September 19, 2014 / 8:11 PM / 5 years ago

Fitch Affirms United States at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 19 (Fitch) Fitch Ratings has affirmed the United States of America's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The ratings on senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS The US has unparalleled financing flexibility as the issuer of the world's pre-eminent reserve currency and benchmark fixed-income asset, and as home to the world's deepest and most liquid capital markets. This means the US rating can tolerate a higher level of public debt than other 'AAA' sovereigns. Foreign holdings of Treasury securities have risen every month since the debt ceiling crisis in October 2013, suggesting the role of the US dollar has not been undermined. The economy is large, rich and diverse, with GDP per capita (at purchasing power parity) and levels of human development above the 'AAA' median. The economy is one of the most productive, dynamic and technologically advanced in the world, underpinned by strong institutions and a favourable business climate. A strong fiscal consolidation is being achieved, reflecting the economic recovery and tax and spending measures. We forecast the federal government budget deficit to decline to 2.9% of GDP in FY14, from 4.1% of GDP in FY13 and 9.8% in FY09. However, on current policies it will start rising again from FY16, reaching 3.8% in 2022, driven by the impact of population ageing on social security and health spending, and higher net interest costs. We forecast federal government debt held by the public at 73.5% at end-2014 and to rise to 75% in 2024. Fitch forecasts gross general government debt (GGGD) to peak at 100% at end-2014 (excluding trade payables and unfunded pension liabilities, consistent with EU countries). We then project it to decline slightly to 98% in 2018, before starting to trend up again, reaching 104% by 2024. However, long-term projections are uncertain as they are sensitive to the economic outlook and future fiscal measures, which may be possible in a more conducive political environment. Our projections for GGGD are little changed from our estimates in March 2014 when we removed the US rating from Rating Watch Negative and affirmed it at 'AAA'. The debt peak is below the threshold of 110% of GDP, which we previously identified as incompatible with 'AAA' for the US (the highest of any country owing to its exceptional financing flexibility). Renewed brinksmanship over the federal debt ceiling is possible in 2015, although its suspension in February 2014 was in a timely manner and in a way that avoided casting uncertainty over the full faith and credit of the US. The suspension elapses on 15 March 2015, after which the seasonality of tax payments and use of extraordinary measures might allow the Treasury to fund the government and retain payment capacity into the summer. In our view, the coherence of economic policymaking is weaker than in most 'AAA' peers - evident in across-the-board discretionary spending cuts, the federal government shutdown in October 2013 and debt ceiling crises in August 2011 and October 2013. The US recovery is outpacing that in most advanced countries, albeit sluggish by its own historical standards. Fitch forecasts GDP growth of 2% in 2014, picking up to 3.1% in 2015 and 3% in 2016. We expect the Federal Reserve to start raising interest rates in mid-2015, after completing 'tapering' of its asset purchase programme in October 2014. Our base case is that the normalisation of monetary policy will not fundamentally destabilise the recovery or financial markets, although it will trigger some increase in volatility. Nonetheless, downside risks are material after an unprecedented period of low interest rates and quantitative easing. External liabilities are high, albeit US dollar-denominated, reflecting persistent current account deficits and low national savings rates, making the economy more vulnerable to adverse external shocks. RATING SENSITIVITIES The current Rating Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a downgrade. However, future developments that may, individually or collectively, lead to negative rating action include: - A significant increase in government deficits and debt/GDP ratio, for example if the US authorities do not take measures in the medium term to offset rising expenditure pressures from ageing and higher interest rates later in the decade. - A material deterioration in the coherence and credibility of economic policymaking or a negative shock that erodes the role of the US dollar as the pre-eminent global reserve currency and reduces financing flexibility and debt tolerance. KEY ASSUMPTIONS Fitch assumes that the federal debt limit, which has been suspended until 15 March 2015, will be suspended again or raised in due course before the Treasury exhausts its extraordinary measures and capacity to fund the government. Fitch's medium-term fiscal projections draw heavily upon Congressional Budget Office projections, which incorporate a baseline assumption that current laws governing federal taxes and spending generally remain the same. Fitch's projections also assume that the medium-term growth potential of the US economy is 2.2%; and that state and local government budget deficits remain the same as a percentage of GDP. Its projections are sensitive to these and other economic and fiscal assumptions. Financial sector risks are currently judged to be low, as reflected in Fitch's stable outlook for the US banking sector and Bank Systemic Indicator of 'a' . Contact: Primary Analyst Ed Parker Managing Director +44 20 3530 1176 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst James McCormack Managing Director +44 20 3530 1286 Committee Chairperson Andrew Colquhoun Senior Director +85 2226 39 938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available at Related Research: --United States Full Rating Report, September 2014 (forthcoming) --U.S. Government Debt and Rating Outlook, March 2014 here -- 'AAA' Sovereign Characteristics and Public Debt Ratios, 22 October 2013 here Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here US Government Debt and Rating Outlook here ‘AAA’ Sovereign Characteristics and Public Debt Ratios here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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