

• Sovereigns. A prolonged deterioration in global economic health could hurt reginal sovereign ratings, despite the limited positive impact of high commodity prices in a few countries. Rising prices would exacerbate domestic inflation, forcing governments and central banks to raise interest rates further to avoid losing monetary policy credibility while they balance the need to sustain GDP growth.
• Corporates. Transportation and food companies are likely to remain the most vulnerable to a scenario of high commodity prices, while export-oriented sectors like metals and mining; forest products and packaging, and agribusiness will continue to thrive, despite also facing margin pressures. Performance will largely depend on companies' ability to pass through cost increases to prices, which could be difficult to achieve if macroeconomic conditions weaken and cause sales volumes to drop, which in turn would also impair profit margins.
• Power and infrastructure. The relatively large base of hydropower in the region lessens to exposure to international oil and gas prices, so high spot market prices don't represent a material threat at least through 2023. However, water scarcity in 2021 hurt Chile, which prompted some Chilean power companies to secure gas in 2022 if dry conditions continue. We expect average spot prices in Mexico to increase in 2022 given its dependency on imported gas in the energy matrix.
• Financial Services. In our view, the direct impact of the armed conflict in Ukraine will be limited for Latin American financial institutions because they have minimal direct exposure to Russia and Ukraine, but the situation has increased uncertainty globally and could lead to indirect effects on the sector.
• Structured Finance. In general, Latin American structured finance transactions don't have direct exposure to Europe, so a scenario of prolonged sanctions to Russia doesn't post a material threat to our rated portfolio.

35. Nordic Credit Outlook: An Uneven Road Ahead, Jan. 9, 2023

• The Nordic economies face a difficult and uncertain economic outlook. The region's countries are up against different challenges, but are, on average, well prepared to weather a recession given generally low public debt levels. However, Nordic governments have limited fiscal space given already high inflation. Finding a way out of these strains leaves little room for policy mistakes that could lead to a deeper and longer recession.
• Nordic banks' earnings prospects are likely to soften. Rising interest rates provide tailwinds for net interest income, but volatile market conditions, a slowdown in credit growth, and high inflation are likely to curtail earnings generation. This, coupled with falling house prices, may put a drag on business prospects for the banks in 2023.
• The end of a golden era of low-cost and ample funding sets in. After nearly a decade of a "lower for longer" cost of goods and interest rates, less-resilient corporates could buckle under tougher economic and market conditions and much higher borrowing costs. Earnings momentum is fading, and the downturn's severity will shape 2023 credit prospects.
• Insurance companies' capital strengthening may come to an end. Nordic insurers have generally proved resilient against market turmoil. Nevertheless, we believe the region's insurers are in the eye of a perfect storm of rising inflation and long-term interest rates as well as depressed capital markets, which may erode capital levels in 2023.
• Nordic LRGs' budgetary performance is set to weaken. Even if growth of nominal tax revenue remains robust due to inflationary support in tax bases, rapidly rising expenditures are likely to outpace revenue growth. Debt is likely to grow moderately as local and regional governments will likely adjust investments, given higher construction costs.

36. Cyber Threat Grows As Russia-Ukraine Conflict Persists, May 11, 2022

• As the likelihood of a prolonged stalemate in the Russia-Ukraine conflict grows, the risk of cyberattacks on financial and public institutions will increase.
• The 2017 NotPetya malware incident shows cyberattacks can quickly spread to global public and private corporations.
• The conflict is spotlighting a rising need for strong cyber governance and affirmative cyber insurance coverage, said S&P Global Ratings cyber specialists at a seminar.

37. For U.S., Ripple Effects Of Russia-Ukraine Are More Concerning Than Direct Exposure, March 18, 2022

• Economy. S&P Global Economics' preliminary estimate in response to developments related to the crisis is that the effect with shave 70 basis points (bps) from U.S. GDP growth this year, with the economy now set to expand 3.2%. The prospects of steadily rising interest rates and persistent inflation are the main drivers of this assessment, with an expected recession in Russia playing only a small part.
• Corporates. The conflict has had minimal direct impact on U.S. and Canadian corporates entities we rate. Only a handful of issuers had any notable direct sales exposure to Russia—and suspended business operations due to sanctions, and discretionary exits due to security concerns or public pressure, have had a limited effect on credit quality. But the ripples in commodities markets and the broader economy are already having a pronounced effect on many.
• Financial Services. The conflict has roiled financial markets and created new risk dynamics across the globe. Although the direct impact for U.S. financial institutions is limited, the situation has created an air of uncertainty. Risks that have arisen for U.S. financial institutions due to the conflict include: cyber risk; operational risk to avoid breaching sanctions; trading losses resulting from higher market volatility; elevated counterparty risk amid higher margin requirements
• Structured Finance. All told, we expect the Russia-Ukraine conflict to have limited direct credit effects on the structured finance transactions we rate globally. U.S. aircraft asset-backed securitization (ABS) is an exception because 48% of the transactions we rate (12 of 25) in the sector have direct exposure to Russia and/or Ukraine airlines.
• U.S. Public Finance. While the diverse sectors that represent U.S. public finance are geographically distant from the Russia-Ukraine military conflict, the geopolitical situation will clearly weigh on macroeconomic and credit conditions. Inflation has been a headwind for all sectors for months, and labor costs, funding services, and capital constructions outlays will likely pressure state and local budgets.
• Insurance. For the vast majority of insurers and reinsurers headquartered outside Russia that have exposure to the country, their exposure is small enough and their capital strong enough for them to avoid a deterioration in credit quality. The same is true for insurers and reinsurers with no direct exposure to Russia, but we continue to assess the impact of macroeconomic and financial market volatility on balance sheets.

Corporates

38. Credit FAQ: Ukraine Conflict And Asian Companies: Commodity Prices, Sentiment Exceed Direct Effects, March 10, 2022

• The Ukraine conflict is raising commodity and energy prices, and increasing market volatility in Asia-Pacific. S&P Global Ratings expects these factors will have the most relevant and immediate credit consequences for the corporate sector in the region. A protracted conflict hitting investor sentiment well into 2022 will complicate access to funding for weaker credits dependent on capital markets to refinance.
• Asia-Pacific entities typically have little or no direct exposure to Russia or Ukraine in terms of revenues, assets, or supply chains. Russian airlines and cargo are an immaterial contributor to traffic at Asian ports and airports, for example.
• In this Credit FAQ we address investor questions on the direct and indirect effects of Ukraine conflict on rated companies in Asia-Pacific.

39. Global Debt Leverage: Cash Flow Negative Corporates Could Double In 2023, Dec. 12, 2022

• Worsening conditions in 2023 could temper this year's tentative rebound in average earnings. Our stress tests show less-creditworthy corporates are still vulnerable. Under our base case, cash flow negative firms would rise to 11%, from 8% in 2021.
• Severe stress test shows double trouble. We've repeated the tests we last did in July. In our severe test in which interest spreads and inflation increase by 300 bp each, the cash flow negative ratio doubles to 16%.
• China corporates remain most vulnerable. As we expected, the cash flow negative ratio of this cohort rises the most under stress (in percentage point terms). This is followed by Asia-Pacific ex-China and emerging markets, then Europe and North America.

40. Italian Corporate Outlook 2023: High Energy Costs May Constrain Competitiveness, Nov. 15, 2022

• Italy and Germany are the two largest European countries most vulnerable to a gas supply shock, given their heavy use of natural gas and significant dependency for this gas on Russia. The share of electricity production from gas in Italy stands at about 51%.
• First-half 2022 saw still robust demand and pricing power across the sector, despite supply chain disruptions due to the Russia-Ukraine conflict and continued lockdowns in China. For second-half 2022 and into 2023, we anticipate weaker results associated with lower volumes and less favorable pricing due to increased economic risks and inflationary pressure.

41. Japanese Companies Exposed To Russia Have The Finances To Buffer Sanctions Hit, Feb. 25, 2022

• Japanese companies operating in Russia have sufficient financial cushions to weather sanctions on the country. Various sanctions announced, such as tech export bans, and ones that could potentially follow will directly and indirectly affect some Japanese companies. Among these are Japan Tobacco Inc. (JT; A+/Stable/A-1), a leader in Russia's cigarette market, along with general trading and investment companies Mitsui & Co. Ltd. (A/Stable/A-1) and Mitsubishi Corp. (A/Stable/A-1), which own energy and resource assets in Russia, including liquefied natural gas.
• JT has a sufficient financial cushion to underpin our current ratings on the company even if its Russia business worsens somewhat.
• We think Mitsui can absorb potential risk despite relatively high exposure to Russia.
• Mitsubishi is less exposed to Russia than Mitsui. It expects a high net profit of ¥820 billion in fiscal 2021, which should allow it to absorb the present risks.

