UPDATE: S&P Affirms US Rating at AA+; Outlook Stable
-- Credit strengths of the U.S. include its diversified and resilient
economy, its extensive economic policy flexibility, and its unique status as
the issuer of the world's leading reserve currency.
-- However, a polarized policymaking environment and high general
government debt and budget deficits constrain the ratings. Although the debt
burden has stabilized, it will likely rise toward the end of the decade absent
medium-term measures to raise additional revenue and/or to cut
-- We are affirming our 'AA+/A-1+' sovereign credit ratings on the U.S.
-- The outlook remains stable, reflecting our view that there is less
than a one-in-three chance that we will change the rating in the next two
years based on our expectation that the inherent economic and policy strengths
of the U.S. will continue to be juxtaposed against an absence of political
cohesion for bolder medium-term policy measures.
On June 6, 2014, Standard & Poor's Ratings Services affirmed its 'AA+'
long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the
United States of America. The outlook on the long-term rating remains stable.
The sovereign credit ratings on the U.S. are supported by the resiliency and
diversity of its economy, its institutional strengths, its extensive economic
policy flexibility (including its management through the 2008-2009 global
financial crisis, particularly its innovative monetary policy), and its unique
status as the issuer of the world's leading reserve currency. A higher degree
of political brinksmanship in recent years--that complicates the policy
decision-making process, resulting in a somewhat weaker ability to enact
reform--constrains the ratings. The general government debt burden has doubled
since 2007. Although it is projected to hold steady over the next several
years, we, along with many other observers, expect the general government debt
burden to rise toward the end of the decade absent measures to raise
additional revenue and/or cut nondiscretionary expenditure.
With a per capita GDP of US$54,750 for 2014, the U.S. ranks 14th out of the
129 sovereigns that Standard & Poor's rates in terms of income level. The
breadth and depth of the U.S. economy, coupled with a track record of
proactive policymaking at the depth of the recession, underpin the recovery
since that time. The level of real GDP is 11% higher than its nadir in
second-quarter 2009. Although the recovery has been subpar compared with
previous rebounds, it has occurred from the deepest economic downturn since
1929. The pace of the U.S. rebound also compares favorably with those of its
advanced economy peers. Long-term potential growth, however, has declined, in
our view. It is likely to be closer to 2% rather than 2.5%, reflecting aging
demographics (which contribute to labor force participation being at a 36-year
low) and diminished labor productivity gains over the past decade compared
with the postwar average.
However, over the next several years, we expect real GDP growth of 2.5%-3.5%.
This growth rate is supported by a revival in manufacturing due to competitive
labor costs and the lower cost of natural gas stemming from increased shale
gas production. In addition, deleveraging in the U.S.'s household sector is
more advanced than it is for European peers, and the U.S. banking system has
bolstered its financial strength more through raising capital than
deleveraging. Compared with prior years, we expect less fiscal drag at the
federal, state, and local government levels (together, the general government)
in the near term. As economic and labor market conditions have improved, the
Federal Reserve has begun a slow process of normalizing monetary policy.
Long-term unemployment, while down, remains high, at more than twice that of
prerecession levels, and with its concentration in the young and the old,
poses a policy concern.
The U.S.'s policymaking and political institutions tend to be transparent and
accountable. The checks and balances of the U.S.'s system of government have
generally generated a stable backdrop for economic prosperity and the free
flow of information, notwithstanding the recent budgetary debates.
Unparalleled economic data in terms of timeliness and coverage are readily
publicly available. A strong civic society, political stability, respect for
property rights and the rule of law, and success as a driver of innovation
have supported economic prosperity and underpin the U.S. dollar's status as
the world's premier reserve currency.
