Thursday’s U.K. election, which saw the Conservatives win an unexpected majority, is sparking concern about the risk of a promised referendum on its continued membership in the European Union (EU).
In a research note, National Bank Financial (NBF) says that the results represent an additional source of geopolitical uncertainty. “While markets are rejoicing over the majority victory of the pro-business Conservatives in the U.K.’s supposedly too-close-to-call election, this development actually ushers in a new era of political uncertainty by giving the victors the power, along with the obligation, to follow through on their promise to hold a referendum on the U.K.’s membership in the EU,” it says.
NBF says that the vast majority of British businesses oppose a referendum, but that rising anti-EU sentiment among the British electorate prompted the Conservatives to promise to hold a vote on the issue by the end of 2017. NBF notes that this anti-EU feeling has been reinforced by the recent increase in transfer payments that the U.K. has had to make to the EU due to its relatively strong economic performance. “Given that Britain’s economy is set to outperform most other EU members for the foreseeable future, this will be a long-term source of political dissension,” it suggests.
Additionally, NBF says that a referendum on the EU, could also be followed by yet another Scottish independence referendum. “Despite the strong victory by the Conservatives, it is very difficult to envisage a return to a pre-election campaign level of political calm and certainty until the debate over EU membership has been resolved,” NBF concludes.
Credit rating agency, Moody’s Investors Service, says that the surprise election outcome does not have a direct impact on the country’s sovereign credit rating, but that the EU question may represent an issue. “The election result has no impact on the U.K.’s sovereign. The Conservatives have committed to pursuing further fiscal consolidation to stabilise and eventually reverse the rising public debt,” says Kathrin Muehlbronner, senior credit officer for Moody’s. “However, the issue of Britain’s continued membership of the European Union could have broader consequences.”
Moody’s says that the U.K.’s potential exit from the EU would likely affect the whole economy. “There could be potential repercussions for the sovereign rating if the U.K. is unable to broadly replicate the benefits of EU membership. The outcome of a referendum remains highly uncertain,” it says.
“A firm judgement on the sovereign credit impact of the U.K. leaving the EU is not possible at this stage, because the terms of the exit scenario are highly uncertain,” says Fitch Ratings in a research note. “Negotiating the shape of a U.K. exit would be lengthy and complicated, and a wide variety of outcomes are possible. This prolonged uncertainty could dent U.K. economic growth by weighing on confidence and investment.”
As for the election result’s impact on specific sectors, Moody’s says that it reduces risks for energy retailers and transportation operators. “On the other hand, we see Conservative policies creating risks for renewable energy developers, banks, life insurers and housing associations,” says Graham Taylor, vice president and senior analyst.
For banks, Moody’s notes that the Conservatives will keep a levy on banks in place, and that they have promised reforms designed to increase competition in the U.K. banking sector. On energy, it says that it sees Conservative policies as less favourable for renewable energy developers than those proposed by Labour and the Liberal Democrats.