Bangkok--30 Mar--Standard & Poor's
-- The outlook on the United Kingdom remains negative, based on our view that, in the absence of a strong fiscal consolidation plan, the U.K.'s net general government debt burden may approach a level incompatible with a 'AAA' rating.
-- We expect to review the long-term rating and outlook again once medium-term fiscal policy becomes clearer following the 2010 parliamentary elections.
-- We are affirming the 'AAA' long-term and 'A-1+' short-term sovereign credit ratings.
Standard & Poor's Ratings Services today said it had affirmed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the United Kingdom (U.K.). The outlook remains negative. The Transfer & Convertibility (T&C) assessment for the United Kingdom is 'AAA'.
Standard & Poor's rating outlooks assess the potential direction of a rating, typically over a period of up to two years. An outlook revision does not necessarily precede a rating change.
To view the main economic indicators for the United Kingdom, please click here (RatingsDirect subscribers only).
We revised the outlook on the U.K. to negative on May 9, 2009, as a result of what we viewed as a structural deterioration in the public finances, and the lack of a well-specified fiscal consolidation plan, against the backdrop of the rapid increase in the government debt burden. We currently estimate general government debt to rise to 77% of GDP in 2010 and to approach 100% by 2014 (compared with 44% in 2007), notwithstanding the Treasury's ?11 billion (0.8% of GDP) downward revision to its borrowing estimate for 2009-2010. In our view, the government's 2010 budget, released March 24, 2010, did not include any material new information relating to its medium-term fiscal strategy. As we indicated in May 2009, we expect to review the rating and outlook on the U.K. again in light of the additional fiscal measures we expect to be announced after the upcoming parliamentary elections, likely to take place in May 2010.
We believe that substantial uncertainty persists with regard to the details of what the current government has indicated will be a largely expenditure-focused fiscal consolidation program starting next year. Official projections indicate that growth in real current spending will slow sharply from around 4.0% in 2010-2011 to 0.8% annually from 2011-2012. However, how this reduction in expenditure growth will be distributed across departments remains unclear. Moreover, we believe that additional spending measures will likely be required to put the public debt burden on a clear downward trajectory later in the current decade. As a result, we will await further clarity on fiscal policy from the new government following the general election. We expect that the institutional framework of budgets, pre-budget reports, and spending reviews will enable us to gain additional insight into medium-term fiscal trends by the end of 2010 regardless of the composition of the new government.
Under our current projections, we believe that the general government deficit reached 11.5% of GDP in 2009 and will still be close to 6% of GDP in 2014. This is based on our estimates of how quickly the erosion in the government's revenue base may be repaired, and the extent to which the growth in government spending can be curtailed. We are less optimistic than the government with regard to the U.K.'s annual economic growth prospects, which we expect to average around one percentage point lower over the next five years than those underpinning the official public finance projections. This conclusion reflects our expectation that fiscal consolidation will weigh on incomes, amid a prolonged period of deleveraging in the highly indebted private sector (we estimate domestic credit at 206% of GDP in 2010). We expect, however, that weaker domestic demand is likely to be offset by a positive contribution to growth from net exports, supported by the 23% depreciation in sterling's trade-weighted real exchange rate since July 2007. This gradual rebalancing of the economy is likely in our opinion to result in less buoyant tax receipts than in the previous economic cycle.
As a result of the sizeable structural general government deficit, together with our weaker economic outlook, we project the general government gross and net debt burdens to continue on an upward trend towards 100% of GDP (the difference between gross and net debt being about 2% of GDP). The official forecast is for the general government debt burden to peak at 89.2% of GDP in 2013-2014. A sustained increase in the general government debt burden toward 100% of GDP over the medium term would, in our view, reduce the government's capacity to respond to future shocks, raise real interest rates, and lower growth potential over the medium term. We therefore believe such an increase in the debt burden would be incompatible with a 'AAA' rating.
The outlook on the U.K. remains negative, based on our view that, in the absence of a stronger fiscal consolidation plan, the U.K.'s net general government debt burden may approach a level incompatible with a 'AAA' rating. The rating could be lowered if we conclude that the incoming government's fiscal strategy is unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term. Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a more sustainable footing.
Sovereign Credit Ratings: A Primer, May 29, 2008
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