Credit Outlook 2024

Cerved Rating Agency provides estimates on default risk for the upcoming year

Cerved Rating Agency’s report analyzes Italian non-financial corporates’ credit risk, based on a forecast from a portfolio of over 14,000 entities. The research assesses default risk and provides detailed estimations to inform stakeholders, especially financial institutions that use these ratings for regulatory capital requirements.

The 2024 Cerved Rating Agency report starts by acknowledging several unresolved issues affecting corporate credit risk profiles, notably geopolitical tensions in Ukraine and the Middle East. Business confidence remains low due to weak demand, high interest rates, and inflation, all of which are affecting the first quarter of 2024's business activities. The credit risk for Italian non-financial corporations as of December 2023, with a default probability at 6.22%, was significantly higher than before the COVID-19 pandemic.

The report aims to estimate the default probability for 2024 using a combined qualitative and quantitative approach. It outlines a three-scenario forecast to represent potential credit risk evolutions in 2024. Under the baseline scenario, despite continued geopolitical tensions, economic activities are expected to recover slightly in the latter half of the year, leading to a minor reduction in credit risk for Italian non-financial corporations to a predicted level of 6.13%. Sector-specific challenges are expected to cause varying outcomes across different industries.

The intermediate scenario considers a worsening of the current economic climate, which may result in a slight increase in the default probability to 6.39%. Finally, the hard scenario predicts a significant deterioration of credit quality, with the default probability reaching 6.82% due to conflicts escalating to new countries, a stagflationary environment, higher interest rates, and the cessation of the NRRP disbursement. This research was conducted in collaboration with LUMSA University, which contributed to the literature review and the mapping of academic references.

Under the initial outcome, while geopolitical strains are likely to continue, the economic repercussions should be manageable. By the second half of 2024, improvements in economic indicators could slightly lessen the credit risk for Italian corporate entities to an anticipated figure of 6.13%. However, this risk reduction is not uniform across sectors.

A secondary outcome reflects deteriorating economic circumstances, possibly escalating current conflicts and leading to a modest hike in default risks to 6.39%. In the most severe outcome envisioned, a profound decline in credit standing is anticipated, with default risks climbing to 6.82%, propelled by expanding global conflicts, a challenging economic environment in major economies, and halting financial support programs. This comprehensive study is a joint effort with LUMSA University, which has supported the academic investigation and reference compilation.

The final remarks of the Cerved Rating Agency's study outline the steps taken and the conclusions reached regarding the default likelihood within their portfolio. The anticipated credit risk for a sizable group of over 14,000 Italian businesses is projected to improve slightly in the upcoming year, decreasing from 6.22% to 6.13%, bolstered by reducing inflation and more favorable financial circumstances in the latter half of the year. Nonetheless, this minor enhancement isn't expected to markedly lower the overall chance of default, as the risk for these Italian companies stays near the most elevated levels noted in history. Additionally, companies with the lowest credit quality are predicted to see a slight uptick in risk since they are particularly susceptible to the ongoing tough business milieu.

Notable differences are projected to emerge among various sectors and company sizes. Financing conditions are predicted to be tough for the remainder of 2024, especially impacting smaller enterprises.

Variability in the evolution of default probabilities is anticipated across industries; some service-oriented sectors and a handful of manufacturing ones may see a decrease in their likelihood of default, while unique risks are likely to burden particular sectors such as textiles and agriculture.

The report also includes a sensitivity analysis to investigate how credit ratings might change under more demanding circumstances for businesses. The scenarios suggest that credit ratings may deteriorate in an intermediate scenario marked by economic deceleration, intensified conflicts, delayed interest rate cuts by the ECB, and hold-ups in the rollout of recovery plans. In the gravest of situations, the probability of default is expected to increase, with projections of nearing a 7% threshold. ​

Relevant Links:

https://ratingagency.cerved.com/credit-outlook-2024-2/

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