London, 24 June 2016 -- Moody's Investors Service has today changed the outlook on the UK's
long term issuer and debt ratings to negative from stable. Both
ratings are affirmed at Aa1.
Today's rating action reflects the following key drivers:
1. The majority vote in favour of leaving the European Union (EU)
(Aaa, Stable) in the referendum held on 23 June will herald a prolonged
period of uncertainty for the UK, with negative implications for
the country's medium-term growth outlook. During the
several years in which the UK will have to renegotiate its trade relations
with the EU, Moody's expects heightened uncertainty,
diminished confidence and lower spending and investment to result in weaker
growth. Over the longer term, should the UK not be able to
secure a favourable alternative trade arrangement with the EU and other
countries, the UK's growth prospects would be materially weaker
than currently expected.
2. While the UK's institutional framework will not change,
Moody's considers that policy predictability and effectiveness of
economic policy-making -- an important aspect of institutional
strength - might be somewhat diminished as a consequence of the
vote. The UK government will not only need to negotiate the UK's
departure from the EU but will likely also aim to embark on significant
changes to the UK's immigration policy, broader trade policies
and regulatory policies. While we consider the UK's institutional
strength to be very high, the challenges for policymakers and officials
will be substantial.
3. As a consequence of the weaker GDP growth outlook and institutional
strength, the UK's public finances will also likely be weaker
than Moody's has assumed so far. In Moody's view,
the negative effect from lower economic growth will outweigh the fiscal
savings from the UK no longer having to contribute to the EU budget.
The UK government has one of the largest budget deficits among advanced
economies, and lower GDP growth will further complicate the implementation
of the government's multi-year fiscal consolidation plan.
Consequently, the public debt ratio will likely remain higher than
the rating agency previously expected.
Concurrent with the rating action on the sovereign, Moody's
has also changed the outlook to negative for the Aa1 rating of the Bank
of England from stable. The Aa1/P-1 ratings were affirmed.
The UK's long-term and short-term foreign and local-currency
bond and deposit ceilings remain unchanged at Aaa/ P-1.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
RATIONALE FOR NEGATIVE OUTLOOK
UK's MEDIUM-TERM GROWTH PROSPECTS COULD BE MATERIALLY WEAKER
The first driver for the change in outlook is the negative impact that
Moody's believes the decision to leave the EU will have on the UK's
growth prospects and economic strength. In the referendum held
on 23 June, a majority of 52% of voters decided in favour
of leaving the EU. This decision will set in motion a withdrawal
process that will likely take several years to conclude: in addition
to the formal withdrawal process, which should notionally take two
years under the Lisbon Treaty provisions (although this can be extended),
the UK will also have to negotiate a new trading arrangement with the
EU, if it chooses to do so.
In Moody's view, many investment and spending decisions are
likely to be put on hold during this period, given the high degree
of uncertainty over the UK's future trade relationship with the
EU. Financial conditions will likely be tighter as well,
reflecting higher risk premia, which will increase the cost of financing.
Moody's therefore expects real GDP growth to be roughly half a per
cent lower in 2016 and roughly one per cent lower in 2017 than the agency's
previous forecasts of 1.8% and 2.1% respectively,
driven by materially lower investment and somewhat lower private consumption.
Over the medium term, the UK's economic growth prospects will
depend crucially on what trade agreement the UK government reaches with
the EU as well as on the UK government's trade policies more generally.
The EU is the UK's biggest trading partner, with around 44%
of exports destined for EU countries (2015 data), and 48%
of foreign direct investment in the UK originating from the EU (2014 data).
While the UK might be able to redirect its trade to other regions and
thus compensate for lower trade with the EU, this will take time.
In a base case scenario, Moody's expects that the UK and the
EU would come to an arrangement to preserve many -- but not all --
of the current trading relationships. However, there are
clear downside risks. In the absence of a trade agreement that
preserves core elements of the UK's current access to the Single
Market, Moody's believes the UK's real GDP growth would
be materially lower. Barriers to trade will not only result in
lower trade but also negatively impact competition, innovation and
productivity. Those effects would be particularly pronounced if
the UK reverted to trading on a "most-favoured nation"
basis with the rest of the world. In addition, the UK authorities
will have to renegotiate the UK's trade relations with a multitude of
other countries, as the UK will no longer automatically benefit
from the more than 30 preferential trade agreements that the EU has concluded,
covering nearly 60 countries.
PREDICTABILITY AND EFFECTIVENESS OF ECONOMIC POLICY-MAKING MIGHT
BE DIMINISHED
The second driver for the outlook change to negative from stable is the
risk that policy predictability and effectiveness might be somewhat diminished
as a consequence of the vote. The UK government will not only have
to negotiate the UK's departure from the EU, but will also
have to agree a new trade relationship with the EU as well as with a large
number of other countries and regions. It will probably also embark
on significant changes to the UK's immigration policy and possibly
regulatory policies, a challenging set of economic policy decisions
under a new government leadership following the resignation of Prime Minister
Cameron.
