Fri Apr 19, 2013
LONDON, April 19 (Fitch) Fitch Ratings has downgraded the United Kingdom’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘AA+’ from ‘AAA’.
The Outlook is Stable.
At the same time, the agency has affirmed the UK’s Short-term foreign currency rating at ‘F1+’ and the Country Ceiling at ‘AAA’. The rating actions follow the conclusion of the review of the UK’s sovereign ratings initiated on 22 March and resolve the Rating Watch Negative. The previous Negative Outlook on the UK’s sovereign ratings had been in place since 14 March 2012.
KEY RATING DRIVERS
The downgrade of the UK’s sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch’s medium-term projections for UK budget deficits and government debt. Despite the loss of its ‘AAA’ status, the UK’s extremely strong credit profile is reflected in its ‘AA+’ rating and the Stable Outlook.
– Fitch now forecasts that general government gross debt (GGGD) will peak at 101% of GDP in 2015-16 (equivalent to 86% of GDP for public sector net debt, PSND) and will only gradually decline from 2017-18. This compares with Fitch’s previous projection for GGGD peaking at 97% and declining from 2016-17 and the ‘AAA’ median of around 50%.
– Fitch previously commented that failure to stabilise debt below 100% of GDP and place it on a firm downward path towards 90% of GDP over the medium term would likely trigger a rating downgrade. Despite the UK’s strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a ‘AAA’ rating.
– Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the UK economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis. Fitch has revised down its forecast economic growth in 2013 and 2014 to 0.8% and 1.8%, respectively, from 1.5% and 2.0% at the time of the last review of the UK’s sovereign ratings in September 2012. The UK economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery.
– Despite significant progress in reducing public sector net borrowing (PSNB from a peak of 11.2% of GDP (GBP159bn) in 2009-10, the budget deficit remains 7.4% of GDP (excluding the effect of the transfer of Royal Mail pensions) and is not expected to fall below 6% of GDP and GBP100bn until the end of the current parliament term. 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.
Continue reading at Fitch Downgrades United Kingdom to ‘AA+’; Outlook Stable | Reuters.