Fitch Ratings on Tuesday downgraded the United States Long-Term Foreign-Currency Issuer Default Rating from ‘AAA’ to ‘AA+’. The global credit rating agency is simply saying that it is less confident in the ability of the World’s biggest economy to repay its debts.
However, Fitch removed the “Rating Watch Negative,” which means they no longer expect the rating to drop further. They also gave the U.S. a “Stable Outlook,” indicating that things might not get worse anytime soon. The “Country Ceiling” remains at ‘AAA,’ which means there’s still hope for improvement.
The credit rating agency said its decision to downgrade was because of some financial challenges the country is facing. It said that it is concerned about the expected deterioration of the U.S. government’s finances over the next three years, especially as the government continues to accumulate a lot of debt. A source of concern for investors.
Another issue it pointed out was the way the government manages its finances, which hasn’t been up to par compared to other countries with ‘AA’ and ‘AAA’ ratings. It took notice of how there have been public disagreements and last-minute decisions related to the debt limit, and that’s raised doubts about the government’s fiscal management skills.
Over the past two decades, the U.S. has been facing a steady decline in its governance standards when it comes to financial matters. Even though there was a bipartisan agreement in June to suspend the debt limit, it wasn’t enough to restore complete confidence.
Fitch also pointed out that part of the problem is that the government doesn’t have a clear medium-term financial plan like most other countries do. The budgeting process is quite complex, and that has contributed to an increase in debt over the last ten years.
On top of that, the U.S. has faced various economic shocks and has implemented tax cuts and new spending plans. These factors, combined with the rising costs of social security and Medicare due to an ageing population, have led to even more debt.
Fitch also predicts that the government’s deficit will increase over the next few years. This is because of weaker federal revenues, more spending on new initiatives, and higher interest payments on the debt.
The situation looks challenging for the U.S. economy, as it’s expected to face a mild recession. We might see slower growth in the coming years, which could affect job opportunities and overall economic potential.
The Federal Reserve, the country’s central bank, has been raising interest rates to manage inflation. But it’s not an easy task, as inflation has been stubbornly high. The Fed’s attempts to control it may affect interest rates even further.
In the long term, the U.S. will have to deal with higher interest payments and increased spending on programmes like social security and healthcare for the elderly. If no corrective actions are taken, this could pose additional challenges for the country’s financial situation.
Fitch, however, pointed out that it is not doom and gloom, as the country still has some strength. Strength based on its size and how advanced its economy is, supported strongly by a dynamic business environment. Plus, the U.S. dollar is the world’s primary reserve currency, which gives the country some flexibility in managing its finances.
