The United States and China are unlikely to see a rapid hit to their credit ratings from a trade war, S&P Global’s top sovereign analyst has said, with damage more likely concentrated on poorer countries and those already on downgrade warnings.
S&P reaffirmed its “stable” outlook on its AA+ U.S. sovereign credit rating days before President Donald Trump announced his sweeping round of global trade tariffs in early April.
It cited the U.S.’ near 100%-of-GDP government debt level and a fiscal deficit running at 6%-7% of GDP as its key credit weaknesses, while it also pointed to the significant uncertainty around Trump’s trade moves and other policies.
The tariffs, most of which Trump has put on pause for 90 days, have subsequently seen cuts to global growth forecasts.
S&P managing director Roberto Sifon-Arevalo said most major economy ratings should be able to weather the strains for now though.
“At the beginning of this period of stress there was a flashback to the COVID era and the thinking that: Is this another global crisis?”
“But when you start looking at the big picture and what the transmission channels are, the question remains: Is it enough to change the creditworthiness (of sovereigns globally) in a significant way?”
That doesn’t mean however that ratings on negative outlooks – rating agency speak for downgrade warnings – won’t go down. Or that outlooks won’t be lowered, as Slovakia’s and Egypt’s already have. It’s more that there shouldn’t be major surprises.
An S&P model that uses credit default swap market data shows that investors are currently pricing an eyewatering five notches’ worth of downgrades for the U.S. rating and three notches of cuts to China’s A+ score.
S&P hasn’t lowered its U.S. rating since chopping it from triple-A in 2011 and hasn’t cut China since 2017, although its peer Fitch cut Beijing by a notch the day after Trump’s tariffs were announced.
“For China and the U.S. there is space (for the ratings),” Sifon-Arevalo said.
It is not a question of how long is too long for the tariffs to stay in force that will determine the two countries’ ratings, although there would need to be “some kind of resolution (on the tariffs) in the next few months or so,” he said.
It was also about whether other more unexpected shocks came along and also in China’s case how much stimulus it opts to inject to offset the tariff hits.
BIG QUESTIONS
S&P is more concerned about the possible knock-on impacts such as a long slump in commodity prices such as oil and metals that swathes of countries rely on for much of their income.
“If you do have a big swing in commodity prices, that is a lot more impactful on ratings,” Sifon-Arevalo said. Oil prices are currently 20% lower than they were in mid-January.
European ratings could also come under pressure again if Trump goes ahead with plans to put 20% tariffs on EU countries.
While he welcomed Germany planning half a trillion euros’ worth of defence and infrastructure spending, he said the trade woes could further sap the bloc’s already anaemic economy.
“Across the continent there is going to be a big question over the fiscal trajectories if all these trade uncertainties don’t get resolved soon,” Sifon-Arevalo said.
“You need growth to help fiscal consolidation. If you throw the tariffs into the mix that is definitely not helpful.”
(Reporting by Marc Jones; Editing by Hugh Lawson)