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Fitch Affirms UK at 'AA+'; Outlook Stable
December 18, 2013 / 5:35 PM / 4 years ago

Fitch Affirms UK at 'AA+'; Outlook Stable

Link to Fitch Ratings' Report: United KingdomLONDON, December 18 (Fitch) Fitch Ratings has affirmed the UK's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA+'. The issue ratings on the UK's senior unsecured foreign and local currency bonds are also affirmed at 'AA+'. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS -The recovery of the UK economy has strengthened since our last review in April 2013. Quarterly GDP growth accelerated to 0.7% and 0.8% in 2Q13 and 3Q13, respectively. Fitch judges the 2013 pick-up to be predominantly cyclical, driven by stronger household consumption and housing investment. -Nevertheless the UK's performance since the 2008 financial crisis continues to lag most of its rated peers. The level of GDP is still 2.5% below its pre-crisis peak, compared with 5.5% above the peak in the US and 2.6% above in Germany, and just 0.3% below the peak in France. -The 2013 Autumn Statement reinforced the government's commitment to a multi-year fiscal consolidation path. The UK has achieved substantial progress with fiscal consolidation since 2010. The budget deficit, or public sector net borrowing (PSNB), is expected to narrow to 6% of GDP in 2013-14 from 11% in 2009-10, despite the unfavourable macroeconomic dynamics during most of the period. In the coming years a strengthening economic recovery will support the fiscal consolidation efforts. -Fitch now expects gross general government debt (GGGD), using the EU Treaty definition, to peak at 94% of GDP in 2015-16 and to start falling in 2017-18. The debt trajectory is similar to the Office for Budget Responsibility's (OBR) latest projection and the forecast peak is almost 7pp lower than at the time of the April rating review, highlighting risks around such projections. Nevertheless, the OBR and Fitch forecast debt will still peak one year later than the supplementary fiscal target and it remains among the highest of 'AA'- and 'AAA'-rated sovereigns. -The consolidation plans of the government are ambitious over the medium term as they envisage a fall in public sector consumption of goods and services to a historical low of 16.4% of GDP by 2018-19, from 21.7% in 2012-13. -The UK's ratings are underpinned by its high-income, diversified and flexible economy as well as by a high degree of political and social stability. 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. -The credible monetary policy framework and sterling's international reserve currency status afford the UK a high degree of financial and economic policy flexibility. -The current account deficit of the UK is forecasted by Fitch to have widened to 3.9% of GDP in 2013 from 1.5% in 2011, compared with a surplus for the 'AA' median. The UK's net external debt is also significantly higher than most rating peers and reflects the high indebtedness of the domestic private and public sectors. -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 substantial improvement in the UK banking sector's capital and liquidity position has further reduced contingent liabilities arising from the sector and as recent developments illustrate, the financial sector is increasingly able to support the economic recovery by better transmitting the loose monetary conditions to borrowers. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced: The main factors that could lead to a negative rating action, individually or collectively, are: - Failure to place the GGGD to GDP ratio on a firm downward path over the medium term -Adverse macroeconomic or financial shocks that significantly slow the economic recovery, adversely affecting the public finances or the financial sector The main factors that could lead to a positive rating action, individually or collectively, are: - Persistently lower budget deficits, resulting in GGGD trend declining at a faster pace than currently projected to below 90% of GDP - Stronger and sustained economic recovery and clear indication of higher medium term growth potential than currently forecast KEY ASSUMPTIONS Fitch expects the UK economy to grow by 2.3% in 2014 and 2015, following a forecast 1.4% in 2013. Fitch maintains its view that the medium term growth potential is in the range of 2%-2.25%, while recognising the size of the output gap is particularly uncertain following a financial crisis. Fitch expects employment growth to lag that of output and forecasts unemployment to fall below 7% by 2015. There remains uncertainty about how fast productivity could normalise during the cyclical upswing. The strong institutional framework for control of public expenditure and effective tax administration alongside the broad-based political and public commitment to deficit reduction underpins Fitch's assumption that fiscal consolidation will be sustained beyond the term of the current parliament. Fitch also assumes that stability-oriented fiscal policy will be maintained amid any new fiscal rule. Beyond the impact of the methodological reclassification of Network Rail from being a private sector entity to a central government entity, Fitch assumes that no contingent liabilities arising from the financial sector or privatisation receipts will have a material impact on the path of UK government debt over the rating horizon. In line with its recent global economic outlook report, Fitch expects the recovery in major advanced economies, including the eurozone, the UK's largest trading partner, to strengthen gradually in 2014-15, while emerging markets growth will be fairly stable avoiding major turbulence from tightening global financing conditions. Furthermore, Fitch assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Gergely Kiss Director +44 20 3530 1425 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Tony Stringer Managing Director +44 20 3530 1219 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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