Scope affirms the United States of America’s AA ratings with Stable Outlook
For the updated report accompanying this review, click here.
Scope Ratings GmbH (Scope) today affirms the long-term local- and foreign-currency issuer and senior unsecured debt ratings of the United States at AA, with Outlooks Stable. The Agency has affirmed the short-term issuer ratings of the United States at S-1+ in local- and foreign-currency, Outlooks Stable.
Summary and Outlook
The affirmation of the United States’ credit ratings at the AA level reflects the sovereign’s multiple credit strengths, such as a wealthy, competitive and diversified economy, the largest economy globally in nominal terms and second largest based on purchasing power parity. In addition, the US benefits from dollar’s continued role as the preeminent international reserve currency, bringing unrivalled strengths as regards Treasury’s financing flexibility, and reducing longer-run debt sustainability risk from comparatively higher government debt than many countries of the same rating class. The United States, in addition, benefits from sound, transparent and accountable economic institutions, including the globe’s foremost central bank in the Federal Reserve supporting macroeconomic and price stability, alongside one of the most advanced domestic financial systems.
Challenges affecting the ratings include rising economic and financial-stability risk, as the Federal Reserve tightens rates to cool elevated inflation, comparatively weak government finances, with the debt stock and annual gross financing requirements expected to remain substantively more elevated than levels from before the Covid-19 crisis. In addition, the US’ ratings are challenged via heightened risk associated with partisan misuse of the debt-ceiling instrument, with the US Treasury projected to reach said debt ceiling by early 2023. The debt ceiling has resulted in phases of severe debt repayment difficulty for the government and dependence upon last-minute congressional action to ensure repayment of debt in full and on time.
Longer-run governance risk reflects a challenge. The Democratic Party is projected presently to lose control of Congress after mid-term elections, which risks heightened policy-making paralysis ahead of 2024 presidential and congressional elections. Furthermore, economic implications of an ageing population and slowing population growth, and vulnerabilities of the external sector are challenges.
The Stable Outlook represents Scope’s opinion that risks to the credit ratings over the next 12 to 18 months are balanced.
The ratings/Outlooks could be downgraded in the event of, individually or collectively: i) a weakening in the outlook of public finances, such as via anticipation of further significant increases in the government debt ratio; ii) inappropriate use of the debt-limit instrument, raising likelihood of technical default; iii) weakening of governance, with negative ramifications for effectiveness of government in management of the economy and resolution of crises; and/or iv) evidence of a significantly reduced role of the US dollar as global reserve currency, leading to attenuated global demand for US treasuries.
Conversely, the ratings/Outlooks could be upgraded if policy changes result in: i) meaningful reform improving the nation’s fiscal policy framework such as effective removal of the debt limit and possible replacement with alternative fiscal safeguards, enforcing prudent fiscal policy making; ii) reforms that improve the potential growth outlook, placing the public debt ratio on a sustained declining trajectory; and/or iii) improvements of governance and/or reduction of political polarisation improving efficacy of economic policy setting.
The affirmation of the United States’ AA credit ratings reflects important credit strengths.
The nation benefits from a large and diversified economy that is the world’s largest based upon nominal size (USD 25trn in 2022) – significantly enhancing resilience during global economic shocks such as that since 2022, with a high level of wealth (GDP per capita of USD 75,180 – among the highest globally), and global leadership in areas such as science, technology and innovation. Flexibility of labour and product markets, a dynamic, entrepreneurial business culture, and a skilled labour force are further credit strengths. Real labour productivity per hour worked is this year around 37% above 2000 levels, around twice gains observed over the same period for ratings peers France (rated AA) or the United Kingdom (AA). As a contravening force, a demographic dividend – while still comparing favourably against that of shrinking working-age populaces such as that of France – has attenuated in strength as a driver of trend growth, with the American working-age population set to increase around 0.1% a year over 2023-27, below a 0.4% rate of the last decade.
