Fitch has identified a consistent degradation in governance over the last two decades, with issues in fiscal management and a lack of medium-term fiscal framework contributing to successive debt increases.
The general government (GG) deficit is projected to rise to 6.3 per cent of gross domestic product (GDP) in 2023, from 3.7 per cent in 2022, reflecting weaker federal revenues and new spending initiatives. The debt-to-GDP ratio, reduced over the last two years from the pandemic high of 122.3 per cent in 2020, is still well above the pre-pandemic level at 112.9 per cent, and is projected to reach 118.4 per cent by 2025.
Higher interest rates and the growing debt stock will increase the interest service burden, and the challenges of an aging population and rising healthcare costs will escalate spending on the elderly. There are also concerns over the potential permanent extension of the 2017 tax cuts, which could further raise the deficit.
Despite these concerns, the US rating continues to be supported by its large and diversified economy, its status as the world’s leading reserve currency, and its dynamic business environment.
Fitch’s projections also include a mild recession in the US in the fourth quarter of 2023 and the first quarter of 2024, with real GDP growth slowing to 1.2 per cent this year, down from 2.1 per cent in 2022. The Federal Reserve has increased interest rates three times in 2023, with one more hike expected by September.
Fitch highlights several structural strengths that underpin the US’ ratings, including its high-income economy, the resilience of the labour market, and the US dollar’s role as the global reserve currency. However, tighter credit conditions and weakened business investment are expected to contribute to a slowdown in economic growth. The US’ high-ranking in the World Bank Governance Indicators reflects strong political stability, rule of law, and low levels of corruption, which continue to support its credit profile.
The downgrade serves as a stark reminder of the vulnerabilities in the US fiscal position, reflecting a broader concern over rising debt levels, governance standards, and future economic shocks. It underscores the importance of addressing these medium and long-term fiscal challenges to ensure financial stability and sustainable growth.
ALCHEMPro News Desk (NB)
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