Lower oil, commodities prices a concern, but no global recession for Moody’s too


The protracted decline in oil prices and weaker growth in China have prompted a reappraisal of global growth prospects, but while the current environment will curb growth in specific regions it does not presage a global recession, Moody’s Investors Service said in a report.

Moody’s has taken negative rating actions in the past weeks for a large number of corporates, banks and sovereigns whose revenues, loan portfolio performance, and tax receipts are heavily dependent on the production of oil and other commodities.

The rating actions have been focused on those issuers directly exposed to the prices of oil and commodities because at present we believe that the positive impact of lower commodity prices on global growth helps mitigate the negative effects from the financial markets turbulence, Moody’s said.

“Risks to global growth have increased, but despite the recent market volatility, we don’t believe that the world’s advanced economies will enter into recession,” said Elena Duggar, a Senior Vice President at Moody’s in the report, Global Credit Strategy and Macro Outlook FAQ: Lower Oil Prices and Recent Market Turmoil Support Rating Actions on Oil­ and Commodity­Dependent Credits.

However, market volatility has recently spread beyond the energy and commodity sectors, leading to a broad decline in global equity prices and a surge in high­ yield corporate bond spreads. As a result, financial market conditions have worsened significantly ­­ a development the rating agency is closely monitoring.

Moody’s said it still expects growth in G­20 advanced countries’ to be broadly stable at 1.8 percent for 2016 and 2.0 percent for 2017.

“Moody’s believes that the positive effects of lower commodity prices to a large extent will mitigate negative factors, such as weaker consumer and business confidence levels caused by increased financial market volatility, and deteriorating trade linkages with emerging markets,” the ratings agency said in a statement.

The most recent real economic indicators for the advanced economies, such as strong employment growth in the US, have been indicative of more sustained, albeit modest, growth than suggested by the shift in bond and equity markets.

“For example, over the last 30 years, we have seen 16 quarters with a similar or larger fall in the stock market and 25 quarters with similar or larger widening in the average corporate 10­year Baa spread ­­ in most cases this volatility did not lead to a recession,” added Duggar.

Moody’s said it believes that the current macro­credit environment is similar to conditions in 1987 or 1998 when credit problems within certain sectors of the global economy were very severe, but the rest of the global economy experienced only a modest slowdown in economic activity.


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