By Davide Barbuscia and Matt Tracy
NEW YORK (Reuters) – Credit rating agency Fitch said on Wednesday it expects U.S. fiscal deficits to remain high this year, and that fiscal policy and governance implications of the U.S. presidential elections will be key issues for the country’s sovereign rating.
Fitch last year downgraded the U.S. government’s top credit rating to AA+ from AAA, citing fiscal deterioration and repeated down-the-wire debt ceiling negotiations.
A major near-term shift to deficit reduction measures is unlikely because of political polarization, said Shelly Shetty, head of Americas Sovereign Ratings at Fitch Ratings, in a webinar on Wednesday.
The U.S. debt rating would be hurt by a “marked increase” in general government debt, and a decline in coherence and credibility of policymaking that undermines the U.S. dollar’s reserve currency status, she added.
Fitch’s downgrade in August, two months after the debt ceiling crisis was resolved, drew an angry response from the White House and surprised investors.
It spotlighted the U.S. government’s debt sustainability – a theme that fueled a summer bond sell-off as investors grew increasingly concerned over the widening federal debt burden and higher interest payments.
The nonpartisan Congressional Budget Office (CBO) has estimated cumulative budget deficits of about $20 trillion in the coming decade.
However, Fitch said the U.S. economic outlook has improved. It no longer expects a recession this year but “a more shallow downturn” than previously forecast, Fitch’s Chief Economist Brian Coulton said in the webinar. When the agency cut the U.S. debt rating, it expected a mild recession by the end of 2023 and in the current quarter.
Fitch expects the Federal Reserve to cut interest rates three times this year, a positive for corporate debt issuers, said Winnie Cisar, global head of strategy at CreditSights, a Fitch company.
While the election is unlikely to affect high-yield and leveraged loan issuers’ decisions to tap the debt markets, she predicted price volatility in secondary corporate debt markets around the presidential primary elections in March.
(Reporting by Davide Barbuscia and Matt Tracy; Editing by Chizu Nomiyama and Richard Chang)