Cyber

42. Cyber Risk Insights: Ongoing Preparedness Is Key To U.S. Power Utilities Keeping Attackers In The Dark, May 11, 2023

• Electric utilities remain attractive targets for malicious actors attempting to access proprietary customer data or cause economic and social disruptions or for financial gain.
• Although we view a utility's compliance with the North American Electric Reliability Corp.'s cyber standards as providing a high degree of protection, we nevertheless believe management teams must continually update practices to address evolving risks.
• To date, cyberattacks and physical attacks have not led to any rating actions in the power utility sector, partly due to utilities' sound risk management practices.
• We believe a successful attack would harm a utility's finances and reputation, which could adversely pressure ratings.

Economics

43. Prospective Mineral Rush Could Be Major Boost For Sub-Saharan Africa Economies, May 25, 2023

• The upcoming increase in demand for minerals is likely to benefit commodity exporters in sub-Saharan Africa (SSA), in our view.
• Several commodity-exporting SSA economies, particularly ones located in southern and central parts of the continent, may see a significant boost from the increased demand for several minerals that are abundant in the region, such as cobalt, copper, graphite, lithium, magnesium, and rare-earth metals.

44. Economic Outlook Asia-Pacific Q3 2023: Domestic Demand, Inflation Relief Support Asia's Outlook, June 25, 2023

• China's recovery should continue but at an uneven pace, with investment and industry lagging. We have reduced our 2023 GDP growth forecast to 5.2%, from 5.5%.
• Other Asia-Pacific economies are on track to slow due to the global slowdown and interest rate hikes. Still, domestic resilience should ensure meaningful growth.
• Modest sequential core inflation is largely alleviating the need for rate hikes. However, rate cuts will be slow to materialize, in part because of persistent high rates in the U.S.

45. Economic Outlook Canada Q3 2023: A First-Half Resurgence Will Give Way To An Inevitable Slowdown, June 26, 2023

• We have revised up our full-year 2023 growth forecast for Canada to 1.6%, given a surprisingly strong first quarter, though growth momentum will weaken materially in the second half of the year.
• We revised down our GDP growth forecast by 30 basis points to 1.2% for 2024, when the full effects of the Bank of Canada's monetary tightening will take hold in the economy.
• The Bank of Canada's monetary tightening stance is poised to continue in the near term, given persistent above-target inflation. We have penciled in one more rate hike in July and the first rate cut likely in first-quarter 2024.

46. Food Price Shock Reverberates Through MENA Economies, May 26, 2022

• The Russia-Ukraine conflict will likely continue to pressure food and energy markets, given Russia's pivotal role in energy supply and both countries' significant contribution to global agricultural exports.
• Our analysis found that five Middle East and North African countries—Egypt, Jordan, Lebanon, Morocco, and Tunisia—will be among the hardest hit by economic spillovers from the conflict because their net food and energy imports account for between 4% and 17% of their GDP and they source a large part of their cereal supply from Russia and Ukraine.
• We believe rising food and energy prices and supply insecurities, alongside high youth unemployment in these countries, could lead to higher income inequality and pose risks to existing sociopolitical dynamics.
• Fiscal measures to soften the blow to consumers and producers and prevent social discontent will put pressure on post-pandemic fiscal consolidation. A protracted Russia-Ukraine conflict risks worsening the fiscal dynamics of MENA commodity importers.

47. Economic Outlook Emerging Markets Q3 2023: A Slowdown Ahead After Beating Expectations, June 26, 2023

• Despite better-than-expected growth in the first quarter, we continue to forecast a sharp slowdown in 2023 for most emerging markets (EMs), excluding China, following strong growth in 2022.
• Headline EM inflation has dropped, but in emerging EMEA and Latin America (excluding Brazil), it remains above central banks' targets.
• We forecast annual average inflation in emerging Asia (excluding the Philippines) to come within central banks' targets in 2023, but for most other EMs, returning to their central bank targets by the end of 2024 will be a bumpy ride.
• Monetary tightening cycles are at or near the end in most EMs given moderating inflation, weakening growth, and declining long-term U.S. bond yields.

48. Emerging Markets Real-Time Data: Service Sector Resilience Buoys Economic Activity, June 12, 2023

• High frequency indicators are still pointing to better-than-expected activity in the emerging markets, buoyed by activity in the services sectors.
• Indicators tracking China's economy are sending mixed signals. The tourism sector is rebounding, and first-quarter GDP surpassed expectations. But there are signs of weakness in import data and the flow of credit.
• The drop in commodity prices in recent months--and the drop in food prices, in particular--could help put a lid on headline inflation in the emerging markets.

49. Which Emerging Markets Are Most Vulnerable To Rising Food And Energy Prices?, April 21, 2022

• On the external side, emerging economies are generally more vulnerable to higher energy prices than higher food prices.
• The most vulnerable emerging economies are significant net importers of both food and energy.
• Higher food prices are a bigger issue than higher energy prices for households.
• Some emerging economies in the Middle East and North Africa (MENA) region are vulnerable to food-supply disruptions.

50. Economic Outlook Eurozone Q3 2023: Short-Term Pain, Medium-Term Gain, June 26, 2023

• A robust labor market, fiscal measures' effects, and the prospect of further rate rises lead us to amend our GDP forecasts for 2023 to 0.6% from 0.3%, while our forecasts for 2024 are marginally lowered. Disinflation should start to gain pace, although we don't see inflation returning to the central bank's 2% target until 2025.
• We expect the eurozone will emerge from stagflation in the second to third quarters, thanks to disinflation and the first normal tourist season since COVID-19. However, other post-pandemic tailwinds are fading, and higher interest rates are dampening demand.
• Even amid a weakening economic cycle, we do not see the eurozone falling into a deep recession. The medium-term outlook (2025-2026) is brighter than the short-term outlook (2023-2024) because monetary policy should have moved away from restraining demand within two years, the labor market might prove more resilient than in previous slowdowns, and fiscal policy will provide some support through Next Gen EU implementation until end-2026.

51. The Underbelly Of Germany’s Export Prowess, Sept. 7, 2022

• Germany, uniquely among export-driven economies, has become more open over the past few decades and its supply chains have become longer and deeper--and therefore more vulnerable.
• Our analysis of Germany's supply chain has found that the country is about three times more exposed to a risk of deglobalization arising from China than Russia.
• We also determined that supply risks to Russia and China are different. Those regarding Russia are mostly related to backward linkages in low tech, that is, dependency to the country's oil and gas. Supply chain risks to China are mostly forward linkages--that is, German components integrated in Chinese productions--concentrated in high-tech and medium high-tech sectors.
• While Germany could diversify trading partners to reduce vulnerabilities in backward and forward supply trade linkages, innovation, and R&D - therefore investment - could help reduce unbalanced backward linkages, which often rely on hard-to-substitute commodities in the domestic production process.

52. Global Economic Outlook Q3 2023: Higher For Longer Rates Is The New Baseline, June 28, 2023

• Demand pressures remain too strong in many economies, particularly for services. This despite the fastest pace of advanced-country policy rate increases in decades. Labor markets are still tight and core inflation is stubbornly high, although headline inflation has eased.
• Major central banks have more work to do and are now signaling that policy rates will stay higher for longer. Moreover, financial markets agree, and rate cut expectations this year are now off the table. Higher for longer will stay the hand of emerging market central banks that want to cut rates.
• Our revised GDP forecasts generally show faster growth in 2023 and a slower pace in 2024. We have once again pushed out the onset of a material growth slowdown, to later this year. Moreover, we now see a longer and shallower slowdown, and recession probabilities have abated.
• On risks, we are entering a delicate phase for monetary policy given the lags. If inflation remains sticky, rates will need to go higher for longer. But if central banks have over-tightened, growth will slow sharply. The transition to a higher rate regime also has negative implications.

53. Economic Outlook U.K. Q3 2023: Higher Rates Start To Bite, June 26, 2023

• A still resilient economy, stubbornly high inflation, and record high pay growth readings prompted the Bank of England to raise interest rates from 4.5% to 5.0% earlier this month.
• High policy rates, as they feed through the economy, will increasingly restrict growth over the next few years, with the maximum impact expected only at the turn of the year.
• Demand for funding by private businesses has already been deteriorating in response to tighter credit conditions and will likely translate into weak investment spending.
• We now therefore forecast zero growth in the U.K. for 2023, compared with a 0.5% contraction in our previous forecast, and just 0.9% growth in 2024, from 1.5% in our earlier projection.

54. Economic Outlook U.S. Q3 2023: A Sticky Slowdown Means Higher For Longer, June 26, 2023

• Despite 500 basis points of official rate hikes in just over a year, the U.S. economy continues to run too hot: output remains above potential, the labor market is tight, and inflation is too high.
• The necessary slowdown in activity means that policy rates will likely need to go higher and stay there for longer, with a growth slowdown rather than a recession in store.
• The main risk to our forecast is that demand and growth may be stickier than anticipated, leading to more rate hikes and/or higher rates for longer. This will cause more damage to interest rate-sensitive sectors and asymmetrically affect credit conditions.

