Dagong Global Credit Rating Co., Ltd.
May 15, 2017
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain both the local and foreign currency sovereign credit ratings of the United States of America (hereafter, “the US”) at A-, each with a stable outlook. The US economy is on a good trend of recovery, as taking the lead into the interest rate hike cycle will attract international capital flow, while risks from the financial system and interest burden increase. The country's fiscal deficit and debt burden have continued to slowly rise at high levels, hence rendering it difficult to improve government solvency.
The main reasons for maintaining the sovereign credit ratings of the US are as follows:
1. Political polarization hinders the Trump government's efficiency and policy continuity. In November 2016, Trump was elected president of the US, while the Republican Party began its full control of the White House and Congress. The country's political situation is expected remain stable in the short term. The fierce political struggle within the Republican Party, between opposing parties, as well as the country's debt ceiling will force the direction of Trump's policies to shift from radical to moderate, as it is expected that tax reform and infrastructure expansion efforts will entail a larger compromise than the Trump campaign originally promised. However, given that the country's long term accumulation of political failure has not yet been resolved, the ongoing struggle between the two parties will continue to affect the government's decision-making and implementation efficiency, thereby hindering the ability of the United States to resolve its sovereign credit risk.
2. The country's financial system remains resilient, although risks of the capital market are rising. On March 15, the Federal Reserve launched the first interest rate hike of 2017. It is expected that the Fed will raise interest rates three times in total over the course of the year, and that the benchmark interest rate will rise to 1.25%-1.5%. Gradual increases in interest rates will accelerate the return of international capital and help improve the profitability of the banking sector, although the asset price bubble accumulated during periods of low interest rates will elevate risk in the financial system.
3. In the short term, fiscal stimulus brings an economic upswing, although the long term economy is subject to deep-seated structural problems and will maintain low growth. In the short term, improvements in the job market, stabilized oil prices, as well as fiscal stimulus measures such as tax cuts and expanding infrastructure, are expected to boost domestic demand. Economic growth is expected to slightly rebound to 1.8% and 2.0% in 2017 and 2018, respectively. In the medium and long term, the US' declining labor productivity growth rate, the hollowing up of the real economy and the widening gap between the rich and the poor will hinder economic growth. In the next five years, the average growth rate of the US economy is expected to be 1.7%.
4. Expansionary fiscal policy will push up the country's deficit rate; although hits source of debt repayment is under pressure. Due to a decline in the economic growth rate and rigid expenditure pressures, the deficit of the US federal government is expected to rise to 3.2% of GDP in FY2016. Since the country's expansionary fiscal policies such as tax cuts and expanding infrastructure, as pushed by the Trump administration, are very likely to be implemented in FY2018, it is expected that the deficit of federal government stabilize at 3.2% of GDP in FY2017, and rise to 4.0% of GDP in FY2018. In the medium term, in consideration of the economic slowdown, interest rate hikes pushing up the burden of interest payment, as well as an aging population will altogether increase the difficulty of fiscal consolidation, ultimately placing pressure upon the sources of government debt repayment.
5. The debt burden of the federal government is rising slowly at a high level, and solvency remains difficult to improve. Under the influence of a widening deficit, the federal debt burden rate is expected to rise to 108.6% in 2017, and to approximately 112% in the medium term. In March 2017, the federal government took unconventional fiscal measures to deal with escalating debt ceiling pressure, and the possibility of rising or postponing the debt ceiling this year remains very high. Since intensified political polarization is making it increasingly difficult for the government to form a systematic deficit reduction plan, and seeing how 32% of government debt is held by foreign creditors, it is expected that in the medium term the government will continue to rely upon debt financing to repay debt, and by virtue of the status of the dollar as international reserve currency, the debt risk of the US government will be transferred to international creditors. Government debt solvency remains difficult to improve.
In the short term, the return of international capital and improvement of the private sector balance sheet will help to alleviate the disturbance of interest rate hikes upon the bond market. The US economy will be slightly boosted under fiscal stimulus. The country's debt ceiling will balance government spending so that the US debt burden will rise rather slowly. Government solvency will remain stable. Therefore, Dagong has decided to maintain a stable outlook upon the local and foreign currency sovereign credit ratings of the US for the next one to two years.