In a significant move, Fitch Ratings has downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘AAA’ to ‘AA+’. The rating downgrade reflects concerns over the nation’s expected fiscal deterioration in the next three years, a growing government debt burden, and the erosion of governance relative to peer countries.
Fitch highlights a steady decline in governance standards over the last two decades, particularly on fiscal and debt matters, which has led to repeated debt limit standoffs and last-minute resolutions. This lack of fiscal management confidence, coupled with the absence of a medium-term fiscal framework, has contributed to successive debt increases over the past decade. Furthermore, addressing medium-term challenges related to rising social security and Medicare costs due to an aging population has seen limited progress.
The agency projects a rise in the general government deficit to 6.3% of GDP in 2023, reflecting weaker federal revenues, new spending initiatives, and a higher interest burden. State and local governments are also expected to run a deficit, leading to concerns about the overall fiscal outlook. Despite some cuts to non-defense discretionary spending, substantial fiscal consolidation measures are not expected before the November 2024 elections.
The general government debt-to-GDP ratio, while reduced from the pandemic high in 2020, remains significantly above pre-pandemic levels. Fitch forecasts further increases in the debt ratio, reaching 118.4% by 2025, which is more than twice the ‘AAA’ median of other countries.
Looking ahead, Fitch projects a mild recession in the U.S. economy in late 2023 and early 2024, with annual real GDP growth slowing down. Persistently high core PCE inflation and tightening financial conditions due to the Federal Reserve’s actions pose additional challenges.
Fitch considers the U.S.’s governance indicators and political stability as highly relevant to the rating, with some positive and negative impacts on the country’s credit profile.
While the U.S. still retains several structural strengths, including a large and advanced economy and the status of the U.S. dollar as the world’s reserve currency, the rating downgrade serves as a warning to policymakers to address fiscal challenges and restore governance confidence to ensure future economic stability.
By: Montel Kamau Serrari Financial Analyst 2nd August, 2023
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