Fitch Downgrades United Kingdom To ‘aa+’; Outlook Stable

Content about Economy of the United Kingdom

The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions (and/or tax increases) if public debt is to be stabilised and reduced over the medium term. The Stable Outlook on the UK’s sovereign ratings reflects the following factors. – Under Fitch’s baseline economic and fiscal scenario, which assumes a continued policy commitment to reducing the underlying budget deficit and medium-term annual growth potential of 2%-2.25%, government debt gradually falls as a share of national income in the latter half of the decade. – The long average maturity of public debt (15 years) – the longest of any high-grade sovereign -exclusively denominated in local currency and low interest service burden implies a higher level of debt tolerance than many high-grade peers. – The international reserve currency status of sterling and the ability and willingness of the Bank of England to intervene in the UK government debt market largely eliminates the risk of a self-fulfilling fiscal financing crisis. – The gradual improvement in the UK banking sector’s capital and liquidity position has further reduced contingent liabilities arising from this sector. The UK’s ‘AA+’ rating is underpinned by its high-income, diversified and flexible economy as well as a high degree of political and social stability. The monetary policy framework as well as sterling’s international reserve currency status afford the UK a high degree of financial and economic policy flexibility. Strong civil and policy institutions and a high degree of transparency enhance the predictability of the business and economic policy environment that compares favourably with peers in the ‘AA’ category. Weak economic performance and growth prospects, relatively high levels of private and foreign as well as public debt, along with sizeable twin fiscal and current account deficits, are weaknesses relative to rating peers. RATING SENSITIVITIES The Stable Outlook indicates a less than 50% chance of a change in the UK sovereign ratings over the next two years. The main factors that could lead to a negative rating action, individually or collectively, are: – Failure to stabilise the government debt to GDP ratio over the medium term. – Increased threat to macro-financial stability, for example arising from an intensification of the eurozone crisis or an erosion of confidence in the UK’s policy commitment to price stability. The main factors that could lead to a positive rating action, individually or collectively, are: – Stronger economic recovery and rebalancing of the UK economy than currently forecast.

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