Recently, CCSI announced that it has removed the United States of America (“U.S.”) from the watch list for possible downgrade, revised the outlook to negative, and maintained the sovereign credit rating at AA+g. Previously, on March 16, 2023, CCSI announced that it had placed the U.S. sovereign credit rating on the watch list for possible downgrade. On May 25, 2023, CCSIC downgraded the U.S. sovereign credit rating from AAAg to AA+g, and continued to place the U.S. sovereign on the watch list for possible downgrade.
Historical Downgrades of the U.S. Sovereign by CSI
CITIC believes that the weakening of financial strength is a key factor restricting the enhancement of the U.S. sovereign credit level, the U.S. debt level is the highest among countries of the same level, and the debt level and cost of debt are in a continuing trend of rising, Trump advocates tax cuts or to further push up the debt, and in the absence of substantive reforms of the high cost of debt, the sustainability of the debt is constantly decreasing; at the same time, the rise of trade protectionism may have a dampening effect on the U.S. economic prospects. At the same time, rising trade protectionism may inhibit the U.S. economic outlook, and attention should also be paid to the impact of political party rivalry on U.S. social stability and policy continuity. These factors are the main reasons for the negative outlook on the U.S. sovereign credit rating. At the same time, however, the U.S., as the world's largest economy, has a diversified economic structure and a high level of national income, and occupies a dominant position in the fields of science and technology, commerce and finance. Benefiting from the centrality of the United States dollar and United States debt in the global financial system, the United States Government has been able to raise international financing at a relatively low cost for a long time, and its debt sustainability is relatively high.
The U.S. debt level is at the highest in the same class of countries, Trump's advocated tax cuts may further push up the debt, and in the expectation of high inflation, the high cost of debt increases the U.S. long-term fiscal risk, and the fiscal strength may be further weakened. Prior to the outbreak of the New Crown epidemic, the U.S. fiscal deficit and debt levels were already on an upward trajectory. the U.S. government's fiscal deficit rate exceeded 7% in FY2023, and the government's debt ratio[1] was about 109%, which is at a very high level. As of November 5, 2024, the stock of federal government debt has exceeded $35.9 trillion and is on an accelerated upward path since the suspension of the debt ceiling constraint. Trump's advocated fiscal policy, which includes lowering the corporate tax rate and personal income tax rate and setting higher spending levels, including increased infrastructure and defense spending, may lead to further upward movement of the government's fiscal deficit and indebtedness, and, in the absence of substantive reforms, the fiscal deficit rate is expected to remain at a high level of more than 7% over the medium term, and the government's indebtedness may rise to more than 110%. Meanwhile, high interest rates have led to a significant rise in the cost of government debt, and in the absence of substantial fiscal consolidation measures by the government, debt sustainability has been declining.2022 The prolonged period of high interest rates since then has pushed up the cost of U.S. government debt, with interest payments on the U.S. government's public debt reaching US$1.1 trillion in FY2024, a year-on-year increase of 29% from FY2023. Trump's advocacy of stimulative policies or push up inflation expectations, resulting in a slower pace of interest rates downward, and due to the cost of the national debt there is a certain lag, is expected to 2025 ~ 2026 fiscal year interest expenses as a percentage will remain high. Against the backdrop of a slowing economy, rising debt costs overlaid with excessive debt burdens will drive refinancing risk to the upside. When the debt ceiling negotiations are restarted in 2025, the total federal government debt could reach $40 trillion, and weakening fiscal strength has become a key factor constraining the upgrading of the U.S. sovereign credit level.
In the context of the U.S. economic slowdown, the dovish policies advocated by Trump may lead to a resurgence of inflation risk, and the Federal Reserve's policy path choice faces multiple challenges; at the same time, the warming of trade protectionism may inhibit the U.S. economic outlook. Since the beginning of the year, the U.S. economy has shown strong resilience, and inflationary pressures have eased under persistently high interest rates, providing a certain cushion for the Fed to cut interest rates. Employment data volatility for the market to form a certain disturbance, but a comprehensive view of the labor market shows a moderate slowdown trend, the U.S. unemployment rate has risen from 3.7% at the beginning of 2024 to 4.1% in September. At the same time, long-term high interest rates for the fiscal debt, the banking sector and other extensive risks, and the economy to form a certain inhibition, is expected to 2024 U.S. economic growth will slow down slightly to 2.7%. Trump advocates dovish policies, including large-scale tax cuts, promises to ease restrictions on fossil fuels, while increasing investment in infrastructure and defense, or a short-term boost to the economy, but its trade protection policy triggered by rising tariffs will further push up inflation, U.S. inflation risk or re-emergence, which leads to increased variability in the path of the Federal Reserve's subsequent monetary policy. At the same time, Trump came to power if he seeks to “unilateralism” policy return, will lead to global trade environment tensions, superimposed on the global geopolitical risks and restrictive immigration policy, for the U.S. economic outlook constitutes a negative impact on the subsequent economic trends facing a high degree of uncertainty.
