The United States is facing a challenging economic landscape, with soaring levels of debt and a shift away from the dollar in global markets. These factors pose a serious threat to the nation’s sovereign credit rating and overall economic stability. In this article, we will delve into the repercussions of increasing debt and de-dollarisation on the US sovereign score, examining the potential outcomes and strategies to address these risks.
US Bracing for Prolonged Wide Primary Fiscal Deficits in 2024-29
Projections indicate persistent and substantial primary fiscal deficits averaging 4.1% over the period of 2024-29, accompanied by a continued rise in interest payments, expected to reach 3.7% of GDP by 2029 (equivalent to 11.9% of revenue), nearly double the recent low of 2.1% of GDP (6.7% of revenue) in 2020.
Interest payments are on the upswing as the Federal Reserve is anticipated to maintain higher rates for an extended period, even after initiating rate cuts. Investors have adjusted their expectations for future rate cuts, evident in the recent increase in 10-year Treasury yields to around 4.3% from 3.8% in December of the previous year.
The headline annual US fiscal deficit is projected to average 7.7% of GDP during the period of 2024-29, following an increase to 8.8% of GDP last year from a recent low of 4.1% in 2022. Risks to these deficit projections lean towards the upside due to the possibility of an adverse economic shock, influenced by the current volatile geopolitical and macroeconomic environment.
The Impact of 2024 Elections on US Fiscal Path
Much of the uncertainty surrounding future US budget deficits hinges on the outcomes of the upcoming presidential and congressional elections in November. Recent polls indicate a narrow lead for Donald Trump over President Joe Biden, with potential implications for the Republican challenger to secure a majority in the Electoral College despite a potential shortfall in the popular vote.
A Divided Future Government as a Potential Enabler of Stricter Fiscal Measures
The composition of the next government and Congress will be crucial for policy decisions. A unified government under either party is likely to result in further fiscal expansion post-2025. Conversely, a divided government would likely enforce more stringent fiscal controls, regardless of the specific policies enacted.
US Treasury Bonds Under Scrutiny Amid Election Uncertainty
Despite the US holding the highest debt capacity globally, owing to the dominance of the dollar, challenges to US Treasuries’ status as the global safe asset loom. The escalating de-dollarisation led by major economies such as China and Russia, coupled with geopolitical tensions, could potentially impact the demand for US Treasuries.
while US Treasuries currently serve as the benchmark global safe asset, the outcome of the upcoming elections may alter this status quo. A second Trump presidency could potentially accelerate de-dollarisation and prompt a shift away from Treasuries to alternative safe assets. The evolving economic landscape underscores the need for proactive measures to address the mounting challenges facing the US economy.
For real-time updates on today’s economic events, refer to our economic calendar.
Dennis Shen, Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, serves as the lead analyst for the United States’ sovereign credit rating. Brian Marly, an analyst at Scope, contributed to the development of this article.