US Outperformance | Asian EM Currencies Comeback | Sovereign Debt 2024 | LATAM Debt for Nature Swaps | TSMC and Water Risks

Welcome to the latest edition of Essential Economics! We kick off this week with my article on US growth outperformance, where I argue it reflects a combination of resilience (flexibility and productivity), fiscal policy (loose), lags (monetary transmission), and luck (geography). Asia-Pacific Chief Economist Louis Kuijs weighs in on ASEAN currencies and sees prospects for a comeback against the US dollar. Our international public finance ratings team led by Roberto Sifon-Arevalo issued a suite of 2024 reports, estimating that sovereign long-term borrowing will reach $11.5?trillion in 2024, more than 50% above the pre-pandemic levels. Staying with sovereigns, a team led by Caroline Caballero analyzed debt-for-nature swaps, which have gained traction among sovereigns we rate in Latin America; we expect their appeal will increase in coming years among lower-rated issuers. Finally, in our latest Sustainability Insight, Credit Analyst Hins Li and team look at water scarcity as a risk in the coming decade for the tech hardware industry, particularly the water-intensive semiconductor subsector. As a case study, they take a deep dive into the Taiwan Semiconductor Manufacturing Company (TSMC).

US Bucks The Global Growth Trend

My senior team and I argue that the U.S. economy continues to outperform peers; it was the only major advanced economy where growth rose in 2023 despite the steep increase in policy rates. In our assessment, the strong relative performance of the U.S. reflects a combination of resilience (flexibility and productivity), fiscal policy (loose), lags (monetary transmission), and luck (geography).

U.S. growth should eventually slow as monetary policy tightening bites, but relative outperformance will continue if recent gains in productivity are sustained.

To read the full report, click here.

ASEAN EM Currencies: Charting A Comeback?

Louis concludes that following a decade of sizable real depreciation against the U.S. dollar, Asian emerging market (EM) currencies are now cheap enough to suggest a potential for long-term appreciation. The low valuations and prospects for continued economic catch-up should help the currencies strengthen in real terms, with nominal appreciation playing a crucial role.

Our benchmarks suggest much larger room for appreciation for some Asian EM currencies than for others, currency prospects also differ for developed economies.

To read the full document, click here.

Sovereign Debt 2024

Our international public finance team estimates that sovereign long-term borrowing will reach $11.5?trillion in 2024 (more than 50% above the pre-pandemic-levels) amid softer GDP growth, the heavy election schedule, elevated interest, and defense spending. The U.S. will account for 39% of global long-term issuance and China will overtake Japan as the second-largest sovereign issuer.

Even if government borrowing costs have likely peaked, the effective rate of servicing existing debt will remain higher than the pre-pandemic level.

To read the global report, click here.

To read the regional reports, click on: Americas, EMEA Developed, EMEA Emerging and Asia Pacific.

LATAM Debt for Nature Swaps

Caroline and team write that debt-for-nature swaps have gained traction among sovereigns we rate in Latin America, and we expect their appeal will increase in coming years among lower-rated issuers. Despite lowering the debt burden, none of the transactions we analyzed have changed the issuer's fundamental credit characteristics or led to higher ratings.

The capability of governments to meet their long-term commitments to conservation targets, as well as the enforceability of the contracts, remains broadly untested.

To read the full report, click here.

Sustainability Insights: TSMC and Water

Hins and team view water scarcity as a risk in the coming decade for the tech hardware industry, particularly the water-intensive semiconductor subsector. Mishandling such a risk could hit a chipmaker's operations and creditworthiness. We look at the sector leader Taiwan Semiconductor Manufacturing Company's (TSMC) risk exposure to water supply as a case study.

Given TSMC's dominance in advanced chipmaking, potential water-related disruptions to operations could disrupt the global tech supply chain.

To read the full report, click here.