Ratings agency Fitch said on Wednesday it expects the U.S. budget deficit to remain high this year and that the impact of the presidential election on fiscal policy and governance will be a key issue for the country's sovereign rating.
Last year, Fitch downgraded the U.S. government's top credit rating from “AAA'' to “AA+,'' citing worsening fiscal conditions and repeated tense debt ceiling negotiations.
Sherry Shetty, head of Americas sovereign ratings at Fitch Ratings, said in a webinar on Wednesday that political polarization makes a significant shift toward deficit reduction measures unlikely in the near term.
He added that the U.S. debt rating would be hurt by a “significant increase” in general government debt and a decline in the consistency and credibility of policy decisions that would undermine the U.S. dollar's reserve currency status.
Fitch's downgrade in August, two months after the debt ceiling crisis was resolved, prompted an angry response from the White House and surprised investors.
The theme focuses on the sustainability of government debt, a theme that fueled a summer bond selloff as investors grew concerned about the growing federal debt burden and rising interest payments.
The nonpartisan Congressional Budget Office estimates that the cumulative budget deficit over the next 10 years will be about $20 trillion.
However, Fitch said the U.S. economic outlook is improving. Fitch chief economist Brian Coulton said in a webinar that a recession is no longer expected this year, but it will be a “shallower recession” than previously expected. When the agency downgraded the country's debt rating, it predicted a mild recession between the end of 2023 and this quarter.
Winnie Schiesser, head of global strategy at CreditSights, a Fitch unit, said Fitch expects the Federal Reserve to cut interest rates three times this year, which will be positive for corporate bond issuers.
Although the election is unlikely to influence the decisions of issuers of high-yield and leveraged loans to enter the bond market, he predicted price movements in the secondary corporate bond market around the March presidential primaries.
