Fitch Ratings Inc. and S&P Financial Services LLC have downgraded their sovereign credit ratings on the U.K. in the wake of last week’s “Brexit” referendum result and the turmoil that has followed.
Specifically, Fitch cut its issuer default ratings to ‘AA’ from ‘AA+’ and S&P lowered its ratings to ‘AA’ from ‘AAA’ on Monday. The outlooks for the ratings are also negative.
In addition, Moody’s Investors Service said in the immediate aftermath of last week’s vote that the outcome was credit negative for the U.K., but it has yet to make any move with its rating.
S&P calls the Brexit vote “a seminal event, [that] will lead to a less predictable, stable, and effective policy framework in the U.K.” Its downgrade also reflects the risks of a “marked deterioration of” external financing conditions. Furthermore, S&P also points to the contrary results in Scotland and Northern Ireland as possibly creating “wider constitutional issues” for the U.K., overall.
Fitch’s decision to downgrade stems from its expectation that the vote result will have a negative impact on the U.K.’s economy, public finances and political continuity: “Fitch believes that uncertainty following the referendum outcome will induce an abrupt slowdown in short-term [gross domestic product (GDP)] growth, as businesses defer investment and consider changes to the legal and regulatory environment.”
Despite the high degree of uncertainty surrounding the extent of the negative shock, Fitch has revised its forecast for real GDP growth down to 1.6% in 2016 (from 1.9%) and to 0.9% in 2017 in 2018 (from 2%). It also says that medium-term growth will also likely be weaker “due to less favourable terms for exports to the [European Union (EU)], lower immigration and a reduction in foreign direct investment.”
In addition, Fitch notes that the referendum has created political turmoil, including the resignation of the current prime minister, which is “contributing to heightened uncertainty over government economic policies and diminished scope for policy implementation.”
Moreover, the fact that Scotland voted to stay in the EU, “makes a second referendum on Scottish independence more probable in the short to medium term,” it says.
“The negative outlook reflects the risk to economic prospects, fiscal and external performance and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the U.K. if there is another referendum on Scottish independence,” S&P adds.
Moody’s notes that the lasting credit impact of the vote “will depend on the nature of the UK’s new ties with the EU,” and notes that the potential credit risks extend beyond the sovereign to various corporate sectors will likely be affected.