On Tuesday, Fitch Ratings downgraded the US government’s credit rating from AAA to AA+, citing concerns over fiscal deterioration in the next three years and a steady decline in governance over the past two decades. This marks only the second time in history that the US has lost its top-tier credit rating. The downgrade has implications for the US’ global reputation and standing, especially amidst a rapidly changing global geo-economic landscape.
Although the rating agency’s move may lead to some turmoil in global financial markets, analysts predict that the direct impact will likely be limited and temporary. However, the downgrade, combined with the underlying economic and governance issues in the US, may gradually erode the country’s economic dominance and the dominance of the US dollar. This comes as the de-dollarization trend gains momentum worldwide.
Analysts point out that the US’ irresponsible policymaking and economic governance have already negatively impacted other economies, especially developing countries. In contrast, China’s robust efforts to ensure stable economic development position it as the biggest contributor to global growth for the foreseeable future.
“Judging from the current development trend, the possibility of the US reducing its debt is almost zero. Under such a premise, additional borrowing needs to be supported by strong economic activities. Fitch’s analysis is in line with the current trend and proves that the US’ current economic situation does not support strong solvency of the US in the future,” Li Yong, a senior research fellow at the China Association of International Trade, told the Global Times on Wednesday. “In the current situation where the US is fiscally unrestrained and ignores the need to reform, its debt burden will become heavier and heavier under its current governance level.”
Fitch’s downgrade reflects concerns over the expected fiscal deterioration, high government debt burden, and the erosion of governance standards in the US. The agency highlighted the lack of a medium-term fiscal framework and complex budgeting process as areas of concern.
The US economy may face challenges in the coming quarters, with Fitch warning of a potential mild recession in late 2023 and early 2024. Higher interest rates, rising debt, an aging population, and increased healthcare costs contribute to these economic headwinds.
Despite the short-term effects of the downgrade on global markets, analysts emphasize the longer-term implications of the US’ fiscal and governance problems on its global standing. The US dollar’s hegemony is facing increasing challenges as more countries, including China, seek de-dollarization strategies.
The de-dollarization trend has seen many countries turn to alternatives like the Chinese yuan for trade settlement and debt repayment. China’s stable economic development and responsible policymaking further strengthen its position as a major player in the global economy.
While China’s economy also faces some challenges, its responsible policymaking and positive long-term growth trend position it well to continue contributing significantly to global growth. Recent measures announced by Chinese authorities to boost various sectors and ensure steady economic recovery reinforce this outlook.