UPDATE: S&P reaffirms ratings, outlook on USA

(Updated - June 30, 2016 3:45 PM EDT)

S&P

OVERVIEW

• The credit strengths of the U.S. include its diversified and resilient economy, extensive economic policy flexibility, and unique status as the issuer of the world's leading reserve currency.
• However, a high level of general government debt and the relatively short-term-oriented nature of policymaking constrain the ratings. We expect the debt burden will hold fairly steady over the next several years but then rise thereafter absent medium-term measures to raise additional revenue and/or cut nondiscretionary expenditures.
• We affirmed our 'AA+/A-1+' sovereign credit ratings on the U.S. The outlook remains stable, reflecting our view that over the next two years, the positive and negative rating factors are balanced. We base this on our expectation that the inherent economic and policy strengths of the U.S. will continue to offset its high level of debt and weak political cohesion.

RATING ACTION
On June 30, 2016, S&P Global Ratings affirmed its 'AA+' long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the United States of America. The outlook on the long-term rating remains stable.

RATIONALE
The sovereign credit ratings on the U.S. are supported by the resilience and diversity of its economy, its institutional strengths, its extensive economic policy flexibility (including its management through the 2008-2009 global financial crisis, particularly its proactive monetary policy), and its unique status as the issuer of the world's leading reserve currency. Political disagreement across and within parties has complicated the policy decision-making process and resulted, in our view, in a weaker ability to enact reform, which constrains the ratings.

The U.S.'s general government debt burden (as a share of GDP) remains twice its 2007 level. While debt to GDP should hold fairly steady over the next several years, we expect it to rise thereafter absent measures to raise additional revenue and/or cut nondiscretionary expenditures. In addition, the contingent liabilities associated with the nonbank financial sector, namely the government-sponsored enterprises Fannie Mae and Freddie Mac, contribute to the burden on public finances.

With a per capita GDP of US$57,000 for 2016, the U.S.'s income level is ninth out of the 131 sovereigns that we rate (see the interactive version of Sovereign Risk Indicators at spratings.com/SRI). The breadth and depth of the U.S. economy--coupled with a track record of proactive policymaking at the depth of the recession--underpin the recovery since that time. Real GDP is 15% higher than its low point in second-quarter 2009.

Although the recovery has been subpar compared with previous rebounds, it followed the most severe economic downturn since 1929. The pace of the U.S. rebound also compares favorably with that of other advanced economies. Indeed, following the U.K.'s decision to leave the EU, this is even more likely to be the case. That said, long-term potential growth in the U.S. has declined and will likely be close to 2%, reflecting aging demographics (which contribute to labor force participation being at a 40-year low) and diminished labor productivity gains over the past decade compared with the postwar average. This underscores the challenge for policymakers in the U.S. in the coming years.

We expect growth of about 2.0% this year following 2.4% in 2015. During 2017-2018, we expect real GDP growth to average about 2.3%. This growth rate is supported by an ongoing improvement in both the housing sector and the labor market, with steady job gains putting unemployment at 4.7% in May. The decline in shale energy investment stemming from lower global oil prices has weighed on both investment and near-term growth. However, that should reverse eventually given the removal of the export ban on U.S. oil exports. In addition, we expect continued competitiveness gains in manufacturing because of competitive labor costs and the lower cost of natural gas stemming from increased shale gas production. Also, deleveraging in the U.S. household sector is more advanced than it is for European sovereigns, and the U.S. banking system has bolstered its financial strength more through raising capital than deleveraging. We also expect the moderation in fiscal drag at the federal, state, and local government levels (together, the general government) in 2014 and 2015 to continue to support growth given some near-term relaxation of the sequester caps following the Bipartisan Budget Act of 2015 (BBA2015).

As economic and labor market conditions have improved, the Federal Reserve has begun a slow process of normalizing monetary policy. In December 2015, the Federal Reserve raised the federal funds rate for the first time since 2006 to 0.25% - 0.50%. In line with signals from the authorities, we expect slow and measured increases in the overnight rate given lingering constraints on household income following the financial crisis. We expect the Fed's decisions to remain data driven. Job creation has slowed lately, and long-term unemployment, though down, remains higher than pre-recession levels. In addition, wage growth has been subdued for the majority of households. Furthermore, potential global financial volatility following the Brexit vote could inform the pace of monetary tightening.

The U.S.'s policymaking and political institutions tend to be transparent and accountable. The checks and balances of the U.S.'s system of government have generally generated a stable backdrop for economic prosperity and the free flow of information, notwithstanding several budgetary impasses in recent years. Unparalleled economic data in terms of timeliness and coverage are readily and publicly available. A strong civic society, political stability, respect for property rights and the rule of law, and success as a driver of innovation have supported economic prosperity and underpin the U.S. dollar's status as the world's premier reserve currency.