Financial institutions

55. High Reliance On Russia Could Increase Economic Risk For Armenia's Banking System, May 23, 2022

• Following a recent review, S&P Global Ratings says that it is keeping its Banking Industry Country Risk Assessment (BICRA) of Armenia's banking sector in group '8'. Our BICRAs are on a scale of '1' to '10', with '1' denoting the lowest risk and '10' the highest.
• In our view, economic risk for Armenian banks could potentially rise, due to weakening economic prospects for Russia, Armenia's most important trading partner, as a result of the conflict that started when Russian troops entered Ukraine in February 2022.
• Our baseline assumption is that the most acute impact of the war on key commodity markets, supply chains, and global confidence would occur in the first and second quarters of this year, with a lingering but lesser impact after that. Given the highly fluid and uncertain situation, the consequences for Armenia will be varied. Therefore, we now view the economic risk trend for Armenian banks as negative rather than stable.

56. Asia-Pacific Banks And The Ukraine Crisis: Small Exposures But Secondary Impacts Could Bite, March 15, 2022

• Direct exposures to Russia of Asia-Pacific banks are small and are unlikely--by themselves--to have a broad-based impact on our ratings or outlooks on Asia-Pacific banks.
• Secondary impacts on the real economy and the corporate sector may eventually cause Asia-Pacific banks' asset quality to deteriorate.
• Economic risks, geopolitical risks, and negative event risks such as cyberattacks are meaningful and could yet hit Asia-Pacific bank ratings.

57. Banking Sector Outlook 2023: Central Asia And Caucasus Remain Resilient, Feb. 9, 2023

• We expect the banking sectors of Armenia, Azerbaijan, Georgia, Kazakhstan, and Uzbekistan to continue their post-pandemic recovery in 2023, supported by favorable economic growth prospects despite increased geopolitical tensions in the region.
• An influx of migrants, companies, and money transfers in 2022 boosted economic growth and strengthened banks' funding bases, although this impact will likely be temporary and its magnitude will vary by country.
• Still, weaker global economic prospects than expected, particularly in Europe, potentially volatile commodity prices, and supply chain disruptions might curb growth in markets dependent on commodity export revenue and erode some borrowers' creditworthiness, with a knock-on impact on the region's banks.
• Inflation, volatile currency exchange rates, and the need to refinance external funding remain material risks for the region's banking sectors.

58. EMEA Financial Institutions Monitor 2Q2023: Steering Through Volatility, May 24, 2023

• With persistently high inflation requiring interest rates to remain in restrictive territory (potentially for about two years), financing conditions have clearly deteriorated for retail and corporate borrowers in Europe.
• Tighter financial conditions have also exposed vulnerable financial actors, shaking the market's confidence in banks. Looking ahead, our economists expect that real interest rates will turn positive in 2024, which is usually associated with weaker investment and economic growth.
• Against this backdrop, we expect that banks across Europe, the Middle East, and Africa (EMEA) will remain broadly resilient in 2023. Indeed, the solid capital buffers they have built up over the past few years, as well as their ample liquidity position and generally diversified funding profiles will support their creditworthiness. That said, we will likely see divergences among EMEA banks, with the strength of deposit franchises and credit risk management practices as key sources of differentiation.

59. Middle East And African Banks: Varied Exposure To Russia-Ukraine Conflict, April 4, 2022

• S&P Global Ratings expects rated banks across the Middle East and Africa to suffer little direct fallout from the Russia-Ukraine conflict due to their limited dealings with Russian and Ukrainian counterparties.
• The Turkish and Tunisian banking sectors are most likely to suffer from negative indirect effects, while we expect Saudi, United Arab Emirates, and South African banks will remain relatively insulated.
• The major indirect effects of the conflict will include: Higher oil prices, which will bolster oil exporting economies and weigh on oil importing countries; Higher food prices, leading to inflationary pressure and current account deficits; and Increased investor risk aversion, which could increase vulnerability for banking systems with substantial net external debt.
• This report focuses on the few emerging markets where we have observed significant vulnerabilities, or where we have received specific investor queries relating to the conflict's effects.

60. Where And How External Funding Stress Might Hit Emerging Market Banks, April 17, 2023

• Emerging market banking systems are under pressure from tighter international financing conditions ushered in by higher-for-longer rates.
• Banks' exposure to those pressures can be direct, through their own significant net external debt, or indirect, due to corporate or sovereign weaknesses linked to net external debt.
• Among the five banking systems assessed in this report, Turkiye and Tunisia appear the most at risk.

61. Which Emerging Market Banking Systems Are Most Exposed To External Funding Stress And Why, June 13, 2022

• Major central banks are tightening monetary policy faster than initially expected, which is likely to make global liquidity scarcer and more expensive.
• Some emerging markets banking systems are exposed to this phenomena either directly through their own substantial net external debt or indirectly through exposure to corporates or sovereigns.
• Among the five banking systems we look at in this report, Turkey's and Tunisia's appear the most at risk.

62. The Russia-Ukraine Conflict: European Banks Can Manage The Economic Spillovers, For Now, April 21, 2022

• European banks can manage the economic spillovers from the Russia-Ukraine conflict under our base case that envisages business disruptions in certain corporate sectors and reduced but still positive economic growth in 2022.
• It's undoubtedly a trickier and more uncertain macroeconomic environment than we had envisaged at the start of 2022, and as a result we expect European banks will see lower loan and business growth, as well as a limited uptick in costs. But we do not see these effects as likely to significantly test our view of the creditworthiness of most European banks.
• The conflict has reshuffled and worsened our downside scenarios. European banks are not all equally vulnerable to these downside scenarios, so if they become more likely to play out, we would expect differentiated rating actions--either across national banking sectors or on individual banks.
• If downside risks were to materialize, we would also expect European governments and central banks to intervene to somewhat dampen the effect on the real economy and indirectly on banks.

63. German Banks In 2023: The Sector Is Well Placed To Handle Economic Challenges, Feb. 21, 2023

• Economic risk in Germany remains low by global standards. We revised our economic risk assessment for Germany to '2' from '1' (still among the strongest in the world), which is now in line with that of European countries such as Norway, Switzerland, Austria, and Finland. We see the economic risk trend as stable now, given our view that the resilience of the German economy provides a meaningful buffer against potential further economic downside.
• Germany's dependence on energy imports represents an economic vulnerability. The banking sector and economy have been spared from more severe scenarios due to a relatively mild winter curbing energy demand. Also, the government's efforts to reduce energy dependence on Russia and replace missing gas imports have prevented more severe economic fallout.
• The economic impact of global supply chain bottlenecks also remains a lingering risk. However, we have seen improvements in supply chains and sentiment since China terminated its zero-COVID policy in December 2022.
• We expect house prices to decrease only slightly. We forecast nominal house price declines of 2.0% and 1.0% in 2023 and 2024, respectively. This reflects inelastic and tight supply in housing, a strong labor market, and high household wealth in Germany, partly offsetting the negative effects from the sharp decline in mortgage business in Germany following interest rate hikes.
• Asset quality will weaken slightly. We expect that the German banking sector will see modest increases in credit losses. Germany's banks are bolstered by the economy's demonstrated ability to absorb large shocks.

64. How The Russia-Ukraine Conflict May Affect Multilateral Lenders, June 16, 2022

• Multilateral lending institutions (MLIs) with significant exposure to Russia, Belarus, or Ukraine face asset-quality issues, alongside potential weakening of policy relevance and shareholder realignment, as the impact of Russia's military actions in Ukraine spreads across the region.
• Our stress tests on six such MLIs indicate pressure on the three smallest if many of their borrowers were to default, although this is unlikely since a large amount of loans are to state-owned companies and government-guaranteed projects.
• At this stage, we see a very low likelihood of MLIs facing sanctions or having operational difficulty in paying creditors.
• All six entities have robust liquidity but, for three of them, if the current restricted access to capital markets persists for an extended period, it could eventually erode that position.

65. How The Conflict In Ukraine Is Affecting Financial Institutions Ratings, March 4, 2022

• The Ukraine conflict and the imposition of sanctions potentially carries financial sector implications far beyond the battle zone.
• So far, we have taken negative rating actions on financial institutions in Russia, Ukraine, and Belarus, many of them linked to rating actions on the sovereigns and our view of the deteriorated operating environment.
• Four European banking groups have sizeable Russian and Ukrainian exposures, but we see this as more meaningful for some than others, and we anticipate that all will demonstrate resilience.
• Direct exposures for other banks in Europe, as well as globally, are limited.
• Nevertheless, we remain mindful of the potential for significant second order effects from the conflict, which could yet lead us to revise down our base case assumptions about the operating environment, most obviously in EMEA.

