The 'lower-for-longer' interest rate environment in global markets is leading to a rapid build-up of debt and a deterioration in credit quality, says Moody's Investors Service.
Global credit conditions are expected to remain uneven in 2017, due to “weak trade recovery, political risks and concerns over the efficacy of monetary policy”, according to Moody’s Cross-Sector: Global Credit 2017 Outlook report.
The research house said the lower rates would likely remain supportive of borrowing and refinancing conditions in the coming year as interest rate normalisation remains gradual in the US and monetary policy in other major economies remains “ultra-loose”.
“However, low long-term rates are leading to rapid debt build-ups, as well as increases in underfunding of defined benefits pension plans, leading to credit quality deterioration,” the company said.
Moody’s cautioned that low borrowing costs had contributed to the growth in global debt levels, increasing the risk of financial instability further down the track.
“As a share of GDP, non-financial sector debt – which includes household, corporate and government debt – is at record highs in both advanced economies and emerging markets, with a number of G20 economies exhibiting debt-to-GDP increases of more than 30 percentage points in the past five years,” the company said.
Several sectors, including life insurance and pension funds, are also facing credit challenges caused by flat yield curves, Moody’s said, and advanced economy sovereign spreads which have narrowed in recent times aren’t expected to widen sharply in 2017.
“Risks to Moody's outlook are skewed to the downside, with potential surprises from the growing risk of a repricing of assets, or a loss of confidence in the ability of China to manage its deleveraging and rebalancing process,” Moody’s said.
“Positive surprises include a renewed focus on fiscal expansion via infrastructure spending in advanced economies that could provide a short-term tonic to global growth – however, such expansion would add to government debt and raise debt sustainability concerns.”
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