This reserve currency status affords the U.S. significant flexibility in its external accounts. Taking into account the key reserve currency status, as well as the degree to which the U.S. has supplied liquidity around the globe, our political and economic analysis suggests that the U.S. has unparalleled external liquidity. The external analysis is complicated by the dominant reserve currency role. We expect the ratio of external debt, net of liquid assets, to average about 365% of current account receipts during 2016-2018, which is high compared with the ratios of most sovereigns. However, the overall net external liability position of the U.S. is lower. In addition, the debtor position may be overstated, considering currency issues, composition considerations, and the difficulty of recording multinational activity of U.S. private companies in offshore centers.

Valuation effects on the U.S.'s external assets and liabilities, including derivatives, dominate the external stocks vis-à-vis the current account cash flows. The current account deficit was 2.6% of GDP in 2015, and we expect it to remain at about this level over the next several years. This is still below the pre-recession peak of 5.8% of GDP in 2006 but is up from the recent low of 2.2% in 2013. Weaker global growth and a stronger dollar underpin the wider current account deficit. The ongoing shale gas and oil production could turn the U.S. from a net energy importer to a net energy exporter. In October 2013, domestic production of crude oil was higher than imports for the first time since 1995. The significant increase in natural gas production--with the U.S. the largest natural gas producer in the world--supports natural gas exports and reduces net imports.

At the outset of the 2008-2009 recession, the Federal Reserve Bank acted promptly and innovatively to staunch the collapse in credit. It provided exceptional support to broker-dealers, commercial paper issuers, mutual funds, large insurance companies, U.S. offices of foreign banks, and foreign central banks, to name a few. These operations have since been wound down. At the same time, the Fed has supported monetary conditions through balance-sheet expansion, having reached the zero bound in interest rates in 2008. The Fed's holdings of government securities and mortgage-backed securities totaled $4.4 trillion (24% of GDP) at the end of March 2016, holding steady since the decision to end long-term asset purchases in October 2014 and up from $741 billion in December 2007 (5% of GDP). We expect that the Fed will likely begin to rein in its balance sheet only after it has taken further steps to raise the federal funds rate. The Fed has successfully moved the federal funds rate
into its targeted range via reverse repurchase operations as well as by paying interest on bank reserves and expanding the list of eligible counterparties. We believe inflation expectations are well-anchored, as the yields on 10-year TIPS (government inflation-linked notes) demonstrate.

In our view, the stability and predictability of U.S. policymaking and political institutions, though high, have weakened from when we rated the U.S. 'AAA'. We find that a series of political impasses has impeded more effective policymaking compared with other highly rated advanced sovereigns. An example is the vigorous debates in October 2013 about raising the debt ceiling and shutting down the government. As expected, a last-minute compromise was struck, but we view the continued shorter-term nature of political fiscal calculations and deal-making to be a negative credit factor.

Since then, a series of agreements has been struck. Both parties came together to avoid the so-called "fiscal cliff" in December 2012 and passed the American Taxpayer Relief Act (ATRA2012), making permanent some expiring tax cuts and allowing high-income tax cuts to expire. Following vigorous debate over the shutdown of certain governmental functions and over the debt ceiling in October 2013, both parties concluded the Bipartisan Budget Agreement (BBA2013) in December 2013. This set the example for the BBA2015, which was negotiated last October. Both provided partial relief from the automatic sequestration of discretionary spending in fiscal-years 2014 through 2017 by a combination of higher revenues, spending reductions, and extending sequestration until 2025. We expect BBA2015 will facilitate subsequent funding appropriation discussions for fiscal 2017.

Negotiation of BBA2015 occurred alongside an agreement to suspend the debt ceiling until March 2017. It had expired in March 2015, when the Treasury began undertaking extraordinary measures to stay below the debt ceiling. As expected, the debt ceiling was ultimately resolved, but it remains our view that the ensuing debate about raising or suspending the ceiling poses a risk to the economy. Under our criteria, certain measures taken as a consequence of a debt ceiling impasse could amount to a default, such as if the U.S. government were to unilaterally extend the payment maturities of its sovereign obligations, even if for short periods.

