Special risk survey: US analysts largely unmoved by Trump’s shenanigans and rising debt load

Analysts downgraded the US consistently under Donald Trump’s presidency, despite his administration’s decent record on economic growth before the pandemic, although trade wars contributed to a slowdown last year.

With real GDP contracting by 4.3% this year, according to the IMF’s latest World Economic Outlook projections, and the unemployment rate averaging 8.9%, economic risk indicators have invariably buckled.

However, the economy is expected to bounce back in 2021 with predicted growth of 3.1%.

Downgrades to political risk indicators have been just as apparent as those for GDP, unemployment and government finances.

Analysts became more concerned under Trump’s watch and marked down their scores for institutional risk, transparency, the policymaking environment and government stability, as interference in the political and judicial system and protectionist trade measures raised the stakes for potential investors.

Indeed, the US has fallen steadily out of favour since the global financial crisis.

During the past decade, its country risk score has fallen 12 points in Euromoney’s crowd-sourcing survey to 20th place out of 174 countries in the global risk rankings, sandwiched between Iceland and Canada.

This puts the US midway into the second of five categories, lagging tier-one triple-A rated credits.

Unperturbed

However, analysts taking an holistic view of US investor risk as 2020 draws to a close are not unduly perturbed. The results of this one-off survey show the US risk score stabilizing after downgrades earlier in the year.

In terms of the election fallout, Dan Graeber, geopolitical analyst and founder of the GERM Report, does not foresee a protracted legal challenge to the election results at the Supreme Court weighing on any particular risk factors, economic or political.

“Most of the Trump campaign’s legal challenges have been dismissed on a lack of merit,” he says.

“At this point, it looks a lot like political posturing. British prime minister Boris Johnson on Tuesday became the latest to congratulate former US vice-president Joe Biden on his win, so it looks like we've moved on.”

Indiana University professor Robert Neal concurs. He sees legal issues being raised, but does not think it will have much of an impact overall, “as the margin of victory is likely greater than the margin of fraud”.

With a vaccine on the horizon, people could become more risk averse over the short term as they wait for the vaccine to arrive 

 - Robert Neal, Indiana University

As for the composition of the House, the GERM Report’s Graeber notes that Democrats “were unable to see the blue-wave crash over the national landscape”, leaving Biden facing a divided House and Senate.

This could potentially thwart his most ambitious green agendas.

In terms of the Covid-19 crisis, Neal at Indiana University thinks the economic impact of any shutdowns – at least in the US – will be less than what it was earlier in the year.

“We have adapted and become more rational about the process,” he says. “[However], with a vaccine on the horizon, people could become more risk averse over the short term as they wait for the vaccine to arrive.”

Graeber, meanwhile, points to the markets reacting strongly to reports on the progress of the vaccine’s from Pfizer and its German counterpart, BioNTech, but tempers it by stating: “Most of the smart people in the room see mid-2021 at the earliest as the point where things turn around, both in terms of a vaccine and the economy in general.

“We’ll see what a Biden administration can put forward on a stimulus package, but it’s a long way to January. We have a good many weeks before inauguration day here in the States and, as with the case of the pandemic, [the deficit] may get worse before it gets better.”

Blue wave

ABN Amro economists say the lack of a blue-wave outcome substantially reduces the implementation of the Democrats’ spending plans, even with a Biden presidency, though the economists do not think it would dim the prospects of stimulus entirely.

“We expect a sequel package to the $2 trillion Cares Act to be passed in the coming months,” they state.

“This could happen during the looming lame-duck session of Congress, perhaps something bare bones attached to a continuing resolution, which will be needed before December 11 [when government funding is due to expire].”

The ABN Amro contributors add: “Failing that, we are likely to see something more comprehensive in the early part of 2021. Republicans and Democrats had been locked in negotiations on such a package in the run-up to the election, suggesting there was clear political will on both sides for some stimulus, with the question mark only on the size of the package.

“With the pandemic now resurgent across the US – in both Democrat and Republican states – we expect the pressure for additional relief will be difficult to ignore. With the election out of the way, Democrats and Republicans are likely to find it somewhat easier to strike a compromise deal.”

All told, the US federal and state debt will continue to rise.

The deficit has been increasing for five years and, due to the healthcare emergency, it will reach an unprecedented 18.7% of GDP in 2020, according to the IMF. The deficit will remain high at a projected 8.7% in 2021, with the gross debt burden climbing to around 134% of GDP.

Its short-term sustainability is not in question, says Neal, but “over the long term, it depends on whether the proceeds from the borrowing are spent on economically productive or economically wasteful activities”.