In 2021, the US economy grew 5.9% – with output more than fully recovering to pre-crisis levels after a 2.8% drop of 2020. The economy had recovered to pre-Covid levels of output by Q1 2021 – ahead of peer economies such as that of the United Kingdom, the euro area and Japan. Recovery has been interrupted by escalation of the Russia-Ukraine war and an associated cost-of-living crisis. However, the US economy exited H1-22 technical recession in Q3 of 2022, with growth of an annualised 2.6% QoQ. While economic conditions remain exceptionally challenging, Scope expects growth of 2% for 2022 (revised up from 1.7% under July 2022 forecasting), followed by 1.1% for 2023 (revised down from 2%) – reflecting comparative resilience of the economy to date in the face of significant Federal-Reserve rates tightening. Longer run, Scope assesses the rate of potential growth at 2%, comparing favourably against potential rate of growth of peer economies such as the United Kingdom and France.
Next, the United States’ AA ratings are anchored by an independent monetary policy and dollar’s unparalleled global reserve currency status during the post-war era, which enables the nation to run budget and current-account deficits with comparatively more limited concerns with respect to long-run public and/or external debt sustainability. Based on IMF data1, around 59.5% of the globe’s foreign-exchange reserves were held in dollar as of Q2 2022, trailed (distantly) by the euro (19.8%), yen (5.2%) and pound sterling (4.9%); 2.9% of reserves were held in renminbi. However, the dollar share has nevertheless seen a degree of gradual decline from an above 70% share as of the early 2000s – as long-run challengers to dollar hegemony have risen amid slow fracturing over past years of the multilateral, dollar-based global order. This longer-run fracturing has been accelerated since the full-scale Russia-Ukraine war with pursuits of alternative reserve currencies, such as via China and Russia in advocating payments in their own national currencies, although the current crisis has as well conversely facilitated large-scale safe-haven inflows to dollar as US rates furthermore rise and become a more attractive destination for savings.
On basis of alternative metrics, the share of the US dollar remains similarly by a distance the most significant, such as with respect to currency denomination of outstanding international debt securities (65%, with the euro next with around 22%), outstanding international loans (55%, with the euro around 26%) and international deposits (57%, with euro around 24%) as of end-20212. This prime reserve-currency status of the dollar globally is unique among sovereigns rated by Scope and captured vis-à-vis a three-notch upside reserve-currency adjustment to the United States’ indicative credit rating underlying assigned AA ratings. This safe-haven status of dollar presents US Treasury with unrivalled access to international debt capital markets, including, crucially, during phases of crisis such as 2022-2023. Scope sees dollar’s status as the leading global reserve currency as unlikely to be meaningfully challenged over the foreseeable future, although acknowledging longer-run risks.
Furthermore, the United States’ AA ratings are supported by world-class monetary and financial-supervisory institutions, and one of the world’s most advanced financial systems and deepest capital markets. Banks are soundly positioned, with tier 1 capital of 13.5% of risk-weighted assets as of Q2 2022, having weakened nevertheless from 14.9% as of Q3 2021. Strong asset quality is reflected in non-performing loans of below 1% of total loans, below levels from end-2019 and with limited signalling of deterioration despite weak growth momentum during 2022. On the basis of the Federal Reserve’s annual stress examination in 2021, all 34 large banks’ capitalisations were displayed as being resilient under an event of severe global recession with substantive stress in commercial real estate and corporate debt markets – with capital ratios remaining above double minimum requirements in this adverse scenario.3 Banking-sector profitability had returned to pre-pandemic levels, with a sharp rise in interest rates continuing to anchor interest margins. Funding risks are limited, as banks rely only moderately on short-run wholesale funding and retain liquidity coverage ratios of more than double ratios from before the pandemic crisis – although structural vulnerabilities persist in some types of money market funds as well as in bond and bank-loan mutual funds.4
However, the United States’ ratings are challenged by multiple credit weaknesses.
Firstly, risks to the economy have risen due to elevated price pressure. Core personal consumption expenditure inflation stood at 5.1% YoY as of September, with the Federal Reserve expecting said preferred gauge of inflation to average around 4.4-4.6% YoY in Q4 2022, before receding to 3.0-3.4% by Q4 2023 and 2.2-2.5% by Q4 2024. Headline consumer-price inflation eased more than expected to 7.7% in October, after a 9.1% June peak; core consumer prices eased to 6.3% – still near highest since 1982. As a response to inflationary pressure, the Federal Reserve has raised rates by 375bps since March 2022 to 3.75-4.0% earlier this month and accelerated its pace of quantitative tightening – doubling a pace of balance-sheet reduction to USD 95bn a month starting September 20225. Scope anticipates further rate rises, bringing the Federal Funds Rate target range to 4.25-4.5% by end-2022 and 5.0-5.25% by 1H-2023.