Bipartisan successes in 2015 also included the passage of a Medicare finance bill (that repeals long-standing caps on Medicare payments to doctors that were annually and temporarily suspended), approval of fast-track trade promotion authority, a five-year highway funding bill, and a tax bill that made extenders permanent. More ambitious steps to stem rising medium-term fiscal pressures remain politically challenging. Although both parties agree on the need to moderate the projected longer-term rise in the government debt burden, the parties differ about how this might be achieved. The next president and configuration of Congress will inform the prospects for any advancement of tax and entitlement reform. Additional signs of cross-party dialogue on these pertinent fiscal issues could support the rating.

There has been some improvement in the fiscal position of the U.S. Fiscal deficits have declined since 2009. The improvement is part cyclical and part structural, following from policy decisions. Under our criteria, our primary fiscal metric on the flow side is the change in general government debt. The change in debt results mostly from yearly deficits but also from off-budget activities, such as net lending. The general government deficit (as stated in the National Income and Product Accounts on a calendar-year basis) has declined by more than half--to 3.6% of GDP in 2015 from 11% in 2009. Most of this improvement stems from the federal government due to cyclical improvements in revenue, the rescinding of the temporary reduction in social security contributions, higher tax rates on high-income earners, and expenditure restraint as a result of caps imposed by Budget Control Act of 2011 (BCA2011). The change in general government debt also includes items such as the increase in direct student loans (that has averaged about 0.6% of GDP a year). However, given the increases in discretionary spending in fiscal 2016 and fiscal 2017 as per BBA2015, we expect that fiscal deficits have bottomed and will rise over the forecast period.

Although deficits have declined, net general government debt to GDP remains high at about 80% of GDP. Given our growth forecasts and our expectations that credit conditions will remain subdued, thus keeping real interest rates in check, we expect this ratio to hold fairly steady through 2019. At that point, it could deteriorate more sharply. Our assessment of the U.S.'s debt position incorporates our view that contingent liabilities from the financial sector and all nonfinancial public enterprises are moderate. The "moderate" assessment stems primarily from the materiality and systemic importance of Fannie Mae and Freddie Mac in light of their low levels of capitalization. In our view, the credit standing of both entities incorporates our assessment of an almost certain likelihood of extraordinary support from the U.S. Treasury given their critical policy role in the housing sector and integral link with the government. With $5.2 trillion in assets as of March 2016, they are
material in size: almost 30% of GDP and equivalent to about 30% of the total assets for depository institutions assets.

OUTLOOK
The stable outlook signals our view that negative and positive rating factors will be balanced over the next two years. We do not see material risks to our favorable view of the flexibility and efficacy of monetary policy. We believe the U.S.'s economic performance will match or exceed that of most other advanced economies in the coming years.

The 'AA+' rating already factors in our view that U.S. elected officials are less able to react swiftly and effectively to public finance pressures than are officials of other highly rated sovereigns. It includes the prospect that debates over raising the debt ceiling could be protracted and difficult. We expect these debates to conclude without provoking a sharp discontinuous cut in expenditure or in debt service.

We see some risk that continued improvement in economic performance could lead to complacency in addressing the U.S.'s medium-term fiscal challenges. Less likely than complacency, but more consequential for the rating, would be a deliberate relaxation of fiscal policy without countervailing measures to address the U.S.'s longer-term fiscal challenges, which, if serious enough, could lead to a downgrade.

On the other hand, we could raise the rating to 'AAA' if we see evidence that risks to debt service from debt ceiling debates have receded and that bipartisan measures point to more proactive fiscal and public policy.

