A combination of slowing economic growth, sustained low interest rates and unprecedented levels of indebtedness will broadly influence the global credit outlook in 2020, says Fitch Ratings. The aggregate rise in global indebtedness in 2019, which occurred as monetary authorities reversed course on rate hikes, will increase vulnerabilities for key sectors in the event of a more rapid than expected economic downturn.

Sovereigns are a case in point with stretched median budget deficits across rating categories. Monetary policy has limited room to help reverse a downturn in many countries. This leaves fiscal policy to shoulder the burden, which will be constrained by fiscal and political capacity, and vary between governments. How effectively governments respond will be critical for debt dynamics and creditworthiness in the longer term. Emerging markets (EM) are generally in a weaker position with greater vulnerability to shifts in investor sentiment and have a higher starting point for debt with corresponding higher levels of refinancing risk. A looming maturity wall of nearly $5 trillion for EM issuers in 2020 adds to potential risk in a falling growth and confidence-sensitive environment.

The sustained low-rate, low-growth environment will extend structural profitability challenges for financial institutions, an issue particularly acute in Europe and Japan. How financial institutions respond to these challenges and the extent to which they take on additional risk to boost profitability will likely remain a key point of focus in 2020. The share of financial institution Negative Outlooks has risen sharply in 2019.

Global corporate debt issuance grew strongly in 2019 alongside continued benign credit conditions. In the 'BBB' category companies have not taken advantage of the prolonged economic expansion to deleverage as much as Fitch would typically expect in this portion of the cycle. Maturity profiles remain generally manageable in this category but delaying debt reduction will mean less ratings headroom in the event of a deterioration in performance through a slowdown.

One potential catalyst for a more rapid downturn than in our base case is a sharp equity market correction. Long-term valuation metrics for US equities are near historic highs increasing the probability of a correction, especially as potential risk triggers such as a hard landing in China or trade-related uncertainties are likely to persist.

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