Context- Rating agency Fitch recently downgraded the rating of the United States (US) from AAA to AAA, which it has held with the rating agency since 1994.
Key Highlights
- Rating agencies are institutions that assess the creditworthiness or financial performance of a region, country, its institutions or individual organizations.
- They assess its ability to meet future payment obligations, which is particularly important for investment decision makers.
- Fitch assigns a credit rating from “AAA” (the highest rating) to “D” (the lowest rating).
- “AAA” is assigned to entities that have “exceptionally strong ability to pay their financial obligations.”
What were Fitch’s concerns?
- Fitch said the downgrade reflects the cumulative expected deterioration of public finances over the next three years, the government’s “high and growing” debt burden and “management erosion” compared to peer rating agencies over the past two decades.
- Fitch found that governance has steadily deteriorated over the past 20 years, including fiscal and debt problems.
- Another observation is related to the lack of medium-term fiscal policy, unlike most others, and the complicated budget process.
Indicators to look for
- Fitch forecasts that the general government budget deficit will increase to 6.3 percent of GDP in 2023 from 3.7 percent in 2022.
- This is due to cyclical fluctuations in federal revenues, new spending initiatives and a higher interest burden.
- In addition, he found that higher interest rates and rising debt will increase the burden of interest services (3.6% of GDP by 2033) over the next decade.
- In addition, Fitch noted that an aging population and rising health care costs will require more money from the elderly without fiscal policy reforms.
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