KEY STATISTICS

Table 1

United States Of America--Selected Indicators
	2009	2010	2011	2012	2013	2014	2015	2016f	2017f	2018f
ECONOMIC INDICATORS (%)
Nominal GDP (bil. LC)	14,419	14,964	15,518	16,155	16,663	17,348	17,947	18,542	19,397	20,403
Nominal GDP (bil. $)	14,419	14,964	15,518	16,155	16,663	17,348	17,947	18,542	19,397	20,403
GDP per capita (000s $)	47.0	48.4	49.8	51.4	52.7	54.4	55.8	57.2	59.4	62.0
Real GDP growth	(2.8)	2.5	1.6	2.2	1.5	2.4	2.4	2.0	2.4	2.3
Real GDP per capita growth	(3.6)	1.7	0.8	1.4	0.7	1.6	1.6	1.2	1.6	1.5
Real investment growth	(13.0)	1.1	3.7	6.4	2.5	4.1	3.7	1.9	3.6	3.8
Investment/GDP	17.5	18.4	18.5	19.4	19.5	19.9	20.2	19.6	19.4	20.3
Savings/GDP	14.8	15.4	15.6	16.6	17.3	17.7	17.7	17.0	16.9	17.6
Exports/GDP	11.0	12.4	13.6	13.6	13.6	13.5	12.6	11.9	11.9	12.0
Real exports growth	(8.8)	11.9	6.9	3.4	2.8	3.4	1.1	0.4	3.5	3.8
Unemployment rate	9.3	9.6	8.9	8.1	7.4	6.2	5.3	4.8	4.5	4.4
EXTERNAL INDICATORS (%)
Current account balance/GDP	(2.7)	(3.0)	(3.0)	(2.8)	(2.2)	(2.3)	(2.6)	(2.6)	(2.5)	(2.6)
Current account balance/CARs	(16.8)	(16.8)	(15.4)	(14.4)	(11.4)	(11.7)	(14.6)	(15.7)	(14.9)	(15.5)
Trade balance/GDP	(3.5)	(4.3)	(4.8)	(4.6)	(4.2)	(4.3)	(4.2)	(4.1)	(4.1)	(4.4)
Net FDI/GDP	(1.1)	(0.6)	(1.2)	(0.8)	(0.7)	(0.8)	0.2	(0.6)	(0.6)	(0.5)
Net portfolio equity inflow/GDP	1.1	0.7	0.8	0.8	(2.1)	(1.6)	(2.1)	(0.4)	(0.5)	(0.7)
Gross external financing needs/CARs plus usable reserves	542.7	390.6	366.3	394.7	351.4	349.7	357.6	347.2	350.9	353.2
Narrow net external debt/CARs	320.6	295.2	287.7	289.4	299.7	308.2	327.6	357.0	366.3	371.3
Net external liabilities/CARs	114.7	95.4	148.7	145.8	165.7	210.3	230.4	249.9	255.1	258.6
Short-term external debt by remaining maturity/CARs	495.4	334.4	311.0	350.1	302.8	284.9	291.7	279.1	278.7	278.2
Reserves/CAPs (months)	1.3	1.6	1.7	1.9	1.9	1.4	1.4	1.4	1.3	1.2
FISCAL INDICATORS (%, General government)
Balance/GDP	(12.0)	(11.3)	(10.8)	(8.7)	(5.5)	(4.6)	(4.1)	(4.7)	(4.5)	(4.5)
Change in debt/GDP	10.9	11.0	6.8	6.8	4.4	3.6	3.6	4.7	4.5	4.5
Primary balance/GDP	(10.0)	(9.2)	(8.6)	(6.5)	(3.3)	(2.5)	(2.1)	(2.7)	(2.2)	(1.8)
Revenue/GDP	28.9	30.2	29.3	29.6	31.7	32.2	32.4	32.1	32.0	31.6
Expenditures/GDP	40.8	41.5	40.2	38.3	37.2	36.8	36.5	36.8	36.6	36.1
Interest /revenues	6.8	7.1	7.8	7.5	6.9	6.4	6.0	6.4	7.2	8.4
Debt/GDP	70.6	78.9	82.9	86.4	88.2	88.2	88.9	90.7	91.3	91.2
Debt/Revenue	244.5	261.5	282.7	291.9	278.1	274.1	274.1	282.8	284.8	288.6
Net debt/GDP	59.7	67.1	73.1	76.8	78.6	78.6	78.6	80.1	80.7	80.6
Liquid assets/GDP	10.9	11.9	9.8	9.6	9.6	9.7	10.2	10.6	10.6	10.6
MONETARY INDICATORS (%)
CPI growth	(0.4)	1.6	3.1	2.1	1.5	1.6	0.1	1.4	2.5	2.2
GDP deflator growth	0.8	1.2	2.1	1.8	1.6	1.6	1.0	1.3	2.1	2.8
Exchange rate, year-end (LC/$)	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00
Banks' claims on resident non-gov't sector growth	(3.2)	(1.7)	0.3	2.4	2.7	4.3	4.5	4.5	4.8	5.3
Banks' claims on resident non-gov't sector/GDP	165.8	157.1	151.9	149.4	148.7	149.0	150.5	152.2	152.5	152.7
Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

 

RATINGS SCORE SNAPSHOT

Table 2

United States Of America--Ratings Score Snapshot
Key rating factors	Assessment
Institutional assessment	Strength
Economic assessment	Strength
External assessment	Strength
Fiscal assessment: flexibility and performance	Neutral
Fiscal assessment: debt burden	Weakness
Monetary assessment	Strength
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 23, 2014 , summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Why these analysts say this strategy "may help in choppier times"
• Global S&P Futures mixed in premarket
• Packaging Corp. of America (PKG) PT Lowered to $181 at Citi