Moody’s: Rising borrowing costs and growth slowdown will continue to hit markets

Her Eleftherias Kourtali

The outlook for global credit conditions has deteriorated and will deteriorate further into the rest of the year, amid slower global growth, higher debt service costs, lower consumer and business climate, and increased volatility and market risks, as warned. In particular, the protracted Russia-Ukraine military conflict poses wider risks that will continue to dominate the global geopolitical and economic environment as well as markets.

As central banks in many countries begin to raise interest rates in response to high inflation, financial market conditions are in the midst of a synchronizing tightening on all continents. Since May, financial conditions in the US, UK, eurozone and emerging markets have deteriorated and are well below historical averages and according to the house will continue to deteriorate as interest rates rise.

In May, Moody’s downgraded its growth forecast for the G-20 to 3.1% for this year and 2.9% for next year, compared with its March forecast for growth of 3.6% and 3%. , 0%, respectively, and last November for 4.4% and 3.2%. As inflation remains persistently high, central banks in both developed and emerging countries will continue to raise interest rates to prevent further strengthening of inflation expectations. An exception is China where monetary policy is more accommodative as the “zero COVID” reduction strategy reduces economic activity and the real estate sector remains in severe recession.

As Moody’s warns, the risks to economic growth are unusually high, and there are many developments that could lead to a further slowdown in the macroeconomic outlook. Some central banks could be forced to tighten monetary policy further to create a recession if persistent supply shocks prevent inflation from easing.

Central banks that are lukewarm in their response to inflationary pressures could boost inflation expectations, leading to economic stagnation. Other risks include the possibility of rising commodity prices, long supply chain disruptions, a larger-than-expected slowdown in China’s economy, and new, more dangerous COVID-19 strains leading to a renewed health emergency and mobility restrictions. and activity.

This unusually high uncertainty will translate into volatile energy prices and strong volatility in the stock markets over the next six to eight months.

At the same time, as Moody’s points out, the Russia-Ukraine conflict will continue to blur the economic outlook. Energy markets, especially oil and gas, have already been hit hard by widespread sanctions on Russian oil. Additional EU restrictions on the security and financing of Russian oil transportation will keep world oil prices high and, in turn, burden economic activity. The credit profiles of most EU countries would be resilient to a recession triggered by a temporary cut in Russia’s energy supply. But a sharp and permanent reduction in gas supplies would risk damaging the economic power of countries that are more dependent on Russian gas and have an indirect effect on their fiscal power.

Globally, companies with low ratings, weak liquidity and high refinancing needs, and companies associated with highly commodity-dependent consumers are most exposed to the effects of the Russia-Ukraine crisis, while some sectors, including defense, and oil and gas, will benefit. Overall, companies in Europe, the Middle East and Africa are the most vulnerable to the escalation of the conflict, the house points out.

At the sectoral level, higher energy prices and limited commodity availability will have a greater impact on cars, oil and gas and transport companies. In Europe, utilities, network operators and energy-intensive companies in the manufacturing, chemical, steel and cement industries with significant exposure to countries that are more dependent on Russian gas will face even higher investment and costs. to reduce their dependence on these imports and adapt to the green transition.