66. Financial Stability Risks Stemming From Sanctioned Russian Bank Subsidiaries In Kazakhstan Have Been Limited, July 7, 2022

• Financial stability risks stemming from sanctioned Russian banks' subsidiaries in Kazakhstan have been limited.
• Following the outbreak of the Russia-Ukraine conflict, the EU and the U.S. introduced wide-ranging sanctions against major Russian banks Sberbank, VTB Bank, and Alfa Bank. This increased scrutiny of these banks' significant operating subsidiaries in Kazakhstan. The effective suspension of operations and uncertainty regarding depositor confidence were major and systemic, since these Russian banks' subsidiaries represented about 14% of systemwide customer deposits as of Feb. 1, 2022. However, these Russian banks' Kazakhstan-based subsidiaries have since rapidly downsized their operations to about 2% of the systemwide deposit base.
• The Kazakh banking sector has absorbed the short-term effect of the shock amid a rapid realignment of market structure. At the same time, the banking sector's reshaped structure has further increased the larger banks' market concentration, which could make the competitive environment more challenging for smaller players.

67. Credit FAQ: The Significance Of Some Russian Banks Being Excluded From The SWIFT System, March 4, 2022

• On March 2, 2022, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) confirmed it will disconnect seven Russian banking groups from its financial messaging system on March 12, at the request of the EU and international partners. This system underpins the majority of international interbank payments.
• These seven banks are already subject to economic sanctions by the EU and other G7 countries. In combination, these measures deny or significantly diminish the access of the Russian banking system to the global financial system, markets, and infrastructure. At the same time, sanctions targeting the Central Bank of Russia's (CBR's) foreign exchange reserves are undermining its ability to act as a lender of last resort.
• We answer some questions about the SWIFT cutoff, the other sanctions, and their effect on the Russian banking system in this FAQ.

68. Cryptos Won't Blunt The Sting Of Sanctions On Russia, March 4, 2022

• In our view, cryptocurrencies are increasingly perceived in Russia as a store of value that can protect wealth against ruble devaluation and related asset deflation.
• The scale of crypto use is not broad enough to allow Russian entities to effectively evade financial isolation due to sanctions.
• We expect a pick-up in the pace of regulation on crypto.

69. Ukraine Banking Sector 2023 Outlook: Regulatory Support Is Crucial To Navigate The War, March 20, 2022

• Thanks to regulatory forbearance, Ukrainian banks continue to serve their customers, providing services electronically and through branches.
• The restructuring and recovery of the banking sector will be a part of a bigger post-war recovery plan for Ukraine.
• We expect the structure of the banking system to remain stable in 2023, with the largest banks preserving their market positions and limited consolidation among smaller players so long as the active phase of the war continues.
• We expect that asset quality will further deteriorate and cost of risk will remain very high in 2023. • Profitability will vary markedly, with many banks set to post losses or results significantly below their historical averages.
• We expect deposits to remain stable, supported by increased interest rates and the government's wage payments to the military and government employees.
• Limited new lending and National Bank of Ukraine (NBU) support should benefit banking sector liquidity.

70. U.S. Financial Institutions Ratings See Some Indirect Increased Risk From The Armed Conflict In Ukraine, March 17, 2022

• We believe the direct impact of the armed conflict in Ukraine will be limited for U.S. financial institutions, but the situation has increased uncertainty globally and could lead to indirect effects on the sector.
• The main risks to U.S. financial institutions are settlement and counterparty risk, as well as the asset quality impacts from increased volatility and inflation.
• Still, we do not expect the direct or indirect consequences of the armed conflict, on their own, to lead to immediate rating actions.

Infrastructure

71. Renewables Are The Best Way To Ensure Energy Security, Say Panelists, May 23, 2022

• Panelists at our recent Asia-Pacific conference discussed the "trilemma" of energy transition: (1) decarbonizing while (2) ensuring affordability and (3) promoting energy security.
• Nearly 60% of Asia-Pacific power generators are exposed to environmental risk factors, worth about US$500 billion of rated debt.
• Investors are increasingly assessing investment risks with an ESG lens and seek greater disclosures and transparency.

72. EMEA Utilities Outlook 2023: Germany And Austria | A Testing Year For Credit Quality, Jan. 27, 2023

• Germany and Austria will emerge from the winter with larger gas storage levels than expected, which should help reduce gas and power prices and risks in the region related to next winter, but we expect the market will remain volatile at least until 2024, requiring prudent liquidity management even though utilities are better prepared for a liquidity shock.
• We expect inframarginal power generation companies we rate can still capture higher power prices than historical averages despite the implementation of temporary windfall taxes, so such taxes should not impair credit quality.
• We expect utility companies to increase capital expenditure (capex), which is needed to reach the intermediate target of 100 grams of carbon dioxide (CO2) per megawatt hour (/MWh) by 2030, thereby speeding up the energy transition while supporting security of supply.
• Renewable power producers will fare better than other inframarginal power generators over the medium term, in our view, with low marginal costs strengthening their competitive advantage.
• Grid operators will remain key enablers of the energy transition as they roll out investments to connect new decentralized power generation to the grid, but likely with temporary cash flow mismatches as capex is funded at the current cost of capital while regulatory remuneration will only catch up with a lag.

73. Eastern European Utilities Handbook 2023 , Jan. 5, 2023

• We rate 16 utilities in the Central and Eastern Europe (CEE). This includes five regulated operators of power, gas, and water networks, eight integrated utilities, and two pure generation players.
• In 2023, we expect fixed-cost power generators and network operators with more supportive regulatory frameworks will continue to see earnings performance improve. The former will benefit from increasing profits thanks to low production costs, while the latter should be able to pass on cost increases in a timely manner to final customers.
• Meanwhile, companies with production shortfalls (or short in generation) will continue to suffer from earnings or liquidity events, in our view, absent government intervention.
• That said, we believe CEE governments will likely continue to support liquidity shortfalls for utilities, while using windfall taxes to curb excessive profits. We consider governments and regulatory frameworks in the region generally less supportive than those in Western Europe though and will closely monitor how governments support utilities in case of need.
• Utility companies' adjusted debt related to nuclear activities should drop as long-term yields increase, given the formula for calculating asset-retirement burdens. This could have notable impact in the larger Eastern European economies where nuclear makes up a large and increasing share of power generation.

74. Europe's LNG Focus Can Bring Pain As Well As Gain For Utilities, Nov. 9, 2022

• Europe's forced replacement of nearly 80% of Russian gas supply, mainly by buying liquefied natural gas (LNG), makes its gas balance tight, pricing dynamics riskier, and policymaking more complex, but can benefit utility companies that already have or plan to build LNG infrastructure.
• We estimate that Europe needs a massive amount of LNG--about 150 billion cubic meters (bcm) annually--through 2025, nearly 65% more than the 90 bcm it purchased in 2021; but its utilities face intense competition, especially from China, in a global sellers' market.
• They also face credit risks if LNG prices go way beyond our base case of $40 per mmBtu in 2023 and $25 thereafter, threatening earnings and liquidity, or if assets become stranded after 2030 as Europe fulfils its decarbonization ambitions.
• We also see new areas of risk for security of supply, given Europe's dispersed LNG buying from few global suppliers and supply chain bottlenecks that could hamper delivery to end users, particularly in southern Germany and central Europe.

75. What Europe's Energy Redesign Might Mean For Its Power And Gas Markets, Sept. 13, 2022

• The EU is considering several policy actions to address the energy crisis, including decoupling gas and other power prices and capping the price of EU gas imports or gas used for power generation. Mandatory demand-curbing measures, including on power, are also on the table.
• Additionally, to preserve financial system stability Europe is addressing the severe liquidity concerns of some power exchanges and market participants, with the Swedish, Finnish, and U.K. governments separately having announced liquidity facilities to solvent participants together worth over €80 billion.
• Meanwhile U.K. policy proposals aim to curb energy costs for households and businesses by capping the per unit cost. Further reform could come while incentivizing oil and gas production, possibly even fracking.
• We believe the success of these actions at helping exchange markets return to functioning as intended, reducing price volatility, and allowing utilities to hedge earnings for a bearable liquidity burden will ultimately depend on how swiftly they are implemented and how they work together.
• While government financing of measures appears feasible (including in the U.K.), the implementation will be complex in the very fragmented European power markets and take time, raising further pressure on affordability and demand destruction.

76. Nord Stream 1 Shutdown: Will Utilities And Markets Freeze This Winter?, Sept. 6, 2022

• The indefinite closure of the Nord Stream 1 pipeline adds to existing pressure on gas and power prices in Europe and highlights the already acute question as to who will bear the resulting massive financial burden.
• Despite unprecedented government intervention on markets and specific utilities, the inevitable redesign of the gas and power market will be complex and bears many risks for rated utilities this winter. Windfall taxes may also dent earnings upside for unhedged fixed-cost power generation.
• We believe liquidity risks for rated utilities are up considerably in this extreme price environment, which has triggered massive hedge collateral posting movements. However, European governments appear increasingly willing to support liquidity on energy exchanges and at domestic utilities.