The escalation of the complexity of bipartisan tug-of-war in the United States has had a negative impact on the effectiveness and continuity of policies, while the impact of class antagonism and cleavage on the stability of American society needs to be guarded against. In recent years, political differences between the two parties in the U.S. have led to a reduction in legislative efficiency, weakening the ability of U.S. policymakers to plan substantive changes in policy, and the two-party game has repeatedly caused government shutdowns. The campaign for this election involved a large amount of financial investment, increasing the influence of capital in politics, and due to the U.S. federal state election system, resulting in an imbalance in the distribution of resources and attention, in the final sprint of the campaign, both Democrats and Republicans in the swing states filed a large number of lawsuits against the eligibility of the vote, the rules, and other details of the issue.2024 U.S. presidential election was the closest in history in the polls of the candidates. The 2024 U.S. presidential election was the closest election in history in terms of candidate polls, but the final results showed that Republican candidate Donald Trump had a big lead in the vote, while the Republican Party had a high probability of “sweeping” Congress, and the Democrats' crushing defeat showed that the American people were dissatisfied with the status quo. From the riots on Capitol Hill to the attack on Trump, political violence in the United States has intensified in recent years, showing that politicians of both parties and the public on many issues there are serious differences [2], the election process has also intensified the contradictions between different social groups, expanding the partisan rivalry, and we need to be vigilant about the possible social instability after the election. Trump's domination of the government and majority support from Congress is conducive to accelerating the legislative process and promoting the implementation of policies, but may weaken the U.S. power checks and balances mechanism to a certain extent. CCSIC will keep an eye on the political stability and policy effectiveness of the US.
The deterioration of the U.S. fiscal strength and the continuous breach of the debt ceiling are eroding the credit foundation of the U.S. dollar, and in the long run, the relative weakening of the international status of the U.S. dollar will fundamentally shake its sovereign credit strength. In the short term, Trump's rise to power will support a strong U.S. dollar, but against the backdrop of accelerating anti-globalization, slowing U.S. economic growth, and intensifying domestic political divisions, the accelerating upward movement of debt and rising costs are leading to decreasing U.S. debt sustainability, which will have a certain impact on the status of the U.S. dollar and U.S. debt as a safe asset. Currently, the U.S. dollar, as the world's most widely held reserve currency, has no possibility of being replaced in the short term, but its leading position has declined, with its share of global reserve currencies dropping from 72% to less than 60% over the past 20 years. Along with the opening of the Federal Reserve's rate-cutting cycle in September 2024, the dollar index has declined from a high level to the level of early 2022, and Trump's advocacy of expansionary fiscal policy and high tariffs are expected to drive up U.S. bond yields, and the attractiveness of U.S. bonds may decline in the medium term. In addition, after Trump took office, the trend of “anti-globalization” will further intensify, or lead to a decline in the demand for the dollar in the world. In the longer term, the deterioration of U.S. fiscal strength and the continuous breach of the debt ceiling will erode the credit foundation of the U.S. dollar, and along with the relative weakening of the U.S. geopolitical position and the increase in demand for non-dollar currencies in other economies, the dollar's international status will be weakened, which will fundamentally destabilize its sovereign credit strength.
Factors that could trigger a future
Factors that could trigger a change in the rating outlook from negative to stable:
The U.S. negative outlook could be revised to stable if the U.S. economy achieves a soft landing, debt pressures gradually ease, and a smooth transition is achieved after the election.
Factors that may trigger a rating downgrade in the future:
If the U.S. economy experiences a recession, the debt becomes unsustainable due to accumulating fiscal deficits, and an unanticipated negative political event occurs, CITIC will consider downgrading the U.S. sovereign credit rating.
Review of CSI's U.S. Sovereign Rating Actions
In 2012, China Chengxin International released its sovereign credit rating system, focusing on 76 countries or regions, including 52 countries along the “Belt and Road”, with more than 130 sovereign rating actions in the past three years. 2015 was the first time that China released the “Belt and Road” Countries' Sovereign Credit Risk Report. In 2015, CCSIC issued the “Report on Sovereign Credit Risks of Countries Along the Belt and Road” for the first time in China, and from 2017 to 2023, CCSIC will jointly issue the “Report on Risks of Countries Along the Belt and Road” with overseas credit rating agencies for seven consecutive years. Relying on the panda bond business, CCSIC has successively undertaken the entrusted sovereign rating business of South Korea, Poland, Turkey, Belarus, etc. The panda bond business involves countries covering nearly 20 economies, such as Germany, France, Canada, Italy, Malaysia and Brazil. From a comprehensive point of view, CCSIC is in the forefront of the industry in terms of sovereign tracking efficiency, market attention, and sovereign Panda debt underwriting, etc. In recent years, CCSIC has closely tracked the sovereign ratings of Korea, Turkey, Belarus, and other countries.
In recent years, CCSIC has closely tracked changes in U.S. sovereign credit, and in the adjustments to U.S. sovereign credit ratings since 2020, CCSIC's adjustments have been made earlier than those of international rating agencies, relatively reflecting the timeliness of the ratings.
- On April 21, 2020, CCSIC revised the outlook on the U.S. rating from stable to negative, and then Fitch revised the outlook on the U.S. rating to negative in July of the same year.
- On May 25, 2023, CSCI downgraded the U.S. sovereign credit rating from AAAg to AA+g, ahead of Fitch's downgrade of the U.S. on August 2, 2023, and Moody's downgraded the outlook on the U.S. sovereign credit rating on November 10, 2023 from stable to negative.
- A number of well-known media at home and abroad reported extensively on this, and the U.S. downgrade was publicized in a number of mainstream media at home and abroad, and interviewed by CCTV CGTN.
[1] The U.S. general government debt ratio is the sum of the public debt of the U.S. federal government and local governments as a percentage of GDP.
[2] Democrats and Republican support groups have significantly divergent positions on issues such as race, immigration, climate policy, healthcare, and gun control.
