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Fitch Affirms United Kingdom at 'AA'; Outlook Negative
October 27, 2017 / 8:08 PM / a month ago

Fitch Affirms United Kingdom at 'AA'; Outlook Negative

(The following statement was released by the rating agency) LONDON, October 27 (Fitch) Fitch Ratings has affirmed the UK's Long-Term Foreign-Currency Issuer Default Rating at 'AA' with a Negative Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The UK's ratings balance a high-income, diversified and advanced economy against comparatively high public sector indebtedness. Sterling's reserve currency status, deep capital markets and strong governance indicators further support the ratings. The Negative Outlook reflects the heightened uncertainty and corresponding downside risks following the UK's decision to leave the European Union. Since June, the UK government and the European Commission have commenced negotiations on the terms of the UK's withdrawal from the EU. The complexity of the issues, the magnitude of national interests at stake, the lack of a clear UK position, the EU's negotiating stance, and the limited timeframe will make it challenging for the UK to secure a favourable agreement, in Fitch's view. There is a wide range of potential outcomes to the negotiations including an exit agreement with a transition arrangement giving continued preferential access to the EU Single Market as a bridge to a future UK-EU free trade agreement, or the UK leaving the EU and reverting to trading on WTO terms. An acrimonious "no deal" Brexit leading to substantial disruption to customs and trade, or the UK staying in the EU beyond March 2019 cannot be excluded. Parliamentary elections in June left the ruling Conservative Party as the largest party, but without an outright majority in the House of Commons, after a net loss of 13 seats. In Fitch's view, the election result is likely to weaken policy cohesion and creates uncertainty over the longevity of the UK government. We believe that no single post-Brexit relationship with the EU commands either majority parliamentary or popular support. This increases the uncertainty about the outcome of the withdrawal negotiations, which is due to be completed next year, ahead of the UK's exit from the EU in March 2019. It also increases uncertainty about both parliamentary support for and the final outline of Brexit-related domestic legislation, such as the EU withdrawal bill. The wide range of possible outcomes mean that the UK's ratings are not predicated on any particular Brexit base case. The wide range of possible outcomes also implies uncertainty around the UK's medium-term growth rate and public finances. The UK finance minister will present the new Budget, along with updated macroeconomic and public finance projections from the Office for Budget Responsibility, on 22 November. Recent public finance outturns point to an undershoot in the government deficit for this year compared with the last review's projections. Over 1Q17 and 2Q17, the general government deficit averaged 1.1% of GDP (January is the month with the highest tax receipts). For 2017 as a whole, we expect the deficit to be 2.6% of GDP, a downward revision of 0.5pps from the last review. We have not revised down our deficit projections for the next two years and we expect the deficit to fall only slightly, to 2.4% of GDP in 2018, and 2.1% in 2019. Our projections for the deficit imply that government debt as a share of GDP peaked in 2016 at 88.3%, and that the debt ratio will decline to 86.8% this year, and 85.7% by 2019. Despite the expected decline in the debt ratio, government indebtedness remains around double that of the 'AA' median (42.3% of GDP in 2016). The very long average maturity of public debt (14.9 years at end-2016 on the nominal value) mitigates risks from sharp adjustments in interest rates. The UK economy grew by 0.3% on a quarter-on-quarter basis in both 1Q and 2Q17, confirming the expectation of a slowdown from 0.5% on average in 2H16. The preliminary estimate for 3Q17 recorded quarterly growth of 0.4%. For the rest of the year we expect net trade to boost growth, partially offsetting the slowdown in domestic demand. This implies that real GDP growth will be 1.5% this year. For 2018, we still expect uncertainty to weight on investment prospects and forecast 1.3% growth for real GDP. For 2019, we expect growth to pick up to 1.7%, although this is more than unusually uncertain, given that macroeconomic developments will be related to the outcome of the Brexit negotiations. Inflation has risen from 0.3% in May 2016 to 3% in September. We expect inflation to slow down next year, averaging 2.5%, and 2.3% in 2019. Data revisions pushed up the estimate for the current account deficit to 5.9% in 2016 (compared to a 'AA' median of a 0.6% surplus). We expect the deficit to narrow this year to 4.5%, due to improvements in both the trade and the primary income balance, and then to 4% in the following two years. Sterling's depreciation has led to an improvement in the net international investment position, as it has boosted the GBP value of UK investments abroad. Major UK banks' capitalisation has improved further in recent months, with the Common Equity Tier 1 capital ratio reaching 14.3% (compared with 13.4% at end-2016). Consumer credit has been growing at a relatively fast pace in recent months, reflecting strong growth in dealership car finance, credit card debt and other borrowing. Consumer credit remains a relatively small share of overall household debt (around one-seventh of mortgage debt). At the same time, in case of adverse shocks, this asset class typically generates higher losses than those on mortgages. Overall, household debt as a share of income was 139.7% in 2Q17, up from 134.3% a year earlier. In June, the Financial Policy Committee of the Bank of England raised its countercyclical capital buffer to 0.5%, from zero - with binding effect from June 2018. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns the UK a score equivalent to a rating of 'AA' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES Future developments that could result, individually or collectively, in a downgrade: -Evidence that the consequences of the EU referendum are having a significant negative impact on the UK economy. -Worsened public finance developments leading to a rise in the government debt/GDP ratio. -Political developments that impede a clear determination of the UK's future relationship with the EU or undermines the economic policy framework or economic performance. -An outcome of the negotiations on Brexit and future trade relations with the EU that adversely affect UK economic growth prospects, public finances or the UK's political integrity. Future developments that could, individually or collectively, result in the Outlook being revised to Stable include: -Evidence that the UK's growth prospects prove resilient to the consequences of the EU referendum. -Further improvements in the public finances leading to a steady decline in the government debt to GDP ratio. -An outcome of the negotiations on Brexit and future trade relations with the EU that supports UK growth prospects and public finances. KEY ASSUMPTIONS In our public debt sensitivity scenario, we project that the government debt ratio declines from its end-2016 level (88.3%) to 75.5% by 2026. This scenario assumes, on average, real GDP growth of 1.7%, annual GDP deflator inflation of 2.0%, an average effective interest rate of 2.4%, and an average primary balance of 0.1% of GDP. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'AA'; Outlook Negative Long-Term Local-Currency IDR affirmed at 'AA'; Outlook Negative Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'AA' Issue ratings on short-term senior-unsecured local-currency bonds affirmed at 'F1+' Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Michele Napolitano Senior Director +44 20 3530 1882 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 Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL 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 WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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