UPDATE: Fitch places U.K. on rating watch Negative
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(Updated - March 22, 2013 1:07 PM EDT)
Fitch places U.K. on rating watch Negative.
Below is the Release:
Fitch Ratings has placed the United Kingdom's (UK) 'AAA' Long-term Issuer Default Ratings (IDR) on Rating Watch Negative (RWN) indicating a heightened probability of a downgrade in the near term. Fitch expects to complete its review of the UK's sovereign ratings by the end of April. The UK's Short-term IDR of 'F1+' and Country Ceiling of 'AAA' are unaffected.
The RWN reflect the latest economic and fiscal forecasts published by the Office for Budget Responsibility (OBR) that indicate that UK government debt will peak later and at a higher level than previously expected by Fitch. General government gross debt (GGGD) and public sector net debt are forecast by the OBR to peak in 2016-17 at 100.8% and 85.6% of GDP and only begin to decline in 2017-18. Fitch has previously stated that GGGD failing to stabilise below 100% of GDP and on a firm downward path towards 90% over the medium term would likely result in a downgrade of the UK's sovereign ratings.
KEY RATING DRIVERS
The RWN reflects the following factors:
- The upward revision by the OBR of its projections for GGGD above 100% of GDP in 2015-16 before declining as a share of national income in 2017-18. This compares with Fitch's own projections published in September 2012 that envisaged GGGD peaking at 97.3% in 2015-16.
- Since it last affirmed the UK's 'AAA' IDRs, Fitch has revised down its forecasts for economic growth in 2013 and 2014 from 1.5% and 2.0% to 0.8% and 1.8%, respectively. These forecasts were published 15 March and are broadly in line with the OBR's latest forecasts. The persistently weak performance of UK growth, in part due to European growth, has increased uncertainty around the UK's potential output and longer-term trend rate of growth with significant implications for public finances.
The UK's creditworthiness continues to be underpinned by its high-income, diversified and flexible economy - underscored by the rise in employment despite the tepid economic recovery - and the authorities' commitment to deficit reduction. The independent monetary policy framework, as well as sterling's reserve currency status, and the long average life of government debt are further rating strengths.
RATING SENSITIVITIES
The outcome of the review of the UK's sovereign ratings initiated by the RWN will be influenced by the following factors:
- Fitch will review its current assumptions regarding the gap between the UK economy's actual and potential output and medium-term growth potential that underpinned its previous economic and fiscal projections.
- Fitch will update its medium-term economic and fiscal projections in light of the 2013 Budget and latest OBR forecasts with a particular focus on the trajectory for government debt over the medium to long term and the likelihood of debt being placed on a firm downward path over the foreseeable future. This analysis will factor in the risk of fiscal slippage given the long timeframe of planned consolidation (the OBR project public debt will start falling only in 2017/18).
- The relative standing of the UK's sovereign credit profile in relation to other highly-rated sovereigns taking into account the UK's strong financing flexibility and favourable debt structure.
Fitch places U.K. on rating watch Negative.
Below is the Release:
Fitch Ratings has placed the United Kingdom's (UK) 'AAA' Long-term Issuer Default Ratings (IDR) on Rating Watch Negative (RWN) indicating a heightened probability of a downgrade in the near term. Fitch expects to complete its review of the UK's sovereign ratings by the end of April. The UK's Short-term IDR of 'F1+' and Country Ceiling of 'AAA' are unaffected.
The RWN reflect the latest economic and fiscal forecasts published by the Office for Budget Responsibility (OBR) that indicate that UK government debt will peak later and at a higher level than previously expected by Fitch. General government gross debt (GGGD) and public sector net debt are forecast by the OBR to peak in 2016-17 at 100.8% and 85.6% of GDP and only begin to decline in 2017-18. Fitch has previously stated that GGGD failing to stabilise below 100% of GDP and on a firm downward path towards 90% over the medium term would likely result in a downgrade of the UK's sovereign ratings.
KEY RATING DRIVERS
The RWN reflects the following factors:
- The upward revision by the OBR of its projections for GGGD above 100% of GDP in 2015-16 before declining as a share of national income in 2017-18. This compares with Fitch's own projections published in September 2012 that envisaged GGGD peaking at 97.3% in 2015-16.
- Since it last affirmed the UK's 'AAA' IDRs, Fitch has revised down its forecasts for economic growth in 2013 and 2014 from 1.5% and 2.0% to 0.8% and 1.8%, respectively. These forecasts were published 15 March and are broadly in line with the OBR's latest forecasts. The persistently weak performance of UK growth, in part due to European growth, has increased uncertainty around the UK's potential output and longer-term trend rate of growth with significant implications for public finances.
The UK's creditworthiness continues to be underpinned by its high-income, diversified and flexible economy - underscored by the rise in employment despite the tepid economic recovery - and the authorities' commitment to deficit reduction. The independent monetary policy framework, as well as sterling's reserve currency status, and the long average life of government debt are further rating strengths.
RATING SENSITIVITIES
The outcome of the review of the UK's sovereign ratings initiated by the RWN will be influenced by the following factors:
- Fitch will review its current assumptions regarding the gap between the UK economy's actual and potential output and medium-term growth potential that underpinned its previous economic and fiscal projections.
- Fitch will update its medium-term economic and fiscal projections in light of the 2013 Budget and latest OBR forecasts with a particular focus on the trajectory for government debt over the medium to long term and the likelihood of debt being placed on a firm downward path over the foreseeable future. This analysis will factor in the risk of fiscal slippage given the long timeframe of planned consolidation (the OBR project public debt will start falling only in 2017/18).
- The relative standing of the UK's sovereign credit profile in relation to other highly-rated sovereigns taking into account the UK's strong financing flexibility and favourable debt structure.
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