Fitch Downgrades United Kingdom to AA+; Outlook Stable

Fitch Ratings has downgraded the United Kingdom’s long-term foreign and local currency issuer default ratings (IDR) to AA+ from AAA. The outlook is stable. At the same time, the credit ratings agency (CRA) affirmed the UK’s short-term foreign currency rating at F1+ and the country ceiling at AAA.

Fitch’s downgrade matches that of Moody’s, which stripped the UK of its AAA rating in
late February
. However, Moody’s said earlier this month that it was maintaining an AAA rating for the UK for the near term.

Fitch said that its downgrade of the UK’s sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch’s medium-term projections for UK budget deficits and government debt. Despite the loss of its AAA status, the UK’s extremely strong credit profile is reflected in its AA+ rating and the stable outlook.

The CRA now forecasts that general government gross debt (GGGD) will peak at 101% of gross domestic product (GDP) in 2015-16 – equivalent to 86% of GDP for public sector net debt (PSND)- and will only gradually decline from 2017-18. This compares with Fitch’s previous projection for GGGD peaking at 97% and declining from 2016-17 and the AAA median of around 50%.

Fitch previously commented that failure to stabilise debt below 100% of GDP and place it on a firm downward path towards 90% of GDP over the medium term would likely trigger a rating downgrade. Despite the UK’s strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a AAA rating.

Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the UK economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis. Fitch has revised down its forecast economic growth in 2013 and 2014 to 0.8% and 1.8%, respectively, from 1.5% and 2.0% at the time of the last review of the UK’s sovereign ratings in September 2012. The UK economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery.

Despite significant progress in reducing public sector net borrowing (PSNB from a peak of 11.2% of GDP (£159bn) in 2009-10, the budget deficit remains 7.4% of GDP (excluding the effect of the transfer of Royal Mail pensions) and is not expected to fall below 6% of GDP and £100bn until the end of the current parliament term. The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions (and/or tax increases) if public debt is to be stabilised and reduced over the medium term.


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