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Monday, January 08, 2018 02:23PM/ Fitch
Ratings
The prospect of rating upgrades outnumbering
downgrades this year and next is higher than at any time since the financial
crisis, Fitch Ratings says in its latest global Credit Outlook report. But
credit quality may start to weaken beyond this as ultra-supportive monetary
policy is phased out and rising interest rates start to affect funding costs
and asset quality.
"The rating outlook trend is the most upbeat
in a decade, with positive outlooks outnumbering negatives. But the net bias is
only just over 1% and occurs as the world is about to hit peak growth in the
current cycle. The continued tightening of monetary policy, together with
significant policy and political uncertainty, is likely to pose increasing
challenges to ratings," said Monica Insoll, Managing Director, in Fitch's
Credit Market Research team.
Global rating outlooks continue to improve. The
average net outlook balance across all sectors globally turned positive for the
first time since the financial crisis, at 1.1% as at 30 November 2017, up from
-7.9% at the start of the year.
The trend is evident across sovereigns, corporates
and financial institutions, with prospects brightening for developed and
emerging markets alike. The outlook for structured finance has the most
pronounced positive bias, at net 9%. Other sectors are largely experiencing
rating stability, although there are pockets of rating pressure in some regions
and certain subsectors.
The key drivers of the expected widespread
improvement in credit quality are economic growth, still largely supportive
monetary and fiscal policies, and more stable commodity prices. Fitch expects
global growth to edge up to 3.3% in 2018, boosted by increased investment.
However, beyond 2018 growth is likely to moderate, while monetary policy
conditions will tighten.
The two main macro risks to ratings are the
unwinding of quantitative easing and policy and political uncertainty,
including from a heavy election cycle in emerging markets this year.
The QE unwind is likely to put pressure on
sovereigns as government debt is high in many countries. Banks could be exposed
to asset-quality problems following the long period of cheap credit, with high
property prices in some countries at risk of deflating as the interest rate
cycle turns. In the eurozone, banks will also need to rely more on market
funding rather than the ECB.
In the corporate sector, emerging-markets issuer
could be challenged by the reversal of capital flows but those in developed
markets are likely to cope quite well. However, certain sub-sectors face rating
pressure for idiosyncratic reasons, including traditional retail in the US and
Europe, and utilities in the UK.
Geographic areas with negative rating outlook bias
include the Middle East, Africa, China and Latin America, where several
countries will hold elections this year and outcomes are uncertain.
The more positive outlook for rating activity in
the short term should be seen against the backdrop of downward rating migration
in several sectors in recent years. This trend has been most pronounced for
sovereigns and financial institutions, with the share of 'AAA' to 'A' ratings
in the latter hitting a low of 37% on 30 November 2017, having fallen steadily
from 54% at end-2007.
Our six-monthly credit outlook report provides an
overview of Fitch's outlooks across all rated sectors and regions, identifying
the main macro factors that will drive credit trends over the next 12-24
months. It focuses on outlook outliers - negative and positive - as the vast
majority of ratings are typically stable. The data in today's report is as of
30 November 2017. 
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