Trump's tax cuts may pressure US's top credit rating: Fitch

[LONDON] US President-elect Donald Trump's plans to slash taxes could threaten the country's triple-A credit rating over the medium term, the head of EMEA sovereign ratings at the Fitch agency said on Thursday.

"We do see increasing medium-term pressures (on the US rating)," Ed Parker said at the agency's annual credit outlook conference in London. "Even before elections the US had the highest level of government debt of any triple-A country. If we add on top of that Trump's plans to cut taxes by US$6.2 trillion over the next 10 years that could add around 33 per cent to US government debt," he added.

Trump will take office on Jan 20 but some of his promised policy changes have already sparked market and economic concern, including tax cuts, a repeal of the healthcare reform enacted under President Barack Obama and a threat to slap tariffs on companies moving jobs overseas.

Parker said that in the short-term, Trump did not pose a risk to the US credit rating because the country continues to benefit from strengths such as the role of the dollar as the world's predominant reserve currency. Fitch has a stable outlook on its AAA rating on the United States. Of the other two main agencies, Moody's also has the top rating for the No 1 world economy but Standard and Poor's has it one notch lower at AA+.

Other countries around the world could be in line for ratings cuts in 2017. Fitch's negative outlooks on sovereign ratings currently outweigh positive outlooks by a factor of 6:1. "That is a very clear signal that we see sovereign risks as on the downside and you can expect a further heavy flow of downgrades in 2017," said Parker.

Emerging markets are particularly vulnerable because higher US interest rates could lure investors away from their bonds, and a stronger US dollar could make it more expensive for them to service foreign debt.

Two of the key ratings decisions for Fitch this year in the developing world will be South Africa and Turkey, both of which are on the cusp of a drop into junk territory at BBB- with a negative outlook.

South Africa's economy is barely growing, threatening to leave millions unemployed and potentially fuelling social unrest. With President Jacob Zuma enmeshed in several corruption scandals, there are doubts over whether the country can implement the economic reforms needed to shore up growth. "In terms of what could trigger a downgrade, the key issues we are looking at are...very weak growth...a rising budget deficit...and how politics affects economic performance and economic policies," said Parker, adding that their next rating review on South Africa would likely be in May or June.

Parker said there was also a "risk of a downgrade" for Turkey which the agency reviews on Jan 27.

The Turkish government has imposed emergency rules that enable it to bypass parliament in enacting new laws and to limit or suspend rights and freedoms when deemed necessary. It was imposed after an attempted coup in July and then extended for a second three-month period in October. "The coup attempt is going to compound a whole load of political risks in Turkey and we see that weighing more and more on the growth outlook and the public finances," said Parker.

REUTERS