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The downgrade for the U.S. sovereign rating won’t immediately impact U.S. corporate ratings, but companies still face risks, says Fitch Ratings.

On Aug. 1, Fitch downgraded the U.S. sovereign rating from AAA to AA+, citing growing concerns about the government debt burden and deteriorating governance that has resulted in repeated debt limit standoffs and declining confidence in the country’s fiscal management.

That downgrade won’t immediately trigger rating actions for non-financial U.S. companies, Fitch said, as there are no direct links from the sovereign rating to corporate ratings. Its assessment of the operating environment — which considers economic and financial conditions, and systemic governance — “is expected to remain at a level where it will not constrain ratings.”

However, there are short-term risks to corporate ratings due to tighter financial conditions and a slowing economy, Fitch said.

“A sustained higher cost of debt capital and the severity of the economic slowdown remain the greatest sources of risk,” the rating agency said, noting that it recently downgraded its U.S. GDP forecast for 2024 and raised its interest rate forecast.

“We expect Fed tightening to push the U.S. economy into a mild recession in [the fourth quarter of 2023 and first quarter of 2024], as the full effect of monetary tightening on the labor market, consumer spending and corporate investment unfolds,” it said.

A longer period of high interest rates will also mean increased interest expenses, particularly for companies that need to refinance debt in the coming months, Fitch said.

“We also expect corporate issuers to face sustained higher interest rates in a departure from the historically low cost of debt experienced in the decade following the global financial crisis as still high core inflation is likely to preclude rate cuts until March 2024,” it said.