S&P Global Ratings sees 2022 as a year of divergence and accelerated disruption that will redefine the global economy and credit landscape.

Events in the early part of this year alone have demonstrated just how much faster disruptions are reshaping our globalized world. Omicron surged and plummeted; the S&P 500 benchmark index has experienced noteworthy volatility; climate disasters are occurring with frightening regularity; and, most notably, Russia's military conflict with Ukraine has shocked markets and sent oil and gas, agricultural products, metals, and other commodities prices soaring—just as the global economy was already facing historic inflation and rising interest rates as major central banks signal aggressive monetary policy normalization.

These challenges compound fundamental issues that could radically transform credit markets. As the global economy continues to recover from the pandemic under newly uncertain and volatile conditions, it will be reshaped by changed consumer behavior, reshuffled global supply chains and capital flows, resurfacing credit headwinds, renewed urgency to combat climate change, and new and existing geopolitical shocks, as well as accelerated digitalization of markets and the broader economy.

Against this backdrop, we believe 2022 will be shaped by six key themes:

1. Reshaping Recovery

2. Reshuffling Global Flows

3. Resurfacing Credit Headwinds

4. Toward Net-Zero

5. (Geo)political Shifts

6. Digital Disruption

Reshaping Recovery

The global economy will have to confront structural changes as it pushes through a robust but uneven rebound from the pandemic, with demand outrunning supply and inflationary pressures persisting.

The pandemic has fundamentally changed people's leisure, work, and consumption behaviors--permanently shifting business dynamics and mobility. These will have prolonged effects on personal and professional lifestyles that reverberate from real estate to transportation. Companies will have to adopt new strategies and business models for the future.

Inflation, however, is the immediate challenge to the recovery. Now that the macroeconomic picture has shifted to controlling it, whether central bank policies can slow price pressures without impeding the recovery will likely be more consequential than any current threats from the virus.

In 2021, the cost of inflation was largely borne by consumers, given their ample savings. Corporations were able to pass most of the higher costs onto consumers without much pushback--but that may change this year as inflation, exacerbated by the Russia-Ukraine crisis, will likely persist while monetary policy tightens. Consumers' purchasing power may weaken. How that affects households will vary greatly depending on their income and savings, particularly as government support and stimulus packages have largely ended.

This year will leave winners and losers across economies and industries. The pandemic has amplified political and social tensions, elevating the focus on inequality and the role of corporations in building a more equitable world.

Reshuffling Global Flows

The squeeze on global supply chains, initially triggered by pandemic pressures, is unlikely to wane in the short term. The flows that interconnect the global economy will likely remain stretched for a better part of 2022 even as some larger pressures ease, biting into corporate margins and slowing the economic recovery.

Retailers have spent the past year battling serious disruptions across their supply chains as they tried to deal with pent-up demand, higher prices, worker and truck driver shortages, and overwhelmed ports that backlogged deliveries of autos, semiconductors, and more by weeks or months. Now, with record inflation still fueled in part by persistent global supply bottlenecks, borrowers in many sectors will likely continue to face input-cost pressures that could increasingly erode margins and weigh on credit quality for some, particularly as growth slows.

Similarly, if investors reshuffle their capital flows as the U.S. Federal Reserve begins what promises to be its most aggressive rate-hiking cycle in decades, some emerging markets that are more reliant on external funding may find themselves exposed to vulnerabilities. Abundant market liquidity has bolstered emerging markets for more than a decade, but imbalances remain--and the redistribution of capital flows may result in disparate impacts on emerging versus developed economies.

Resurfacing Credit Headwinds

Borrowers entered the year with largely positive credit momentum, reflecting favorable financing conditions and a powerful economic recovery—but conditions are changing. Persistently high inflation in many regions is pushing central banks to accelerate policy-rate normalization and roll back asset purchases. This is contributing to a turn in the credit cycle, which could expose many borrowers to operational and structural headwinds. If the recovery in company revenues starts to destabilize, some borrowers may find their operating environments increasingly challenging and debt burdens unsustainable, impairing credit quality.

Downside risks to global credit conditions from geopolitical tensions (particularly Russia's military conflict in Ukraine), persistent inflation, and the promise of higher borrowing costs are increasing. On a global scale, 2022 will likely be characterized by more limited access to and a higher cost of credit. We expect credit quality deterioration and default pressures among low-rated or unrated borrowers as financing conditions tighten. A rapid and volatile market repricing—affecting debt servicing costs and funding access—would particularly hurt nonfinancial corporate speculative-grade borrowers, given that more than 30% are rated 'B-' or below.

Still, current economic conditions should continue to support positive momentum in our global ratings portfolio against the backdrop of market uncertainty, and our global nonfinancial corporate net outlook bias has narrowed to about negative 5% from a pandemic peak of about negative 38%. In addition, while financing costs will rise—marking a near-term refinancing risk—the overall implications for lower-rated, speculative-grade issuers are limited, as many took advantage of recent accommodative conditions to extend maturities.