77. The Dash For Gas Fuels Risks For European Utilities, Slows Energy Transition, June 29, 2022

• The Russia-Ukraine conflict is aggravating heavy, preexisting imbalances in European gas markets ahead of a crucial winter. Uncertain and costlier gas supplies are reducing sector visibility. High and volatile gas and power prices lessen affordability and are prompting government action. Plus, security of supply worries are leading to increased use of fossil fuels, notably coal, which may slow the energy transition.
• As a result, we see the sector as riskier, featuring increasingly divergent credit paths. Low-cost generators with high availability are increasingly capitalizing on high power prices, and regulated operations should continue to prove resilient. However, higher debt costs, government measures to support affordability, as well as higher interest rates and inflation could tighten ratings headroom.
• A gas bridge to make the energy transition is still needed, especially as Russian supplies drop before Europe can tackle the challenge of building renewable capacity, which will increasingly temper power prices in the last half of the decade.
• By the end of the decade, Europe's push to accelerate the energy transition could reshape power and gas markets. Policy responses aim at reconciling security of supply, affordability, reliability, and the acceptance and feasibility of accelerated renewables deployment. However, this combination of objectives may prove difficult to achieve.

78. How The Russia-Ukraine Conflict Affects European Infrastructure Companies, March 15, 2022

• S&P Global Ratings anticipates that the Russia-Ukraine conflict is likely to have secondary effects that may hurt infrastructure businesses in Europe, the Middle East, and Africa (EMEA), beyond those directly affected because they trade in Russia or Ukraine.
• We also consider that some infrastructure companies--most notably airports and seaports--have a degree of direct exposure to the region, for example, in terms of air traffic or sea freight volumes.
• The secondary effects derive from the economic fallout of the conflict, such as inflationary pressures, soaring commodity and energy prices, and potentially weaker consumer confidence.
• Weaker growth and capital market volatility may have a more severe and generalized impact on infrastructure companies' credit quality, depending on the headroom and liquidity position of each company. Hence, we will analyze the exact impact on each rated company on an individual basis.

79. Extremely High And Volatile Gas Prices Signal A Structural Shift In Europe's Energy Market, March 17, 2022

• Elevated and extremely volatile European gas prices reflect mounting risks related to gas supply from Russia, and Europe's strong political push to diversify away from Russian gas, on top of an already tight supply-demand situation before the Russia-Ukraine conflict.
• S&P Global Ratings believes this situation, alongside evolving regulation on the gas and energy sector, the EU's steps to secure alternative gas supplies or fuels, and efforts to redirect liquefied natural gas (LNG) cargoes could eventually reshape Europe's energy market.
• This year, we expect to see power prices reaching unprecedented levels, possibly well above €200 per megawatt hour (/MWh) in some major European markets, versus about €120/MWh on average for the largest markets in 2021.

80. Europe's Exit From Russian Gas: 10 Questions On Utilities, March 17, 2022

• Europe's proposal to slash Russian oil and gas imports in light of the Russia-Ukraine conflict will lead to even higher gas and power prices, increased risk of gas shortages, and, we believe, a faster decline of the gas utilities sector as consumers find alternatives.
• Increased political intervention in the energy market, possibly via state aid, profit clawbacks, and price caps, appears inevitable as governments seek to ensure that energy remains affordable.
• Further acceleration of power generation from renewables and renewable gases (biomethane and hydrogen) could boost investments, if supported by state funding, but we see major hurdles for Europe in delivering on those plans.
• European countries appear increasingly open to an alternative energy market design, which could be a game changer for the sector in the longer term.

81. From Lots To Lack: Liquefied Natural Gas' Wild Ride, Jan. 24, 2023

• The liquified natural gas (LNG) market continues to commoditize, with growing levels of spot and short-term trade and more LNG contracted on a free-on-board (FOB-- offtakers are responsible for shipping costs) basis rather than delivered ex-ship (DES).
• Portfolio players increasingly dominate the global market
• North American LNG is lifted FOB with no destination restrictions, making it attractive to portfolio players and utilities.
• As the market moves sharply into deficit through 2026, North American LNG is becoming a leader in supply and demand, reinforcing its position as one of three of the world's largest sources of LNG supply.
• North American (mostly U.S.) LNG supply accounted for 43% of the capacity that took final investment decisions (FID) from 2010-2019 and is forecast to account for about 25% of global supply in 2040.

Insurance

82. Global Insurance Markets: Inflation Bites, Nov. 30, 2022

• Inflation, and to some extent, competition, in key retail lines (motor and medical) should drag on insurers' underwriting performance in 2022-2023.
• Return on equity (ROE) could deviate from our forecasts, since investment results remain uncertain and may be volatile.
• The increase in interest rates by central banks to tackle inflation is causing mark-to-market losses. However, many insurers hold their fixed-income portfolios to maturity, so these unrealized losses are unlikely to fully crystallize.
• Reduced purchasing power due to the increased cost of living may slow premium growth, notably for life insurers. In contrast, many property/casualty (P/C) lines are mandatory, and P/C insurers are increasing premiums to adjust for inflation.
• For many life markets that are still exposed to traditional products with guarantees, the rising interest rate environment should ease the pressure on capital and reserve requirements.

83. Cyber Risk In A New Era: The Rocky Road To A Mature Cyber Insurance Market, July 26, 2022

• Cyber insurance is the fastest-growing subsector of the insurance market, though substantial price increases rather than underlying growth in the size or volume of contracts is responsible for much of the recent increase.
• A growing number of (re)insurers are hesitating to underwrite larger risks, and some have decreased their risk appetite, due to the increased frequency and severity of cyber attacks and greater systemic vulnerabilities.
• The need to continually reassess evolving risk exposures is a challenge for (re)insurers, and dynamic contract conditions are likely to prove an enduring characteristic of the market.
• Clear policies, with precise wording, are key to the sustainable development of the cyber insurance market, as highlighted by concerns about the contractual treatment of cyber warfare in the wake of the Russia-Ukraine conflict.
• A disciplined and targeted expansion into cyber insurance that meets policyholders' needs could support issuers' creditworthiness, enhance their reputations, and leave successful (re)insurers better prepared for the next growth opportunity.

84. Russia-Ukraine Conflict Adds To A Bumpy Start To 2022 For Global Reinsurers, March 31, 2022

• The Russia-Ukraine conflict will add uncertainty and exacerbate earnings volatility in global reinsurers' specialty lines, although their direct asset exposure is minimal.
• Our scenario analysis indicates that losses from specialty lines are likely to be an earnings event for most reinsurers, but could become a capital event for a few outliers. We believe global reinsurers will likely assume about one-half of the potential specialty insurance losses.
• Our sector outlook on the global reinsurance industry is negative, reflecting ongoing challenges to meet cost of capital, worsened by first-quarter natural catastrophe losses, the Russia-Ukraine conflict, and rising inflation.

85. Bulletin: Credit Quality Of Insurers Is Weathering The Geopolitical Storm, March 4, 2022

• For the many insurers headquartered outside Russia that have exposure to the country, their exposure is small enough and their capital strong enough for them to avoid a deterioration in credit quality. The same is true for insurers and reinsurers with no direct exposure to Russia, but we continue to assess the impact of macroeconomic and financial market volatility on balance sheets.
• It should be noted that insurers not headquartered in Russia have exposure to the country as well. We believe that for most of these insurers, asset and insurance liability exposure is less than 2% of total adjusted capital or below 1% of total assets and liabilities, or both. We believe the capital positions of European insurers are a key strength. Therefore, we do not expect invested asset volatility in Russia or local liabilities to lead to negative rating actions.
• Many global and regional reinsurers have exposure to Russia, as well as some industrial line writers. As of now, we believe global reinsurers' exposure is very limited.

86. Taiwan Life Insurers' Russia Exposures Look Manageable, Feb. 23, 2022

• Taiwan's life insurance sector's high allocation to foreign-currency investments includes bond investments in Russia. That makes the sector exposed to unfavorable volatilities from escalating geopolitical tensions between Russia and the Ukraine and West.
• However, we see the Russia investment exposure as manageable.

Leveraged finance

87. A Choppy Return For Corporate High-Yield Issuance On The German, Swiss, And Austrian Markets, Sept. 30, 2022

• Corporate high-yield issuance in Germany, Austria and Switzerland (DACH) is likely to be choppy over the second half of 2022, following an initial six months of thin activity in primary bond and loan markets that left total volumes about two-thirds below the same periods in 2020 and 2021.
• Sluggish primary markets and increased rates on refinanced debt are adding to pressures on issuers in DACH, which already dealing with strains on profitability and consumer demand due to inflation. These strains are reflected across Europe, where we expect the trailing 12-month speculative grade corporate default rate to reach 3% by June 2023, up from 1.1% in June 2022.
• S&P Global Ratings expects DACH speculative-grade issuers will remain an attractive target for leveraged buyouts (LBOs) due to the high proportion of companies with leading niche positions--especially in chemicals, health care, and capital goods companies with limited revenue exposure to China.
• LBO driven demand for financing should provide support for debt issuance once markets stabilize, possibly from 2023.

