Abu Dhabi, UAEFriday 7 August 2020

CORONAVIRUS

Fitch sounds the alarm on US debt as it revises outlook of world's largest economy

The ratings agency expects government debt - the highest of any AAA-rated sovereign - to exceed 130% of GDP by 2021

A woman walks past empty stores and restaurants closed due to impact of the Covid-19 in Beverly Hills, California. The US economy collapsed in the midst of the coronavirus pandemic in the April-to-June period, contracting 32.9% in the second quarter, the worst on record for the world's largest economy. AFP
A woman walks past empty stores and restaurants closed due to impact of the Covid-19 in Beverly Hills, California. The US economy collapsed in the midst of the coronavirus pandemic in the April-to-June period, contracting 32.9% in the second quarter, the worst on record for the world's largest economy. AFP

Fitch ratings agency revised its outlook on the US' AAA rating to negative as the world’s largest economy's national debt topped $26.5 trillion (Dh97tn) in June and it continues to grapple with the coronavirus health crisis.

Though the country's AAA rating was not changed, the revision in outlook is a reflection of “the ongoing deterioration in the US public finances and the absence of a credible fiscal consolidation plan”, the ratings agency said.

The outlook revision of the US is the first major action by an agency since Standard & Poor’s downgrade of the country’s sovereign rating to AA-plus from its triple A status during the global financial crisis in 2011.

Fitch’s action comes as the US continues to battle the highest number of Covid-19 infections in the world and policymakers in Washington argue over the size of a second stimulus package that tops the fiscal stimulus and monetary measures rolled out already.

The number of people in the US infected with Covid-19 rose to more than 4.5 million, equivalent to more than a quarter of all cases globally. As of August 1, the country has more than 153,000 coronavirus-related deaths, according to Johns Hopkins University, which is tracking the pandemic.

Fitch expects the US’ government debt - the highest of any AAA-rated sovereign - to exceed 130 per cent of gross domestic product by 2021.

“Debt to GDP could stabilise temporarily from 2023 if fiscal balances return to pre-pandemic levels, but only assuming that interest rates stay very low,” the agency said.

Health and social security costs are expected to rise over the medium-term, Fitch said.

The US’ rising debt-to-GDP levels follows massive amounts of stimulus injected into the economy. The total of what the US might commit to fight off Covid-19 may exceed $6tn as the government seeks to help businesses and individuals navigate the deepest recession in a century.

US Senate Republicans and Democrats are currently debating the volume of additional stimulus needed to revive the economy. On Thursday government data showed the US economy shrank 32.9 per cent in the second quarter, the worst contraction since the Second World War. Personal spending, which accounts for two-thirds of US GDP slumped an annualised 34.6 per cent in the second quarter, the highest on record.

Republicans, who control the Senate have presented a conservative $1tn plan to boost unemployment benefits and shield businesses from lawsuits stemming from the distress caused by the coronavirus pandemic. Democrats have tabled a $3.5tn plan, which they say is more adequate to cover the needs of American businesses and workers furloughed during the pandemic.

Republicans are opposed to increasing unemployment benefits to Americans laid off during the pandemic. A $600 per week unemployment benefit initiated during the health crisis was allowed to expire Friday night as Republicans and Democrats failed to reach an agreement to extend the programme.

Fitch cautioned there is a "growing risk” that US policymakers will not be able to consolidate public finances sufficiently to stabilise public debt after the pandemic shock has passed.

US unemployment has ballooned during the pandemic, wiping out most of the jobs created since the 2008 financial crisis. The unemployment rate dropped to 11.1 per cent in June, from an all-time high of 14.7 per cent in April as lockdown measures were eased. However jobless claims are set to rise as states impose lockdowns again in the wake of a surge in infections.

While US economic data remained gloomy, US tech stocks performed well, even while other equities remained down.

Apple, whose better-than-expected second quarter earnings saw it regain its position as the world’s most valuable company, led the rally in tech stocks, alongside Facebook and Amazon. Apple, Amazon and Facebook saw their shares rally 6 to 7 per cent in after-hours trading on Friday.

Updated: August 1, 2020 05:15 PM

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