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S&P Global Ratings expects additional credit deterioration in 2024, largely at the lower end of the ratings scale. An environment of increasingly rapid change requires financial market participants to adapt their playbooks.
What We're Watching
If the tug-of-war emerging in the first month of this year—between the competing forces of more-bullish market sentiment about a peak in interest rates and credit trends remaining under pressure—is any indication, 2024 promises to pose challenges for investors. January alone has seen a dizzying deluge of events, including conflict erupting (and consequently escalating) in the Red Sea and 11 issuers defaulting year-to-date.
Against this backdrop, we will be closely watching how credit headwinds, capital flows, geopolitical uncertainty, energy and climate resilience, and crypto, cyber, and tech disruption transform the global economy and markets. These emerging and established risks have proven their capacity to immediately and immensely affect our interconnected world and the credit markets that underpin it.
What We Think And Why
Market participants' focus for 2024 will likely return to credit fundamentals, with cash flow metrics regaining their importance as a key driver of credit quality alongside measures of leverage.
The possibility of volatility—concerning the markets' and central banks' disconnect about how long higher interest rates will prevail—is on the horizon. (At the same time, the fallout from higher-for-longer rates is still evident, notably in real estate, as seen this week with the liquidation of China's commercial megadeveloper Evergrande.) On the back of the market's cautious optimism over the peak in interest rates, S&P Global Ratings Credit Research & Insights expects global bond issuance to rise 4.3%, to roughly $8 trillion, this year. Still, effective long-term rates look set to remain historically high even with a potential pivot by central banks.
Credit headwinds, interest-cost pressures, and a difficult economic backdrop will disproportionately affect weaker corporate borrowers. The return to fundamentals will likely bring credit metrics, such as interest coverage, back to the fore. We estimate median EBIT interest coverage for U.S. 'B' rated nonfinancial corporates will drop below 1x by the end of this year to 0.6x (the lowest since the third quarter of 2004) and remain below 1x in 2024.
Investors are rebalancing their portfolios to adjust for these shifting risks and returns. Borrowers (particularly those lower-rated issuers facing tighter access to credit) will need to adapt to changing capital flows, especially as we expect this year to mark the end of extraordinary liquidity and next year to bring significant debt-maturity pressures.
Geopolitical risks prevail, with the implications for consumer and investor confidence, trade, and capital flows—beyond the devastating effects on human life—yet to be fully realized from the ongoing Israel-Hamas and Russia-Ukraine wars, and tensions between the U.S. and China and in the Red and South China Seas. Any escalation of these conflicts (including the potential for Iran, the U.S., and/or NATO to be drawn in) could spark instability across food, energy, and other commodities markets—further underpinning inflation, hurting economic growth, and pressuring sovereign ratings.
While global supply chains are much closer to normal than they were at the height of the pandemic, they remain highly vulnerable to geopolitical tensions. (The bottlenecks related to the Red Sea attacks are just one example.) Borrowers' supply-chain management has become more of a credit driver. During the significant supply-chain disruptions of 2020-2022, S&P Global Ratings took associated negative rating actions on more than 200 corporate issuers. This is important to note, because persistent profit pressures may force companies to abandon supplier-diversification strategies—thus increasing their vulnerability.
The year ahead will also be marked by uncertainty surrounding more than 70 national elections in 50 countries, spanning developed markets like the European Union to emerging markets including India and South Africa. In addition to this year's U.S. presidential election, 33 Senate seats are at stake in regular elections, along with all 435 seats in the House of Representatives. The outcomes could have ramifications domestically and around the world, potentially increasing political polarization and reducing prospects for substantial fiscal legislation to pass in 2024.
Extreme weather conditions and worsening physical risks continue to increase and influence credit fundamentals. S&P Global Sustainable1 expects 2024 will bring a heightened focus on adaptation and resilience planning, alongside an expanded understanding of the impacts of climate change. But the adaptation gap is widening due to slow progress on preparedness, and tighter financing conditions could make it even more difficult for companies and governments to accelerate the world's energy transition and path to net-zero.
The transformation of global and regional financial systems amid the adoption of new technologies—with the biggest buzz for generative artificial intelligence (gen-AI) and blockchain—is accelerating both a craze for growth and discovery and concern around single-entity and systemic cyber risk.
We believe that the use of gen-AI will continue maturing in 2024, culminating in replacement, transformative, and regenerative effects on labor productivity over the long-term while elevating AI-related risks in the short-term. Meanwhile, decentralized finance will likely solidify itself in the mainstream, with institutional interest in and adoption of digital assets and blockchain technology continuing to grow this year—supported by technological advances. The U.S. Securities and Exchange Commission's approval earlier this month of bitcoin exchange-traded funds is the most recent example.
With S&P Global Ratings' Stablecoin Stability Assessment, we are analyzing the stability of various stablecoins and providing specific insight into their depegging risks, with the aim to provide transparency on this growing market.
What Could Change
The whirlwind of events of recent years alone—the global pandemic, the end of the era of easy money that has existed since the aftermath of the Great Financial Crisis, the prospects of higher-for-longer interest rates alongside elevated inflation, the disruption and devastation of new wars, supply-chain disruptions, and much more—show just how fast the world can radically change. We are constantly assessing how new risks can emerge, and how established risks can evolve.
S&P Global Ratings' proprietary data, analytical expertise, and cross-discipline approach enable us to quickly assess and quantify challenges and credit trends as part of our ongoing ratings surveillance and research.
Writers: Molly Mintz and Joe Maguire
This report does not constitute a rating action.
| Head of Private Markets and Thought Leadership: | Ruth Yang, New York (1) 212-438-2722; ruth.yang2@spglobal.com |
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