Ratings agencies have given the United Kingdom a negative credit outlook, following the results of the EU referendum. Moody's Investors Service has changed the outlook on the UK's long term issuer and debt ratings to negative from stable. Both ratings are affirmed at Aa1. The agency also affirmed the European Union's long-term Aaa issuer rating, the short term (P)P-1 rating and maintained the stable outlook.
For its part, Fitch Ratings says the "Leave" result is credit negative for most sectors in the UK, due to weaker medium-term growth and investment prospects and uncertainty about future trade arrangements,
“The majority vote in favor 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,” according to Moody’s.
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 favorable alternative trade arrangement with the EU and other countries, the UK's growth prospects would be materially weaker than currently expected, noted Moody's.
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.
Broadly negative for corporates
“Brexit will be moderately credit negative for the UK sovereign and as we have previously stated we will review the sovereign rating shortly,” says Fitch.
Fitch adds that any negative sovereign rating action would affect the relatively small number of sovereign-linked or capped ratings in infrastructure, public finance and structured finance and government-guaranteed bank debt.
“But overall we expect near-term rating actions for other sectors to be limited. In the medium to long term any broader rating actions are likely to depend on factors such as the size and duration of the impact on GDP, the extent of sterling depreciation and their subsequent effect on inflation, asset prices, unemployment and interest rates.”
Fitch notes that failure to agree on favorable trade arrangements would also be a significant negative for some sectors. The UK's status as a major international banking hub could be damaged as some business lines shift to the EU.
“Higher import costs and pressure on exports due to the potential imposition of tariffs would be broadly negative for corporates. The extent to which the UK would be able to limit net inward migration could be significant for some asset classes,” says Fitch.
Stable outlook for EU
Moody's has affirmed the European Union's long-term Aaa issuer rating, the short term (P)P-1 rating and maintained the stable outlook.
“The rating action reflects our view that the EU's Aaa rating rests principally on the credit strength of its most highly rated members, and on their commitment to ensuring the continued soundness of its finances, underpinned by the joint and several obligations each EU member assumes to provide it with financial support where needed,” says Moody’s.
Moody's does not expect that the UK's vote to leave and its eventual exit will alter either the capacity or the willingness of those very highly rated members to continue to honor their obligations to support the EU.
Moody's explains the two key drivers of its rating action. First is the resilience of the credit standing of the EU's remaining highly-rated member states, which ultimately back the debt repayment capacity of the EU through a joint and several obligation enshrined in the EU treaty, and the low probability that their commitment to the EU will diminish.
Second, is the strength of the EU's debt repayment capacity provided by the union's conservative budget management, its favourable debt structure, ability to reallocate its large budgetary resources in case of need, and the ability to tap buffers under unforeseen circumstances.