As labour-market conditions have remained tight, with unemployment picking up only modestly to 3.7% in October – remaining near five-decade lows, the concern is that more aggressive tightening might be needed such as to cool demand. Scope expects said unemployment rate to average 3.7% in 2022 before rising to 4.2% next year. However, rapid tightening of funding conditions presents financial-system risks after a prolonged phase of accommodative central-bank policy having pushed financial-asset valuations to exceptionally elevated levels. While debt-service ratios remain moderate relative to historical averages, non-financial corporate debt stood at a high 80.6% of GDP as of Q1 2022, up 4.4pps since Q4 2019. Further risk to financial stability derives from decreased liquidity in treasury markets resulting from quantitative tightening, driving increased financial-market volatility.
Secondly, the ratings consider comparatively weak public finances, with general government debt and annual gross financing needs expected to remain durably more elevated after the Covid-19 crisis.
The headline general government deficit widened to 14.5% of GDP in 2020, after high deficits of an average of 6.1% of GDP over 2010-19. After receding to 10.9% of GDP in 2021, Scope anticipates said general government deficit to decline further to 4.5% of GDP this year, helped by withdrawal of Covid-19 crisis relief measures as well as recovering revenue. However, looking to future years, Scope expects headline budget deficits to return to more elevated levels, averaging 6.6% of GDP over 2023-27, as roll-out of significant spending policies weighs on primary deficits as interest payments furthermore gradually rise as result of significant inflation and Federal-Reserve rate rises. Tax measures under the Inflation Reduction Act – a sweeping health-care, climate and tax bill passed August 2022 – meant the aggregate package would curtail the fiscal deficit by a limited USD 90bn over 2022-31 (0.3% of GDP)6. However, impact of said legislation is expected to be more than offset via implementation of the student debt relief programme.
After rising by >25pps in 2020, reaching 134.5% of GDP, the United States’ general government debt ratio declined to 128.1% in 2021. This debt ratio is expected to further moderate to 122.2% this year before the trajectory reverses more significantly by 2024, with debt ending a forecast horizon to 2027 around 131% of GDP. The trajectory of general government debt is aided by robust nominal growth – including high inflation and continued growth of real output, but debt-creating effects of rises in budget deficits gradually become more significant. This debt projection reflects an improvement from the agency’s debt-sustainability assessment of the United States last year for the near term but a worsened outlook with respect to trajectory of debt longer run.
Scope continues to assume the United States’ debt rests on an increasing long-run path, recognising expected much more significant discrete jumps in said debt ratio during future downturns, rising net interest payments (from 2% of GDP in 2022 to 4% by 2026) alongside rises of spending on health care and Social Security – driven by ageing of the population and growth in health-care costs per person. This is a view shared by the Congressional Budget Office, which sees a sharper rise of the federal debt ratio likewise starting around 2024, reaching fresh records by 2031, before continuing to climb thereafter.7 The IMF estimates a net present value of health-care (131%) and pensions (17%) spending changes of an aggregate 148% of GDP over 2021-50, the most significant rise expected of any advanced economy.8
Annual government gross financing requirements are seen staying elevated, moderating over the coming years but nevertheless averaging 28% of GDP a year over 2023-27 – significantly above levels of sovereign peers. This is partially a reflection of a comparatively moderate average maturity of treasury securities of just above 6 years, boosting an annual redemption volume and elevating Treasury’s sensitivity to changes in interest rates.
Thirdly, the ratings of the United States are challenged by meaningful longer-run risk associated with misuse of the debt-ceiling instrument, with the United States government facing risk during repeated debt-ceiling episodes under conditions of heightened political partisanship alongside more elevated financing requirements today than historically.
