The Future of U.S. Credit Rating: An Analysis of Fiscal Deficits and Political Stability
In the coming years, the U.S. credit rating may face additional challenges due to rising fiscal deficits and political instability. While credit ratings from agencies like Fitch have already shown signs of concern, the necessity for further downgrades is not yet clear. This article explores the current state of U.S. creditworthiness and prospects for a downgrade, contrasting it with the economic profiles of other nations.
Current State of U.S. Credit Rating
The U.S. credit rating has been influenced significantly by its immense debt burden and the absence of effective political leadership. On August 1, 2023, Fitch downgraded the long-term credit rating of the United States from AAA to AA. While Moody's and other rating agencies have yet to follow suit, the subsequent actions of the U.S. Congress will play a significant role in determining whether further downgrades are imminent.
The Impact of Political Instability and Debt
Political instability, especially the tendency of Republican parties to shut down or threaten to shut down government, has adversely affected the U.S. credit rating. For instance, Donald Trump led the longest government shutdown in U.S. history—38 days during the Christmas and New Years holidays—clearly demonstrating the government's inability to manage finances efficiently. In 2023, House Republicans attempted to default on the debt and impeach various leaders, further exacerbating the issue.
Implications of Future Downgrades
The upcoming 118th Congress may drive a downgrade due to continued political deadlock and the lack of bipartisan cooperation. If congressional Republicans begin to hint that they will not honor the massive national debt, it may prompt a further downgrade in credit ratings.
Comparative Analysis of Credit Ratings
To better understand the U.S. credit rating in a global context, let's compare it with Indonesia, a country with a similar population and economic structure.
Indonesia boasts a stable record of not defaulting on its debts and maintains a relatively low debt-to-GDP ratio of under 40%. The country is a democratic nation with a vibrant population, numerous NGOs, and a free press, which are highly valued by Western countries. Indonesia's credit rating is BBB, reflecting its solid economic fundamentals.
In contrast, the U.S. faces several severe challenges. Its debt-to-GDP ratio is at least 123%, and this does not include unfunded liabilities, which range from 60 to 100 trillion dollars. The U.S. has consistently run a trade deficit for over 40 years, indicating a structural imbalance in the economy.
Given these economic fundamentals, it is highly likely that the U.S. credit rating would be below Indonesia’s BBB if only economic factors were considered. This suggests a significant improvement in the U.S. economy and political stability is necessary to maintain its current AAA rating from Moody's.
Conclusion
The future of the U.S. credit rating will depend on the resolution of fiscal deficits and the restoration of political stability. As the 118th Congress meets, its actions could further impact the country’s standing. Investors and policymakers should monitor these developments closely to understand the dynamics of U.S. creditworthiness and its global position.