Economy

Fitch Maintains AAA Rating and Stable Outlook for United States

Jon C. Ogg

Published: April 12, 2016 2:45 pm

Last Updated: January 13, 2020 10:51 am

There is some good news on the ratings front for the United States. Despite the national debt clock being more than $19.2 trillion as of April 12, 2016, Fitch Ratings has affirmed the U.S. credit ratings at AAA. Fitch even gave the United States a Stable Outlook.

Fitch’s report showed that the long-term foreign and local currency issuer default ratings (IDRs) remain AAA. Fitch said that it also has affirmed the issue ratings on the U.S. senior unsecured bonds at AAA, the country ceiling at AAA and the short-term foreign currency IDR at F1+.

It may be true that not all ratings agencies view the United States as still being AAA. That being said, U.S. borrowing costs have remained low and the United States is deemed to be the safest destination for investors around the world. Fitch’s report even said:

The U.S.’s ‘AAA’ rating is underpinned by the sovereign’s 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.

Before thinking this is all full of good news, there are some caveats here. Fitch acknowledged that the deficit and the debt outlook have deteriorated since its last review. Still, Fitch says that it remains well within the tolerance of the AAA rating. The report said:

The federal fiscal deficit will widen in the 2016 fiscal year for the first time since 2009, reaching 2.9% of GDP according to the Congressional Budget Office, up from 2.5% of GDP in 2015, the low point since the global financial crisis. As interest rates on government borrowing creep up and the deficit stops narrowing, Fitch expects a gradual rise in general government debt from 101% of GDP in 2016 (75% of GDP for federal debt held by the public) to over 107% of GDP over the next decade. This assumes real GDP growth averages 2% and a gradual rise in government borrowing costs.

On the debt ceiling, Fitch said:

Congress passed a new Bipartisan Budget Act at the end of 2015 and lifted the debt ceiling until March 2017, passing a funding bill to avert a government shutdown. A return to regular budget order is unlikely in 2016, as neither the House budget drawn up by the Republican majority (which proposes an aggressive spending-driven consolidation) nor the President’s budget (which combines higher revenues from taxes and lowering exemptions with modest spending consolidation) receive a reading in Congress.

Fitch also is taking a stand ahead of the election. Its view is that neither party is likely to get a runaway scenario where the House, Senate, and executive branch will be dominated entirely by one party. Fitch noted:

Whatever the result of the congressional and presidential elections to be held in November, neither party is likely to win full control of both houses of Congress and the presidency, making progress on fiscal issues dependent on bipartisan cooperation. The most immediate fiscal challenge is to restore the social security system – largely unaddressed by 2016 budget proposals – to a more sustainable state. The main social security trust fund is projected by its trustees to run dry in 2029 as payments outpace contributions.

Despite 2.4% GDP growth in 2015, Fitch has revised its real GDP growth forecast down to 2.1% in 2016 and 2017. Fitch currently expects two more policy rate rises (fed funds) in 2016, but it sees three hikes in 2017. Fitch said that this is slightly above the current market expectations, but noted that it is more in line with the Federal Reserve’s FOMC forecast.

Here is how Fitch compares a AAA rating in the United States against broader AAA measures:

The U.S. runs a current account deficit, which widened by 0.5pp of GDP to 2.7% of GDP in 2015, while the median ‘AAA’ sovereign runs a substantial surplus. However, the current account deficit is mirrored by capital inflows from foreign investors, including into sovereign assets. The sovereign, banks and the non-bank private sector alike are all net external debtors. The net external debt position of the U.S. is equivalent to 49% of GDP, a weakness relative to the ‘AAA’ median.