While 2021 debt-ceiling crises were resolved ultimately as a result of last-minute party line votes in October and December 2021, risk around the debt ceiling is expected to increase in wake of November 2022 mid-term elections, if Democrats lose control of Congress. This would result in requirement of potential negotiation of fraught bipartisan solution(s) after January 2023 to raise or suspend the ceiling. Experiences of 2011 and 2013 debt-ceiling crises demonstrate that debt-ceiling risks were near peaks when a Democrat President faced a divided or Republican-led Congress – and was absent recourse to a party-line congressional vote to raise (the ceiling).
Federal debt stands at approximately USD 31.2trn presently and is projected to reach the raised USD 31.4trn level signed into law December 2021 around Q1 of 2023. If the debt limit is reached, the Bipartisan Policy Center expects a new date on which the US Treasury would face a decision of either delaying payments for its activities or defaulting on debt obligations (“X-date”) to be reached as early as third quarter of 2023 even considering recent strong growth of tax revenue.9 Democrats have considered pre-emptively raising the debt ceiling during the lame-duck session of Congress after mid-term elections – which would support ratings if executed upon. Scope would consider any effective abolition of the debt ceiling as being credit positive, although President Biden has thus far indicated he does not support such a step. Heightened political polarisation and attenuated capacity to locate bipartisan compromise increase risk around debt-ceiling crises compared with the past. Furthermore, federal deficits are elevated over forthcoming years – curtailing the space of time the US Treasury has for emergency actions in meeting government spending obligations during debt-ceiling crises.
Fourthly, the United States’ AA credit ratings consider vulnerabilities in governance compared with those of sovereign peers. The failure of former president Donald Trump to recognise the outcome of the 2020 election and undermining of US democratic institutions, rule of law and the nation’s international alliances hold no recent parallels across Scope’s very highly rated sovereigns. The former President has durably influenced the positioning of the Republican party, presenting risk for the institutional outlook as he is expected to announce a re-election campaign. Before 2024 elections, polarised political conditions are expected to see heightened gridlock as Democrats lose control of Congress, raising political brinkmanship and impeding the government’s ability to further address medium-run economic and fiscal challenges, although a more divided government after 2022 elections might also place a straight-jacket on expansionary budget policy – supporting restraint of budget and current-account deficits and inflation to a degree.
Finally, the United States’ external sector reflects a ratings challenge, with a current-account deficit of 4.0% of GDP in the year to Q2 2022, having doubled from 2.0% of GDP in a year to Q1 2020, amid strong domestic demand for tradeable goods and having risen despite marked pick-up of US oil and gas exports. This current-account imbalance is significantly linked to high budget deficits, with the current account expected by the IMF to remain in deficit above 2% of GDP through at least 2027. The net international investment liability position of the United States stood at 67% of GDP as of Q2 2022, having increased from 40% of GDP as of end-2017.
Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)
Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative rating of ‘bbb+’ as regards the United States of America. The country receives a three-notch upside adjustment for the US dollar’s status as the leading global reserve currency under the methodology’s reserve-currency adjustment. A resulting ‘a+’ indicative rating can be adjusted, in the next step, via the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses versus a ‘a+’ indicative peer group of countries.
For the United States, ‘monetary policy framework’, ‘macro-economic stability and sustainability’, ‘debt profile and market access’, ‘current account resilience’, ‘external debt structure’, ‘resilience to short-term external shocks’, ‘banking sector performance’, and ‘banking sector oversight’ have been identified as relative credit strengths. Conversely, ‘fiscal policy framework’, ‘social risks’ and ‘institutional and political risks’ are identified as relative credit weaknesses via the QS.
On aggregate, the QS generates a two-notch net upside adjustment and indicates AA long-term credit ratings for the United States.
A rating committee has discussed and confirmed these results.
Factoring of Environment, Social and Governance (ESG)
Scope explicitly factors in ESG sustainability issues during its ratings process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (CVS).