Metals and mining

88. U.S. Coal Companies’ Profits Burn Hot, Melting Debt Against A Bleak Global Backdrop, May 17, 2023

• U.S. coal companies have used record cash flows to build credit defense as they head into a period of moderating coal prices and demand.
• We expect coal companies will continue to maintain low levels of debt after reducing adjusted debt by 50% between 2019 and 2022.
• Seaborne metallurgical (met) coal, or steelmaking coal, continues to provide some diversification for pure thermal coal players, despite its own inherent risks and pressure from decarbonizing steel.
• With few growth opportunities in the core thermal coal business and low levels of funded debt, these companies likely have room for shareholder returns after funding obligations such as asset retirement costs and pensions.
• Banks and fixed-income investors continue to reduce their coal exposure on the path to meeting greenhouse gas reduction targets.

89. S&P Global Ratings' Metal Price Assumptions: Short-Term Fundamentals Remain Favorable Despite Volatile Conditions, April 11, 2023

• We're slightly increasing most of our metal price assumptions for 2023 because we forecast markets to improve somewhat given stronger Chinese demand and the potential for some moderation in U.S. monetary policy.
• Metals and mining companies' credit profiles remain largely stable despite still high inflation and notably lower prices than the peak levels seen in 2021. We expect to see capital allocation moderate and a persistent trend of lower leverage and high cash distribution to shareholders.
• We continue to expect good medium-term fundamentals for base metals and short-term fundamentals for thermal coal prices due to regional natural gas shortages.

Oil and gas

90. South And Southeast Asia Oil Nationals To See Revenue Boost As Europe Looks East For Energy Supply, March 6, 2022

• Europe is likely to look to Asia to bridge any potential supply gap from Russian imports for its energy supply. The result will be higher revenues for many national oil companies (NOCs) in South and Southeast Asia. Some of this will be offset by higher costs at NOCs' downstream operations.
• Given the integrated, diversified business models of many hydrocarbon companies in South and Southeast Asia, the impact on revenues and margins will vary. For example, some companies rely on fuel imports. Downstream refining activities and subsidized fuel distribution are also likely to suffer.
• Demand for liquified natural gas (LNG) will likely spike the most as a result of the sanctions on Russia. Given that the NOCs' sales volumes are secured under long-term contracts, many of which have destination clauses, it's unlikely that significant spare capacity can be immediately redirected-- keeping prices elevated in the near-term.
• Of the South and Southeast Asian NOCs that we rate, most derive 60%-70% of their EBITDA from exploration and production of hydrocarbons. Petronas has a sizable LNG portfolio, as one of the world's leading LNG players, with more than 20% of its product revenues coming from LNG sales.

91. China's Refiners Feel The Heat As Oil Nears US$130, March 7, 2022

• Chinese national oil companies (NOCs) are feeling the heat of tension in Europe. Their refining operations will take a hit as crude oil nears US$130 per barrel, as this may trigger discounts to the degree of cost pass through.
• While the upstream business of these companies will continue to gain from higher oil prices, special-gain levies or windfall taxes will take away some of this uplift.
• The credit profiles on the Chinese NOCs remain intact due to their balance sheet strength, the prospect for increased upstream profits, and our assumption that oil price will eventually normalize.

92. Clear LNG Outlook Could Turn Murky Near End Of Decade, June 27, 2023

• Global events over the last couple of years have reconstituted the energy landscape and led to severe volatility and price hikes while bringing the topic of energy security to the forefront.
• The situation was never more apparent than in Europe, where Russia, following the West's embargo of Russian oil and oil products, retaliated by drastically curtailing gas exports to the EU, which relied on Russia for 40% of its gas demand in 2021.
• Russian pipeline exports to the EU and UK fell significantly to only 62 billion cubic meters (bcm) in 2022 from 139 bcm in 2021. The loss of Russian pipeline gas represented about 3% of the global market. With the global gas markets suffering a major shock, liquefied natural gas (LNG) drew renewed interest and attention as one potential remedy to address energy security concerns in Europe.

93. S&P Global Ratings Lowers Hydrocarbon Price Assumptions On Moderate Demand, June 22, 2023

• S&P Global Ratings has lowered its Henry Hub, Canadian AECO, and Dutch Title Transfer Facility (TTF) benchmark natural gas price assumptions for the remainder of 2023.
• We have also lowered our Henry Hub price assumption for 2024 and our TTF price assumptions for 2024-2025. These prices have been lowered primarily in response to lower demand for natural gas and high inventory levels.
• In addition, we lowered our West Texas Intermediate (WTI) and Brent oil price assumptions for the remainder of the year and affirmed all other years. Our 2025-2026 long-term Henry Hub and AECO natural gas and our 2026 TTF price assumptions are unchanged.

94. S&P Global Ratings Cuts 2023 European, U.S., And Canadian Gas Price Assumptions On Lower Demand, Feb. 24, 2023

• S&P Global Ratings has cut its U.S. Henry Hub, Canadian AECO, and Dutch Title Transfer Facility (TTF) benchmark natural gas price assumptions for 2023 and 2024, primarily in response to lower demand for natural gas.
• Our 2025 long-term Henry Hub, AECO, and TTF natural gas price assumptions and our West Texas Intermediate (WTI) and Brent oil price assumptions are unchanged from those published Jan. 10, 2023.

95. S&P Global Ratings Lowers 2023 European And U.S. Gas Price Assumptions On More Balanced Supply And Demand, Jan. 10, 2023

• S&P Global Ratings has significantly reduced its European Title Transfer Facility (TTF) and Henry Hub price assumptions for 2023. Our 2024 and 2025 TTF and Henry Hub assumptions and all our Brent and West Texas Intermediate crude oil and AECO natural gas price assumptions are unchanged.
• We now use a TTF assumption of $30 per million British thermal units (/mmBtu) for the rest of 2023--equivalent to about €100 per megawatt hour (/MWh)--down from $40/mmBtu. Our TTF price assumptions for 2024 and 2025 are unchanged at $25/mmBtu and $20/mmBtu respectively. The TTF 2023 price revision primarily reflects the steady, and above-expectation, underlying reduction in Europe's demand for natural gas, which we estimate exceeded 20% over August-December 2022. We expect much of this demand reduction, which was material even with normalized temperatures, to be sustainable.
• We now use a Henry Hub assumption of $4/mmBtu for the rest of 2023, down from $5.25/mmBtu. Our Henry Hub price assumptions for 2024 and 2025 are unchanged at $4.5/mmBtu and $2.75/mmBtu respectively. The revision to the 2023 price reflects the precipitous decline in the Hub futures curve, primarily due to unseasonable warm weather, increasing inventories and the Freeport liquefied natural gas (LNG) facility in Texas, U.S., still being offline. Among supporting factors, we note that Freeport is expected to be operational again in early February, inventories are slightly below five-year averages, and China's reopening could increase demand for U.S. LNG and related upstream gas production.

96. Wild Swings In Oil And Gas Prices: What Are The Drivers And Where Do We Go From Here?, March 24, 2022

• The climate for the global oil and natural gas markets can best be described as one of extreme nervousness, uncertainty, and volatility. A plethora of factors are fueling it, including concerns about supply, rising COVID cases in China, and low global inventory levels. Geopolitical events, which are always a factor in oil prices, are probably a well-above-average influence given the crisis in Ukraine.
• In this FAQ, S&P Global Ratings responds to frequently asked questions on the topic. The questions addressed are as follows: What is driving the volatility in oil and natural gas prices? What does the U.S. sanction of Russian crude mean for the U.S.? What about possible EU sanctions? What about Iranian/Venezuela production? What are some of the implications due to withdrawal by several major oil companies?

97. Japan's LNG Supply: On Solid Ground?, Jan. 6, 2023

• Economic headwinds and a correction in the property sector will continue to squeeze the credit profiles of Chinese local governments.
• LNG will trump renewables and nuclear power to hold key energy resource status and underpin Japan's energy supply until at least 2030.
• Supply headwinds should be offset by Japan's long-term agreements for LNG, as well as the geographic diversity of upstream projects and pricing formulas that keep market volatility at bay for now.
• Global gas shortages and increasing competition are big risks; adverse conditions could over the medium-term pressure Japan's electric and gas utilities' earnings, and consequently their stand-alone credit profiles (SACPs).

98. Qatar Could Gain As Europe Diversifies From Russian Gas, March 16, 2022

• In the short-term, QatarEnergy (QE) could divert only some of its liquefied natural gas (LNG) volumes to help bridge the gap if Russian gas imports to the EU and U.K. are significantly curtailed, or to support the EU's diversification efforts.
• Most of QE's gas contracts are long term, expiring after four years or more, with divertible shipments accounting for 10%-15% of its total LNG export volumes at best. We estimate diverted Qatari LNG could cover about 13% of Russian gas imports to the EU and U.K.
• We see modest monetary benefits to QE from diverting LNG to Europe from Asia, given relatively small volumes but currently higher spot prices for gas in Europe.
• Qatar could play an important role in European governments' plans to be independent of Russian oil and gas by 2030. Qatar is embarking on an investment program to significantly increase LNG production capacity to 126 million tons per year (mtpa), from 77 mtpa, by 2027.

