US tariffs to weaken credit conditions, raise default risks: Moody's

Moody's Ratings on Wednesday said US tariffs will weaken credit conditions and raise defaults risks especially for low-rated and speculative grade corporates.

  It said that an unpredictable US trade policy will lead to a deterioration in global credit conditions and macroeconomic impact will slow growth with a growing possibility of recession.

"Non-financial corporate sectors are most at risk from tariffs. Low-rated, speculative-grade companies will be affected by their reliance on debt markets. Risks for most banks and sovereigns are indirect through economic weakness," Moody's Ratings said in a report on US tariffs.

On April 9, the US administration authorised a 90-day pause on the implementation of most reciprocal tariffs, reverting to a universal rate of 10 per cent on almost all targeted countries, while raising tariffs on most goods from China to 145 per cent. On April 16, US further hiked tariffs on exports from China to 245 per cent.

 

"The tariffs have shocked financial markets and are raising the risk of a global economic recession. Continued uncertainty will impede business planning, stall investment and hit consumer confidence," Moody's Ratings said  The agency said even though the "pause" will give businesses more time to adjust production and sourcing, the lack of clarity on the tariff regime after 90 days will impede business planning, stall investment and slow growth.

"... credit conditions have deteriorated sharply over the last month and our baseline scenario anticipates that defaults will be higher than previously expected as businesses are forced to adjust to the higher cost of doing business, more expensive and scarcer funding and persistent uncertainty," it said.

With regard to tariff impact on US economy, Moody's said tariffs will shave at least one percentage point from US growth and significantly raise prices on US consumers and businesses.

The tariffs will eventually likely be borne by US consumers. Even if the pass-through may be slow, the tax will reduce household purchasing power. It will also squeeze profit margins of firms along the supply chain, Moody's added.

On China, Moody's said export sector and overall economy face severe challenges from the escalating trade tensions with the US and a slowing global economy.

"Even if the current escalation eases, US-China relations will remain contentious. This will weigh on business and consumer sentiment, posing a significant setback to the Chinese government's ongoing efforts to boost consumption and encourage the private sector," it said.

Domestic constraints, particularly arising from already weak consumer sentiment, indicate that the government may not be able to muster enough support to offset the impact of tariffs, without which the country's growth could slip to 4 per cent or less this year.