This reserve currency status affords the U.S. significant flexibility in its
external accounts. Taking into account the key reserve currency status, as
well as the degree to which the U.S. has supplied liquidity around the globe
in recent years, our political and economic analysis suggests that the U.S.
has unparalleled external liquidity. The external analysis is complicated by
the dominant reserve currency role. Whereas the ratio of external debt, net of
liquid assets, averaging about 360% of current account receipts (CAR) during
2014-2017, is high compared with the ratios of most sovereigns, the overall
net external liability position of the U.S., at 195% of CAR over this same
period, is much lower. In addition, the debtor position may be overstated,
considering currency issues, composition considerations, and the difficulty of
recording multinational activity of U.S. private companies in offshore
Valuation effects on the U.S.'s external assets and liabilities, including
derivatives, dominate the external stocks vis-a-vis the balance of payments
cash flows. The current account deficit declined to 2.3% of GDP as of 2013
from a prerecession 2006 peak of 5.8% of GDP, and we expect it to remain
around this level. Prospects for ongoing shale gas and oil production could
turn the U.S. from a net energy importer to potentially a net energy exporter.
In October 2013, domestic production of crude oil was higher than imports for
the first time since 1995. The significant increase in natural gas
production--with the U.S. the largest natural gas producer in the world--will
support natural gas exports.
At the outset of the 2008-2009 recession, the Federal Reserve Bank acted
promptly and innovatively to staunch the collapse in credit. It provided
exceptional support to broker-dealers, commercial paper issuers, mutual funds,
large insurance companies, U.S. offices of foreign banks, and foreign central
banks, to name a few. These operations have since been wound down. At the same
time, the Fed has supported monetary conditions through balance sheet
expansion, having reached the zero bound in interest rates in 2008. The Fed's
holdings of government securities and mortgage-backed securities rose to $4.1
trillion (24% of GDP) at the end of May 2014 from $741 billion in December
2007 (5% of GDP). In our view, the Fed will likely begin to rein in its
balance sheet only after the first hike in the federal funds rate (which could
be in the second quarter of 2015). In preparation for this normalization, the
Fed has developed its tools to manage the process, including paying interest
on bank reserves and expanding the list of eligible counterparties for reverse
repurchase transactions. We believe inflation expectations are well-anchored,
as evidenced by the yields on 10-year TIPS (government inflation-linked
The stability and predictability of U.S. policymaking and political
institutions, while high, have weakened in recent years, in our view. We find
that the political impasses have impeded more effective policymaking compared
with some of the U.S.'s other peers. This is underscored most recently by the
simultaneous acrimonious debates in October 2013 about raising the debt
ceiling and shutting down the government. As we expected, a last-minute
compromise was struck, but we find the repeated shorter-term nature of
political fiscal calculations and deal-making to be negative credit factors.
That said, some agreements have been struck. Both parties reached across the
aisle to conclude The Bipartisan Budget Agreement (BBA2013) in December 2013.
BBA2013 provided partial relief from the automatic sequestration of
discretionary spending in fiscal 2014 and fiscal 2015 (by a combination of
higher revenues, spending reductions, and extending sequestration beyond its
previous end date by an additional two years); the agreement on overall
discretionary spending levels should facilitate funding appropriation through
fiscal year-end Sept. 30, 2015. The same was done to avoid the so-called
"fiscal cliff" in December 2012 as both parties passed the American Taxpayer
Relief Act (ATRA2012), making permanent some expiring tax cuts and allowing
high-income tax cuts to expire.
However, more ambitious steps to stem rising medium-term fiscal pressures do
not appear to be in the offing. Although both parties agree on the need to
lower the government debt burden, the discussions about how this might be
achieved are acrimonious. In the near term, including the run-up to the
presidential elections in 2016, we do not expect entitlement or tax reform to
advance. We believe that renewed debate over the debt ceiling could resume
after the midterm elections in November 2014 under certain scenarios. While we
expect the discussions about the debt ceiling to be ultimately resolved as
they have been, we still see risks that these debates entail.
Against this backdrop, we see that the fiscal position of the U.S. has, in
fact, improved from 2009 on a flow basis, namely a decline in government
deficits. The improvement is part cyclical and part structural following from
policy decisions: namely implementation of the Budget Control Act of 2011
(BCA2011), ATRA2012, and BBA2013.
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