dollar boat in the bad weather illustration economic instability

Amid rising debt levels, governments and non-financial corporates are likely to face the toughest challenges as the global economy weakens and credit conditions deteriorate, Fitch Ratings states in a new report.

The rating agency says that credit risks are rising in a variety of sectors, with global debt at near-record levels and credit conditions facing a cyclical downturn. Yet conditions are much different from what they were during the global financial crisis of 2008-09, it notes.

“Since 2007,” the report states, “aggregate financial sector and household debt as a percentage of GDP globally has remained roughly steady. In contrast, governments and non-financial corporates have seen their debt rise significantly, up 27 percentage points (pp) and 16 pp, respectively.”

As a result, the report says, governments and non-financials will likely have a tougher time navigating an economic slowdown.

“Government debt/GDP ratios have increased substantially across most large and developed economies since 2007,” the report says, “leaving some sovereigns heavily exposed in the event of a future economic downturn with potential negative rating implications.”

At the same time, Fitch notes, corporate leverage has risen substantially since the global financial crisis, “enabled by low rates, rising equity valuations and the expansion of non-bank lenders.”

Conversely, banks are in a much stronger position compared with their position during the crisis: “Capital levels and liquidity are significantly stronger, owing to a wave of regulatory reform, while reduced risk appetite and smaller loan portfolios have led to a significant reduction in banking assets as a proportion of GDP.”

Instead, higher-risk lending has moved to less visible areas of the financial services system, the report says: “This could increase uncertainty for the financial market heading into a downturn while adding to risks from the interconnectedness between non-bank financial institutions and the rest of the financial market.”