As a result of the decision which the ratings agency said will lead to, among other things, a “less predictable, stable, and effective policy framework in the U.K”, S&P lowered its long-term sovereign credit ratings by two notches from AAA to AA with a negative outlook.
According to the ratings agency, the downgrade “also reflects the risks of a marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements.”
In an extensive and downbeat rationale, S&P said, it believed the result of the EU referendum could see a a deterioration of the U.K.’s economic performance, partly as a result of a diminished role for its its large financial services sector, which it said is a major contributor to employment and public receipts.
It added that the lack of clarity not only on the economic outlook, but also the possibility of a constitutional crisis on the back of a second referendum on Scottish independence from the UK will hurt “confidence, investment, GDP growth, and public finances in the U.K., and put at risk important external financing sources vital to the financing of the U.K.’s
large current account deficits”.
S&P said that a lengthy negotiation process could also lead to a reduction in sterling’s role as a global reserve currency.
“These multiple and significant challenges will likely be very demanding and we expect them to take precedence over macroeconomic goals, such as maintaining growth, consolidating public finances, and the importance of finding a solution to worsening supply bottlenecks in the U.K. economy. Lack of clarity while negotiations ensue will also significantly deter private investment,” the rating agency said.
As a result of these various issues, S&P is now forecasting a significant slowdown between 2016 and 2019, with GDP growth averaging 1.1% per year, down from 2.1% which it forecast in April.
But, while it said this fall and the ongoing uncertainty surrounding Brexit, it said, it believes the UK will continue to benefit from its large, diversified, and open economy, which it said: “exhibits high labour- and product-market flexibility, and enjoys credible monetary policy.
Additionally, the U.K. benefits from deep capital markets and a globally competitive financial sector.”
S&P also affirmed its unsolicited short-term foreign and local currency sovereign credit ratings on the U.K. at ‘A-1+’ and lowered to ‘AA’ from ‘AAA’ its long-term issuer credit rating on the Bank of England (BoE) and the ratings on the debt programs of Network Rail Infrastructure Finance PLC.
