US Supply Chain Strains I China’s Debt Trap | Central Asia’s China Links | Low Defaults Despite Record CCC Credits | Sovereign Ratings EM Webinar
Welcome to another edition of?Essential Economics! Chief US Economist Beth Ann Bovino looks at the impact of supply chain disruptions on slower US growth. Spurred by recent events involving Evergrande and other developers, our Asia-Pacific credit research colleagues led by Terry Chan and Eunice Tan took a deep dive into China’s corporate debt challenges. Our expanded “EM-plus” initiative continues as Valerijs Rezvijs looks at Central Asia’s growing trade and investment links with China at the expense of Russia. Credit researcher Nicole Serino investigates the unprecedented wedge between default rates and CCC ratings levels.?Next, we feature a sovereign team webinar replay focusing on emerging market trends and ratings. We wrap things up with a bonus section featuring our senior economists and credit researchers in the news this week. Enjoy!
US Economy Slows Under Supply Chain Strain
The pace of the US recovery has slowed in recent months as supply chain bottlenecks limit economic activity and raise inflation above the Fed’s target. But some perspective is warranted: the Weekly Economic Index, which reflects the common trends in several production indicators has showed resilience. And our recently lowered 5.7% GDP growth forecast for 2021 is still a 37- year high.
Fortunately, COVID-19 infection rates have fallen from their September highs and mobility rates improved in most of the U.S, pointing to a rebound in growth.
To read Beth Ann’s full report, click here.
China’s Corporate Debt Trap
Evergrande’s problems exposed credit strains among Chinese corporates, as well as a strong resolve by the government to tackle this issue. A cross-sector Ratings team probed these pressures in a survey of over 25,000 global entities. They found that leverage levels of China's corporate sector are both significantly above the global average and riskier than the global average.
With the Chinese government's resources, the corporate debt trap could be overcome, but not without pain for borrowers and lenders.
To read the full report, click here.
Central Asia’s Growing Links with China
As part of our “EM+” initiative, Valerijs looks at trade and investment links between Central Asia and China, particularly the rise in energy exports from the region. China's transition to a consumption-led from an investment-led growth model and its new climate goals will likely change Central Asia's export dynamics with a gap of 10%-15% between the two models.
However, China's plan to achieve carbon neutrality by 2060 could increase its need to import gas from Central Asia, at least in the medium term.
To read the full paper, click here.
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Low Default Rates Despite Record Level CCC Ratings
Nicole reports that low default rates persist despite record levels of 'CCC' ratings. Historically, there has been a strong correlation with the percentage of 'CCC' ratings and default rates. One explanation: the profile of a typical 'CCC' rated company has changed in the past 18 months, reflecting the dramatic economic impact of COVID-19.
The divergence between 'CCC' rated entities as a percentage of all speculative-grade ratings and the default rate should fade as government supports are withdrawn and financing conditions normalize.
To read the full report, click here.
Global Sovereign Webinar: EM Spotlight
Earlier this week, Roberto moderated a panel of our leading sovereign ratings analysts from across the globe in an interactive webinar. They provided their insights and views on emerging market sovereign ratings, focusing?on China, Indonesia, Malaysia, Brazil, Mexico, South Africa and Turkey, among others
To watch the replay, click here.
Bonus Section: S&P Global Ratings Economists and Research in the News
Our senior economists and researchers were active in the media this week telling our macro and credit stories to the marketplace.
1.?????Chief European Economist Sylvain Broyer appeared on Bloomberg Market Close to discuss the outlook for inflation and wages in Europe, and the growing gap between the ECB and Bank of England monetary policies. Sylvain’s interview, which starts at 14:30, can be found here.
2.?????Global Head of Analytical Research and Development Alexandra Dimitrijevic appeared on Bloomberg Radio to share her views on the state of the recovery and its impact on credit. Alexandra’s interview can be found here.
3.?????Head of Credit Market Research Patrick Drury Byrne appeared on CNBC Africa to discuss our latest report on global corporate debt (see above). Patrick’s interview can be found here.