Public finance

99. Central And Eastern European Local Governments Weather The War But Face Higher Spending, Oct. 27, 2022

• We believe elevated inflation will mean increased revenue for most local and regional governments (LRGs) in Central and Eastern Europe (CEE) this year, but expenditure will likely catch up by 2023.
• The Russia-Ukraine war could further dent economic growth in the region and LRG revenue bases in the medium term.
• Budgets could also be hit by additional fiscal costs of refugees, investment rigidities, and higher interest expenditure than we currently project over the short-to-medium term.
• In addition, higher energy prices may pose a risk, especially for LRGs with large energy-sensitive municipal companies.
• In our stress scenario, we found six of 11 rated CEE LRGs can absorb additional borrowing equivalent to about 30% of operating revenue over 2023-2024 without a material hit to credit quality.

Retail

100. European Retailers: Forced To Raise Prices While Wary Of Consumers Cutting Back Spending, June 9, 2022

• While rated retailers in Europe have endured and largely overcome the pandemic's hardships, they continue to face supply chain constraints and disruption, and are forced to pass on higher input and operating costs to consumers.
• The first quarter of 2022 and year-end 2021 results from European retailers show a sound operating performance on the back of strong consumer demand--even amid rising prices--that is largely supported by household savings.
• At the same time, deteriorating global macroeconomic conditions, heightened geopolitical uncertainty, and persistent inflation affecting essentials such as fuel, energy, and food, and rising interest rates have begun to hit lower- and middle-income households and consumer confidence.
• We expect retailers and restaurants will experience margin pressure and increased volatility in their top lines over the next few quarters as consumers gradually cut back on discretionary spending and become more price conscious in the face of falling real incomes.

Sovereigns

101. Credit FAQ: Dubai's Debt Reduction Strengthens Government Balance Sheet, May 22, 2023

• S&P Global Ratings expects Dubai's government debt burden will decline as a share of GDP amid robust economic growth.
• We forecast a reduction in government debt to about 51% of GDP in 2023 from a cyclical high of 78% in 2020. The government's debt stock could fall even faster if the reduction in nominal debt, which occurred in 2021 and to a more significant extent in 2022, continues over the coming years. Nevertheless, broader public sector debt will remain high at about 100% of GDP, when considering liabilities from nonfinancial government-related entities (GREs) of about 48% of GDP.

102. EMEA Emerging Markets Sovereign Rating Trends 2023: Through A Glass Darkly, Jan. 26, 2023

• 2022 saw the most sovereign defaults (four) in emerging markets (EM) EMEA this century.
• Including Russia, our GDP-weighted average EM EMEA foreign currency sovereign rating would have declined by nearly two notches during 2022, after Russia defaulted by using local currency to service its commercial foreign currency obligations on April 4, 2022.
• At the beginning of 2023, the balance of outlooks on the 55 EM EMEA sovereigns we rate remains negative by a factor of 2 to 1, barely changed from end-2021.
• The external environment however is notably improving as easing global inflation, a weaker dollar, and China's reopening are all supporting a (selective) return of portfolio capital inflows into EM EMEA assets.
• Despite this relief, EM EMEA's macroeconomic fundamentals remain strained. There is more sovereign debt today than two years ago, and it costs more to service. The deceleration in inflation is uneven. Finally, a series of high-stake EMEA elections is scheduled for this year with major implications for debt sustainability and growth.

103. CEE And CIS Countries Turn Away From Russia, May 23, 2022

• Although the Russia-Ukraine conflict has caused a marked shift to the economic outlook in Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) region, sovereign ratings in these areas have so far remained largely resilient.
• War is inherently unpredictable, but our baseline expectation is that the conflict will not expand to include any NATO members.
• Direct trade and financial linkages between CEE/CIS countries and Russia and Ukraine are often limited. The most important direct linkages that exist are related to energy imports from Russia and financial ties from remittance flows.
• Second-round effects, such as the economic slowdown in other trading partners, or rising energy and food prices, will have a similar effect on sovereigns in the region as they do on other sovereigns globally.

104. Central and Eastern Europe Sovereign Rating Outlook 2023: The Top-Five Risks, Feb. 6, 2023

• The Russia-Ukraine conflict will continue to weigh on CEE sovereigns' growth, balance of payments, fiscal and inflation outlooks in 2023.
• Strong macroeconomic fundamentals before the war allowed the region to absorb the immediate war-induced negative effects, but sovereign credit pressure is building up.
• Despite a somewhat improving external environment early this year, four out of the 11 rated CEE sovereigns carry a negative rating outlook.
• Factors that could undermine CEE sovereign credit quality in 2023 include a sharper economic downturn; disruptions in EU transfers; elevated fiscal deficits; balance of payments pressures; and monetary policy missteps.

105. European Developed Markets Sovereign Rating Trends 2023: Soft Landing, Hard Constraints, Jan. 30, 2023

• The second-round effects of the Russia-Ukraine war on developed European economies' balance of payments, fiscal positions, and inflation rates led us to introduce seven negative outlooks on developed European sovereigns last year. We have one on positive outlook: the Republic of Ireland.
• Costly interventions to mitigate the drain on growth and confidence from the pandemic and the war have consumed most of European sovereigns' remaining monetary and fiscal flexibility.
• Fortunately, European developed sovereign debt profiles are long-dated enough to prolong the convergence of their average cost of total debt toward market rates, while floating rate and/or inflation indexed debt is fairly modest except in the U.K. (26%) and Italy (11%).
• At the same time, the recent easing of natural gas prices, and headline inflation, amid signs of resilient labor markets and demand, suggest that most euro area economies will avoid a recession this year.
• China's reopening will also likely support euro area export growth, while the 13% appreciation of the euro versus the dollar should help anchor disinflation and smooth the ECB's interest rate path after a pair of 50 basis point rate hikes in February and March.

106. CEE Cities Are Withstanding Russia-Ukraine War Risks, At Least For Now, May 30, 2022

• Rated cities in Central and Eastern Europe (CEE) face numerous challenges as a consequence of the ongoing Russian invasion of Ukraine.
• Beyond the broader effects of higher inflation and lower GDP growth, they are vulnerable to peculiarities of their economies, their locations, and relationships with municipal companies. Much depends on their energy exposure and mix.
• We believe that, for now, the CEE cities we rate have sufficient buffers and flexibility to mitigate arising financial costs, but the overall credit impact will depend on the duration and severity of the conflict.

107. Oiling The Economy: EU National Strategic Oil Reserve Agencies’ Actions Reflect Their Central Role For Governments, March 22, 2022

• The sale of oil by EU strategic reserve managers illustrates that these entities are fulfilling their critical role for their states. However, we don't believe this will have a meaningful impact on their financial positions.
• On March 1, the member countries of the governing board of the International Energy Agency (IEA) agreed to release 62.7 million barrels of oil from their emergency reserves to soften the shock to oil prices of the conflict in Ukraine.
• Given the persistent oil price pressures, we believe further barrels could be released from the strategic reserves. This may include some held directly by the national strategic oil reserve managers, where they initially relied on private oil operators.
• We view the current and any further potential policy action as fully aligned with the agencies' mandates and evidence of the critical role they play for, and their integral link with their respective governments.

108. Sovereign Debt 2023: Borrowing Will Stay Elevated Despite Rising Cost Of Debt, March 9, 2023

• We estimate sovereign borrowing will remain high and reach $10.5 trillion in 2023, nearly 40% above the historical average before the COVID-19 pandemic.
• Developed Europe and Latin America will post the biggest increases in borrowings amid stagnant growth and budgetary pressures, including from high energy prices.
• Globally, we project the net cost of energy-related fiscal measures to reach a sizable $1.65 trillion in 2022-2023 (1.7% of global GDP).
• Tighter for longer monetary policies will keep sovereign borrowing costs at levels not seen in the past decade, more than doubling issuance costs for advanced sovereigns and keeping them high for emerging market sovereigns.
• Given the generally shorter debt profiles and reliance on foreign currency debt, the effective cost of servicing debt for emerging market and frontier sovereigns is rising fast, presenting a growing credit risk.

109. Global Sovereign Rating Trends 2023: We’re Not Over The Hump Yet, Jan. 26, 2023

• After two years of recovery and expansion, we expect the world economy to slow down markedly, though the reopening of China could give a boost to our outlook.
• Rising global interest rates will likely remain high through 2024, posing more risks for sovereigns heavily reliant on external funding and those with large debt stocks.
• Geopolitical uncertainty, the ongoing war in Ukraine, and a polarized social context present ongoing challenges for the global economy.
• While the majority of our sovereign ratings have a stable outlook, overall creditworthiness continues to deteriorate, with more than 10% of our portfolio starting 2023 with negative outlooks.

