Global credit conditions to stabilise in 2022, but Covid-linked challenges remain: Report

IN MOST economies, inflation will subside next year from this year's elevated levels, as base effects reverse and the effects of one-off price increases fade, Moody's Investors Service said in a report on Wednesday (Nov 3).

But inflation risks remain high and elevated inflation will strain household budgets and weigh on growth, especially if job market conditions remain weak, said Moody's. Inflation can also trigger food price controls and mandated wage hikes in emerging markets, which could weaken corporate profitability in affected sectors in those countries.

Moody's identified six major themes that will drive credit dynamics in 2022:

* Reshaped economies, as Covid-19's aftershocks continue to reverberate;

* Debt sustainability, as governments and companies grapple with managing increased debt loads;

* Policy shifts, as fiscal and monetary support are gradually pared back in many countries;

* New technologies, which will transform ways of producing, financing, consuming and working;

* The path to net-zero emissions and what carbon transition means for energy-intensive sectors and their access to capital; and

* Increasing focus on inequality and social risk.

Unsurprisingly, Covid-19's aftershocks will continue to reshape economies. The report said: "Overall, we expect the global economic recovery to further solidify throughout the year, led by slowing but still-solid growth in the US and China, stated the report.

"In many economies with high vaccination rates, improvement in the public health situation will allow for a greater resumption of business activity and a firming of the economic recovery ... Most of the G-20 economies will have surpassed the pre-pandemic level of real GDP by the end of this year. The rest, including Italy, Argentina and South Africa, will return to pre-pandemic levels by the end of 2022, according to our forecasts."

Meanwhile, progress will be slower in many low-income countries that have struggled to gain access to vaccines or to distribute them. The shock also had especially negative effects on some countries with limited economic diversification, such as those heavily dependent on oil exports, commodities, or tourism.

"Those with a large reliance on tourism will encounter particular challenges, given that the sector likely will not fully recover for another two years," it said.

Overall, steadying economic activity, supported by progress in vaccinations against Covid-19, will drive enhanced credit quality of debt issuers overall, but leverage risks will remain high, said Moody's managing director Elena Duggar.

She said: "(This will) create repayment risks, where economic growth, corporate earnings and government revenue prospects weaken, or liquidity wanes.

"The steadying economic outlook bodes well for an earnings revival for financially stronger companies, with large differences, however, by region, sector and size.

"Supply-chain disruptions, labour shortages and higher prices for some goods and services resulting from pandemic-induced lockdowns and fitful re-openings will stretch into 2022, but their effects will lessen in the second half of the year."