Moody's considers many aspects of the UK's institutional framework
to be very strong, such as the rule of law, a strong fiscal
framework as well as a highly credible central bank that has been successful
in achieving its policy objective and a professional and highly qualified
civil service. However, the decision to exit the EU will
pose material challenges for policymakers and officials.
THE UK GOVERNMENT'S FISCAL STRENGTH WILL LIKELY BE LOWER
The third driver for the outlook change to negative from stable is the
negative effect on the UK's public finances arising from lower economic
growth.
Moody's sovereign rating of Aa1 for the UK is based on the expectation
that the UK government will successfully implement a multi-year
fiscal consolidation plan and bring the elevated general government debt
ratio of over 89% of GDP (2015) on a declining trend from this
year onwards. The government has already slowed the pace of fiscal
consolidation materially compared to its original plans, and other
things being equal lower growth will lead to lower revenues and higher
expenditures, further challenging the government's ability
to rebalance its books.
In addition, the change in leadership of the government and/or likely
political pressures stemming from weaker growth create uncertainty around
the fiscal stance in future years and increase the risk of a looser stance
than the agency has assumed so far. In a pessimistic scenario,
the budget deficit reduction could stall and the public debt would rise
from current levels.
Moody's does not believe that the negative effects from lower growth
will be fully compensated by the fiscal savings from the UK no longer
having to contribute to the EU budget.
RATIONALE FOR AFFIRMATION OF THE UK'S Aa1 RATING
The economic and fiscal consequences of the referendum result are highly
uncertain as they depend crucially on the outcome of future negotiations
with the EU as well as with other trading partners. Moody's
believes that a scenario in which the UK manages to preserve many (albeit
not all) of its current trade benefits from EU membership is plausible.
The long-term economic impact would be limited in such a scenario
and the UK's current sovereign rating of Aa1 would remain appropriate.
Also, the UK authorities might well adopt policies that mitigate
the above mentioned negative consequences of the decision to leave the
EU. Those policies -- in the areas of trade, regulations,
immigration, tax -- will become clearer over the coming 1-2
years.
WHAT COULD MOVE THE RATING DOWN/UP
The rating could be downgraded if the negotiations are protracted and
suggest that the UK government is unlikely to conclude a trade agreement
with the EU that will protect core elements of the UK's current
access to the EU Single Market. The rating would also come under
downward pressure if there is no further material progress in reducing
the government's budget deficit, as this would leave the public
debt burden close to the current levels in the next several years.
A third driver for a downgrade of the rating could be the emergence of
heightened pressures on the exchange rate in the context of substantial
and persistent capital outflows, as this would raise questions over
the funding of the UK's large current account deficit of more than
5% of GDP (2015) and more fundamentally over the role of Sterling
as one of the few global reserve currencies.
The outlook could be returned to stable if Moody's concluded that
the UK government is likely to be able to negotiate a trade arrangement
with the EU that preserves core elements of the UK's current access
to the Single Market. This in turn would limit the economic impact
from the EU exit and allow for a continued improvement in the country's
public finances and a gradual reduction of public debt over the coming
years.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Bank of England
....LT Issuer Rating, Affirmed Aa1
....Senior Unsecured Regular Bond/Debenture,
Affirmed Aa1
....Senior Unsecured MTN, Affirmed (P)Aa1
....ST Issuer Rating , Affirmed P-1
..Issuer: United Kingdom, Government of
....LT Issuer Rating, Affirmed Aa1
....Senior Unsecured Regular Bond/Debenture,
Affirmed Aa1
Outlook Actions:
..Issuer: Bank of England
....Outlook, Changed To Negative From
Stable
..Issuer: United Kingdom, Government of
....Outlook, Changed To Negative From
Stable
The referendum outcome to leave the EU required the publication of this
credit rating action on a date that deviates from the previously scheduled
release date in the sovereign release calendar, published on www.moodys.com.
GDP per capita (PPP basis, US$): 41,159 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.3% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.2%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -4.4%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.2% (2015 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 24 June 2016, 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 decreased.
The issuer's governance and/or management, have decreased.
The issuer's fiscal or financial strength, including its debt profile,
has decreased.
The principal methodology used in these rating was Sovereign Bond Ratings
published in December 2015. Please see the Ratings Methodologies
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 credit 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. On
this basis Government of United Kingdom or their agents are considered
to be participating entities. These rated entities or their agents
generally provide Moody's with information for their ratings process.
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.
Kathrin Muehlbronner
Senior Vice President
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
Yves Lemay
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 changes outlook on UK sovereign rating to negative from stable, affirms Aa1 rating
