London, 19 September 2014 -- Moody's Investors Service, ("Moody's") has
today affirmed the UK's government bond rating at Aa1 and maintained
a stable outlook.
Moody's decision to affirm the UK's rating follows the outcome
of the referendum on Scottish independence, which maintains the
307-year-old union, thereby preserving the country's
current institutional and fiscal framework. While the political
process going forward will likely lead to further devolution of powers
to Scotland and some changes in the fiscal transfers, the rating
agency does not anticipate that these will have a material impact on the
quality of the UK's institutions, or its financial strength.
Indeed, as Moody's indicated in May, the strength of
the UK's credit profile would not have changed materially in the
event of Scottish independence and therefore such an event would have
likely been rating neutral.
The UK's Aa1/stable government bond rating is based on Moody's four-factor
methodology for assessing sovereign credit risk, focusing on economic
strength, institutional strength, government fiscal strength
and susceptibility to event risk.
In a related rating action, Moody's has today also affirmed
the rating and maintained outlook of the Bank of England at Aa1/stable.
The issuer's P-1 rating is unaffected by this rating action.
RATINGS RATIONALE
RATIONALE FOR AFFIRMATION OF Aa1 RATING
Moody's assesses the UK's economic strength to be "Very High",
which reflects its large, diversified and highly competitive economy,
especially in the services sector. The UK also benefits from a
flexible and attractive labour market. The pace of the economic
recovery was slower than originally expected in the wake of the global
financial crisis, but more recently it has returned to growth levels
that are more in line with its historical trend growth rate of 2.0-2.5%.
The structural economic strengths of the UK also indicate that trend growth
will remain in line with this historic performance.
The UK's institutional strength is "Very High (+)",
which is driven by the country's robust institutional capacity and pragmatic
policymaking as evidenced by its willingness and ability to take long-term
austerity measures, if required - a commitment that was confirmed
by Chancellor George Osborne as part of his stated goal of achieving a
surplus during the next parliament should the Conservatives remain in
government. The UK's constitutional arrangements are generally
supportive of large fiscal consolidation programmes. The executive
wields significant power in the British system and is able to change many,
although not all, large expenditure items without passing specific
pieces of legislation. This has contributed to the country's proven
track record over many decades of reversing increases in debt.
Moreover, in recent years, the UK has also proactively protected
its balance sheet from the need to provide financial support to its banking
system in the future by increasing bank capital requirements and strengthening
bank supervision. While it is likely that there will be further
devolution of powers to Scotland (and possibly other parts of the UK as
well) and some changes in fiscal transfers once Scotland has greater taxation
powers, Moody's does not anticipate that these will have a
material impact on the quality of the UK's institutions, or
its financial strength.
The rating agency deems the UK government's fiscal strength to be "High".
Indeed, the credit profile of the UK is marginally weaker than those
of Aaa-rated sovereigns because of the erosion of its shock-absorption
capacity. This has been driven by the slow economic recovery,
the repeated extension of the government's austerity programme and the
UK's high and rising debt burden, which Moody's expects will
remain high for an extended period of time. However, the
robust structure of government debt is supportive of the country's high
Aa1 sovereign rating. The UK's debt refinancing risk is low relative
to some other highly rated and indebted sovereigns, due to the long
average maturity of its outstanding debt stock (around 15 years),
its large domestic investor base, and its independent central bank
which is willing and able to adopt accommodative monetary policies.
Finally, the score for the UK's susceptibility to event risk is
"Low", which is driven by banking sector risk.
The UK has a very large banking system (with total assets equivalent to
around 430% of GDP). While it compares favourably with other
large banking systems in the European Union, the large UK banking
system represents a contingent liability on the government's balance sheet
and thus slightly elevates event risks for the sovereign.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on the UK's Aa1 sovereign rating reflects Moody's
belief that the government is unlikely to face additional material difficulties
in implementing fiscal consolidation.
WHAT COULD CHANGE THE RATING DOWN/UP
Moody's would consider changing the outlook on the UK's rating to
positive, and ultimately upgrading the rating back to Aaa,
in the event of much more rapid economic growth and debt-to-GDP
reduction than the rating agency currently anticipates.
As reflected by the stable rating outlook, Moody's does not
anticipate any movement in the rating over the next 12-18 months.
However, downward pressure on the rating could arise if government
policies were unable to stabilise and begin to ease the UK's debt burden
during the multi-year fiscal consolidation programme. Moody's
could also downgrade the UK's government debt rating in the event of a
material deterioration in the country's economic prospects or a reduced
political commitment to fiscal consolidation.
GDP per capita (PPP basis, US$): 37,307 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.7% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2% (2013
Actual)
Gen. Gov. Financial Balance/GDP: -5.7%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.5% (2013 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 17 September 2014, a rating committee was called to discuss the
rating of the United Kingdom, Government of. The main points
raised during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The systemic
risk in which the issuer operates has not materially changed. The
issuer's susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings of rated entity Government of United Kingdom were initiated
by Moody's and were not requested by the rated entity.
The rated entity Government of United Kingdom or its agents participated
in the rating process. This rated entity or its agent(s)provided
Moody's access to the books, records and other relevant internal
documents of the rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sarah Carlson
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Alastair Wilson
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms UK's government bond rating at Aa1; outlook stable
