By Nick Mann | 11 June 2013
Standard & Poor’s has raised its outlook on the US credit rating following better deficit forecasts and ‘tentative improvements’ in the prospects of a long-term fiscal deal.
In a statement issued overnight, the ratings agency reaffirmed its US credit ratings of AA+ for long-term government debt and A–1+ for short-term debt. It revised its outlook on these ratings from ‘negative’ to ‘stable’.
Stronger-than-expected private sector contributions to economic growth and increased payments to the government from the bailed-out mortgage lenders Fannie Mae and Freddie Mac had together led to an improved outlook for the US budget deficit, S&P noted.
The agency now expects the US government deficit to be around 6% of gross domestic product this year – down from 7% in 2012 – before falling further to 4% in 2014.
This will enable net government debt as a percentage of GDP to remain ‘broadly stable for the next few years’ at around 84%, giving policymakers time to address the growing pressure of the ageing US population on its public finances, it said.
S&P noted that US fiscal policy making was being increasingly hampered by the ‘increased partisanship and fundamentally opposing views’ of the country’s two leading political parties.
But it highlighted ‘tentative improvements’. These included the deal reached between Republicans and Democrats to avoid the worst effect of the ‘fiscal cliff’ of automatic spending cuts and tax rises at the start of the year.
The agency was also hopeful that further dramatic spending cuts could be avoided when the US government finally reached its borrowing limit, known as the debt ceiling. S&P said that it expected some 'political posturing' to accompany the discussions around increasing the US's borrowing limit, or debt ceiling, which is expected to be reached around the end of September.
But it is now assuming this will not result in 'disruptive' sudden unplanned spending cuts. It also now believes there will be no risk to the US being able to pay its debts.
The change to a stable outlook reflects S&P’s view that the likelihood of a ‘near-term’ downgrade of the US credit rating is less than one in three.
However, it warned of risks that the recently improved fiscal performance – which was partly due to one-off and cyclical factors – could lead to complacency.
‘A deliberate relaxation of fiscal policy without countervailing measures to address the nation's longer-term fiscal challenges could place renewed downward pressure on the rating,’ the agency added.
