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Brexit versus strong economy: The tugs on UK’s credit profile

Publication Date: 03 Jul 2019 - By ReachX Team By ReachX Team
Actionable
Differentiated

Investment Strategies Macro Multi Asset UK

The United Kingdom faces important credit challenges, most importantly those related to Brexit, but the country's considerable economic and institutional strengths provide "shock absorption capacity" to weather this change, according to a leading rating agency. 

In a note to clients, Moody's said the credit profile of the UK [rated by the agency as 'Aa2' with stable outlook] reflects the country's significant economic and institutional strengths, set against challenges posed by its withdrawal from the European Union.

While the UK's credit profile is also supported by very low government financing risks and a very high average debt maturity, Brexit has raised questions around the growth rates that can be achieved once the process is completed, as well as the country's future institutional strength.

"The UK faces important credit challenges, most significantly those related to Brexit," said Sarah Carlson, a Moody's Senior Vice President. "Even without Brexit, growth potential would have been weaker than it was pre-crisis. Brexit will exert further pressure on growth potential even in benign scenarios.

"While we don't see an upside scenario for Brexit, the UK's considerable economic and institutional strengths give the country shock absorption capacity to weather this significant change in its economic circumstances and alliances."

The UK's sovereign rating would come under pressure if Moody's concluded that the economic impact of the decision to leave the European Union (EU, Aaa stable) would be more severe than currently expected – for instance, if the UK were to leave without a deal. A significant weakening of the public finances would also be negative.

Conversely, a material and sustained recovery in fiscal strength in the coming years, with evidence that the economic impact of Brexit will be less severe than currently expected, would be positive for the rating.

 

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