110. Introduction To Supranationals Special Edition 2022, Oct. 11, 2022

• Lending is expected to remain high for multilateral lending institutions as they are called on to exercise their countercyclical role in a recessionary environment.
• MLIs paid out $196 billion in 2021, down from $210 billion in 2020 but up significantly from $156 billion in 2019.
• Capital adequacy assessments are largely unchanged. The proportion of MLIs with the highest capital adequacy assessment rose to 65% from 59% as of September 2022.

111. Take A Hike 2022: Which Sovereigns Are Best And Worst Placed To Handle A Rise In Interest Rates, June 22, 2022

• The Russia-Ukraine war, energy price spikes, and de-globalization are weighing on global productivity trends, perpetuating higher inflation, and increasing sovereigns' vulnerability to rate shocks.
• Under our interest rate shock scenarios, the first-order effects of rising rates look to be fiscally challenging for a minority of developed market (DM) sovereigns and at least six out of 19 emerging market (EM) sovereigns.
• The average debt maturity of the sovereigns (both EM and DM) in our survey is just over seven years, implying, for most, a gradual rather than immediate pass-through of higher market rates into the average effective rate central governments pay on total debt.
• For those EMs with annual gross refinancing needs above 10% of GDP and with rising cost of new debt (Brazil, Hungary, Ghana, Egypt, and Kenya) the uncertainty and direction of the Federal Reserve's rate policy will remain a key risk through to the end of 2022.
• Several of the most credible EM central banks (BCBrazil, Banxico, SARB) are arguably ahead of their DM peers in the monetary tightening cycle, reducing the probability that these sovereigns will suffer an additional rate shock.

112. The Global Food Shock Will Last Years, Not Months, June 1, 2022

• Rising food prices and diminishing supplies will last through 2024 and possibly beyond, in our view.
• Fertilizer shortages, export controls, disrupted global trade, and escalating fuel and transport costs will all exert upward pressure on the cost of staples.
• Our analysis shows low and low-to-middle income countries in Central Asia, the Middle East, Africa, and the Caucasus could be worst hit by the first-round impact.
• The food shock will drag on GDP growth, fiscal performance, and social stability, and could lead to rating actions, depending on the response by governments and international organizations.

Structured finance

113. The European CLO Market: Is The Par Back?, May 18, 2023

• The lack of mark-to-market triggers makes CLOs better equipped to withstand market volatility.
• During 2022, collateral managers regained some of the par lost during the pandemic by benefitting from opportunities stemming from market conditions and price movements.
• Over three quarters of CLOs gained par during 2022, with nearly €0.85 million gained by CLOs as an overall aggregate average.
• Strong trading activity by CLOs at the start and end of 2022 saw transactions look to improve other key benchmarks through purchasing loans at discounted prices.

114. A Deal-By-Deal Look Behind The Aircraft ABS Rating Actions As Of June 13, 2022, June 13, 2022

• We arrived at one or more of the credit ratings in this article by deviating from S&P Global Ratings' published criteria.
• Earlier today, S&P Global Ratings took various rating actions on 28 ratings from seven aircraft ABS transactions that were placed on CreditWatch with negative implications on March 15, 2022, due to the Russia-Ukraine conflict (see "Various Actions Taken On 28 Ratings From Seven Aircraft ABS Transactions; Off CreditWatch Negative," published June 13, 2022). We are providing additional details on those rating actions on a transaction-by-transaction basis.

115. Norwegian And Finnish Covered Bond Market Insights 2023, April 18, 2023

• Rising interest rates has had a damping effect on Finnish and Norwegian property prices while mortgage loan performance remains resilient.
• Increasing cost of covered bond issuance and negative mortgage margin pressure could lead to higher required credit enhancements for Finnish and Norwegian covered bond ratings.
• Relatively stable economic development continues to support credit performance in both countries.
• Healthy rating buffers in most covered bond programs continue to support rating performance, even as economic growth outlook weakens.

116. Payment Shock In Swedish Covered Bond Pools, April 18, 2023

• Swedish consumer prices are rising rapidly, pushing policy and mortgage rates to multi-year highs.
• For a sample of over a million mortgage loans backing Swedish covered bond programs, the average monthly payment has risen to Swedish krona (SEK) 2,256 from SEK1,503 (+50%) at the start of 2022, assuming rates have risen by 300 basis points (bps). If rates were to rise a further 200 bps, the average payment would rise to SEK2,792 (+86%).
• Two-thirds of the loans in our sample are either on a floating rate or will have reset to a new fixed rate by the end of 2023, and will therefore have experienced a payment shock by then.
• Many loans backing Swedish covered bonds--45% in our sample--pay interest only. These loans are more sensitive to rate rises and see almost twice the monthly payment increase compared with amortizing loans in our sample under the same rate rise scenarios.
• Mortgage collateral originated before 2015 tends to have lower absolute monthly installments than more recent loans but comprises 60%-70% interest-only loans, increasing its relative sensitivity to rate rises.
• Swedish house prices are under pressure, but we anticipate only a 2%-3% further decline in 2023. Although rising loan-to-value ratios could exacerbate payment shock for mortgage borrowers when their loan rates reset, leverage is generally modest for the pool we analyzed.
• We expect Swedish covered bond ratings to remain stable, given high overcollateralization buffers and unused notches of uplift from the issuer credit rating.

Technology

117. Excess Inventory Is The First Roadblock To Tech Recovery, March 31, 2023

• Elevated inventory will hurt the technology supply chain sales, earnings, and cash flow generation almost across all product end markets. Pace of demand recovery and safety stock will determine timing of a cyclical trough.
• Inventory should peak in the first quarter for most product end markets, and about a quarter later for component and semiconductor suppliers.
• We believe, similar to 2018, macroeconomic deceleration is the driving force for a sharp decline in inventory and production.
• Heightened semiconductor inventory may signal a period of weaker credit metrics for the U.S. technology hardware and semiconductor sectors. Probability and depth of a recession, geopolitical uncertainties, and a China economic rebound are key ratings focus areas in the near term.

Transportation

118. Rated APAC Transportation Lessors To Withstand Russia-Ukraine Fallout, March 4, 2022

• Transportation leasing companies in the Asia-Pacific that we rate should be able to withstand operational disruptions caused by the escalating Russia-Ukraine conflict.
• This is because most of them have minimal direct exposure to the affected area. Since most are also globally diversified, we believe they can redirect their assets to other regions.
• The second-order impact from the escalation could affect some players more than others.

119. Leased Aircraft Stranded In Russia: The Focus Turns To Insurance, March 22, 2022

• Aircraft leasing companies have mostly been blocked by the Russian government from repossessing planes leased to Russian airlines. The situation remains unclear and is evolving, but it appears that the lessors' best hope for compensation may come from claims under their insurance policies.
• We understand there are several layers of insurance protection against potential loss due to confiscation or similar situations that make it impossible to repossess a plane. The potentially most consequential coverage is provided by contingency policies on an aircraft lessor's entire fleet of planes. Those policies may limit the amounts insured and basis for claims, but could provide meaningful recovery.
• We have not taken any rating actions on aircraft leasing companies, though we did place our ratings on seven aircraft-backed debt securitizations on CreditWatch.

120. Global Shipping 2023: Containerships And Tankers Part Ways, Feb. 7, 2023

• Container liners' significant capacity withdrawals should help freight rates stop falling over 2023-2024, allowing shipping companies to cover recent operating cost inflation.
• Exceptional free cash flows in 2021-2022 enabled container shipping companies to slash debt and secure ample financial headroom to cope with lower freight rates.
• Oil shipping has entered a bullish cycle due to a surge in ton mile demand and the lowest new tanker orderbook in more than 20 years, while dry-bulk shipping's charter rates are unlikely to improve before late 2023.
• New emission regulations in 2023 and a preliminary deal to include shipping in the EU's Emissions Trading System from 2024 mark an acceleration in decarbonization efforts that will weigh on ship owners and operators.

121. Aircraft Lessors Hit By Western Sanctions On Russia, March 1, 2022

• The Russia-Ukraine military conflict and the financial sanctions imposed on Russia by the EU, U.S., and certain other countries, will directly affect rated aircraft lessors. The sanctions prohibit providing aircraft and aircraft parts to Russia, and this also applies to aircraft leases. This prohibition takes effect March 28.
• Several lessors have disclosed their exposure to Russia: AerCap Holdings N.V., the world's largest aircraft leasing company, stated that about 5% of its aircraft (measured by book value) are on lease to Russian airlines. We expect that the exposure of most other rated aircraft lessors will also be in the single-digit percent area. The highest exposure disclosed thus far is SMBC Aviation Capital, at 10%, but the aircraft are mostly new technology narrowbody planes, currently the easiest to place with new airline lessees.
• We believe that aircraft leases have provisions that allow a leasing company to terminate a lease if forced to do so by government actions. The actual repossession of the hundreds of aircraft affected will be a major logistical undertaking, but our understanding is that prohibitions on Russian planes entering the air space of certain other countries either would not apply to repossession flights or could be circumvented by flying to other destinations outside Russia.
• More broadly, the run-up in oil (and thus jet fuel) prices will hurt airlines throughout the world, including those outside Russia.

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