This year may also determine how smaller and more vulnerable borrowers in private debt markets weather the storm compared to larger corporate borrowers. Amid a decade of explosive growth in direct lending, the limited transparency and ways in which risk is distributed have made it difficult to assess how much long-term risk exists and how vulnerable borrowers would be in the event of a credit crisis. A slowdown in economic growth—coupled with inflation and rising interest rates, and the consequent pressure on margins—could weigh heavily on some weaker companies with low coverage ratios. This is especially pertinent, given that almost three-fourths of the middle-market entities we reviewed last year received a credit estimate score of 'b-'.

Toward Net-Zero

Global citizens, policymakers, economic actors, and other market participants' awareness of the physical risks of climate change is accelerating the energy transition from fossil fuels to renewable energy sources. However, the latest United Nations Intergovernmental Panel on Climate Change report showcased how governments and companies only have a short window of opportunity remaining to reduce exposure to existing unavoidable and irreversible climate risks--and even worse outcomes if the world surpasses 1.5 degrees Celsius of global warming. Now, as companies and countries invest more into their net-zero plans to counter carbon dioxide emissions and the associated risks, markets can play a key role in funding the path to net-zero. But investors, corporate boards, and government leaders will need to address several intersecting pressures and challenges that will advance their transparency, disclosures, and actions.

Investors and companies' increased engagement with environmental, social, and governance (ESG) principles will continue to reshape global credit markets. ESG considerations will be more of a risk than an opportunity to credit quality in 2022. Nevertheless, sustainable finance can play a significant role in the recovery and toward building a greener and more equitable global economy.

S&P Global Ratings expects issuance in the global sustainable debt market to surpass $1.5 trillion this year. This will likely be driven by sustainability-linked bonds, which are instruments that achieve issuers' predefined sustainability objectives; growth in green bonds, which raise funds for projects with environmental benefits; and the diversification of social and sustainability bonds, which are respectively targeted to projects associated with positive social outcomes and projects with both environmental and social benefits.

As diversification and innovation in sustainable bond structures grows, ensuring greater integrity, transparency, and credibility across the market will be key. Efforts to further establish and encourage the uptake of clear standards, regulations, and disclosure requirements will be critical.

(Geo)political Shifts

Geopolitical tensions are amplifying dramatically, with Russia's military conflict with Ukraine and its devastating humanitarian costs and consequences. The Russia-Ukraine crisis is redefining the international political order that has been in place since the end of the Cold War and recentering the West's focus on energy security—all while fueling new volatility across markets and creating significant short-term pressures on global energy supply and potential long-term implications for the energy transition.

The imposition of strict sanctions on Russia may hinder the operations of exposed borrowers inside and outside the region and have broader ramifications in the form of energy-supply disruptions or price shocks; sustained inflationary pressures; a drag on economic growth or risk of policy missteps by central banks; a migrant crisis in Eastern Europe; additional cyberattacks between Russia and its perceived adversaries; risk-repricing that drives up borrowing costs or limits funding access; and profit erosion for certain sectors.

Meanwhile, previous tensions remain. As China strives to be less reliant on foreign markets and technology, its strategic confrontation with the U.S. shows no signs of abating. Escalating tensions over the South China Sea region could weigh on trade, investments, and financial transactions for both and other economies—with some sectors suffering disproportionately. As such, we see rising risks of restricted trade and capital flows weighing on economic growth this year.

At the same time, internal political pressures--which in some cases reflect widening socioeconomic gaps, systemic inequities, and ideological divisions--will likely fuel more nationalistic and populist policies that threaten economic efficiency and social stability.

Digital Disruption

Technological disruption is the driving change agent for businesses, their competitive and industrial dynamics, and capital markets that fund growth. Businesses' digital adoption has been catalyzed by the pandemic's transformation of everyday life and behavior—and this year will see technologies continue to disrupt segments of the global economy.

The pace of digitalization in the global economy exposes corporates and countries to mounting cyber risks—where targets can include anything from utilities to insurers to government agencies, weigh on credit quality, result in substantial monetary losses, and undermine confidence in key institutions and infrastructure. Russia's use of cyber attacks during its military conflict with Ukraine proves how these moves are becoming a more prevalent means of weaponry with systemic implications. Whether organizations have embedded the following into their operations will be key considerations: response plans, or business continuity and disaster recovery plans, that are defined, understood, and tested before an attack; backup procedures that ensure that critical data can be restored following a ransomware or destructive cyber attack; and backups that are isolated from network connections.

Markets could also be on the eve of a new era as the digitalization and decentralization of finance, along with blockchain technologies, shape the future of money. This ongoing market digitalization is both complementing and disrupting established market frameworks and business models—with a myriad of implications. The emergence and acceptance of new digital asset classes will require integrating traditional risk and performance assessments with fresh types of analyses. Broader acceptance from institutional investors may herald a new phase of rapid acceleration, even if cryptocurrencies and the broader ecosystem remain a small segment of the financial market. The regulatory debate will also continue to progress apace—with the Russia-Ukraine conflict illustrating some of the issues at stake.