With respect to environmental risk, the US receives medium scores under the CVS on indices of the economy’s carbon intensity (capturing scale of an economy’s likely transition costs to a greener economic paradigm) under an international comparison although weaker scores than that of many peer economies. Similarly, the US receives medium scores as far as the ecological footprint of its consumption behaviour as compared with available biocapacity. CVS scores related to natural disaster risk, captured by the World Risk Index, are strong, signalling relative2 economic preparedness to cope with natural hazards even acknowledging the United States’ significant exposure to a range of environmental hazards. According to the National Centers for Environmental Information, the US has experienced 338 significant climate disasters since 1980 with an aggregate price tag of nearly USD 2.3trn.10 Under the new administration, the US has re-joined the Paris Climate Accords and committed to significant investment and measures addressing climate change and promotion of the green transition. The Biden government targets 50-52% reductions from 2005 levels in net greenhouse gas pollution by 2030, a carbon-free power sector by 2035 and net-zero emissions not later than 2050.11 The government’s reversal of environmental policies of the last administration and global leadership on climate issues support a ‘medium’ assessment on ‘environmental risks’ of the United States under the agency’s complementary QS against ‘a+’ indicative sovereign peers.
Credit factors related to social criteria are similarly captured under the CVS quantitative model and QS analyst overlay. In the CVS, the US performs weakly on income inequality, as measured via the income share of the 20% of the population with the highest income against that received by the 20% of the population with the lowest income. However, CVS marks on labour-force participation are aligned with peers’ – even though labour-force participation (of those 16+ years of age) remains under pre-crisis levels at 62.3% as of September 2022 vs 63.3% in December 2019. The US receives a weak score in the CVS for its old-age dependency ratio, although nevertheless outperforming performance of most advanced economies. Via the QS, Scope furthermore considers polarised distributions of income and wealth, disappointing tertiary-education outcomes, erosion of socio-economic mobility, long-standing racial disparities alongside high poverty. Furthermore, the Covid-19 pandemic crisis exposed weaknesses within the US health-care system, which is the most expensive globally and presents unequal access to and quality of care. Despite the high cost of health care, healthy life expectancy has lagged that of most advanced economies. However, the Covid-19 recovery plan has been directed to addressing many such social crises with an aim of strengthening the social infrastructure. Scope evaluates the United States’ ‘social risks’ under the QS presently with an assessment of ‘weak’ as compared with indicative sovereign peers.
Under governance-related factors captured in the CVS, the United States maintains good average scores on six World Bank Worldwide Governance Indicators (WGIs), although weaker than performance of main sovereign peers – especially on a category of political stability and absence of violence/terrorism. The United States’ scores have weakened across the six WGIs since 2010, although displaying slight improvement in 2021 compared with 2020. The US benefits nevertheless from resilient democratic institutions and checks and balances protecting accountability and transparency. With Democrats in control of the Presidency and Congress over the past two years, the administration was able to advance on some aspects of its agenda. However, this is expected to change moving ahead, with likelihood of greater policy gridlock before 2024 presidential and congressional elections. Under the QS, Scope assesses ‘governance risks’ of the United States as ‘weak’ against an indicative peer group of sovereign states.
The main points discussed by the rating committee: i) economic outlook; ii) reserve-currency status of dollar; iii) banking system; iv) inflation and monetary policy; v) fiscal dynamics; vi) debt ceiling; vii) mid-term elections and governance risk; viii) corporate debt; ix) 2024 elections; and x) peers comparison.
Rating driver references
1. IMF Currency Composition of Official Foreign Exchange Reserves (COFER)
2. European Central Bank – The international role of the euro, June 2022
3. Federal Reserve, Results of 2022 bank stress tests
4. Federal Reserve – Financial Stability Report – November 2022
5. Federal Reserve – Plans for Reducing the Size of the Federal Reserve's Balance Sheet – May 2022 Meeting
6. Congressional Budget Office – Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022
7. Congressional Budget Office – The 2022 Long-Term Budget Outlook
8. IMF – Fiscal Monitor October 2022
9. Bipartisan Policy Center
10. National Centers for Environmental Information (NOAA) – Billion-Dollar Weather and Climate Disasters (2022)
11. White House – Greenhouse Gas Pollution Reduction Target
The model used for these Credit Ratings and Outlooks is (Sovereign CVS model version 2.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies. The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology 27 September 2022), is available on https://scoperatings.com/ratings-and-research/sovereign-and-public-sector/methodologies. Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation NO
With access to internal documents NO
With access to management NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director, Sovereign and Public Sector
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 26 November 2021.
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Conditions of use / exclusion of liability
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