A year after Moody’s warned investors that weak economic growth was hampering the UK’s ability to reduce its debt and deficit, the ratings agency downgraded the UK’s government bond rating to Aa1 with a stable outlook.
Credit ratings assess the creditworthiness of companies and governments, and the Aaa rating that UK government bonds had carried since 1978 reflected Moody’s strongest confidence that the debtor can meet its financial commitments. The Aa1 rating differs only by a small degree from the prime rating.
Moody’s justified the downgrade, saying that GDP growth is expected to remain slow in the UK for several years, which, in turn, is raising the UK’s debt burden and prolonging fiscal consolidation.
Along with the downgrade of the domestic- and foreign-currency government bonds, Moody’s also downgraded the ratings of the Bank of England, the UK’s central bank, to Aa1 from Aaa.
While the UK’s creditworthiness remains high, “the slower-than-expected recovery, the higher debt load and the policy uncertainties combine to form the third driver of today’s rating action – namely, the erosion of the shock-absorption capacity of the UK’s balance sheet,” Moody’s said in a statement on Friday. “Moody’s believes that the mounting debt levels in a low-growth environment have impaired the sovereign’s ability to contain and quickly reverse the impact of adverse economic or financial shocks.”
The British Chambers of Commerce in its most recent economic outlook lowered projections for UK GDP growth to 1% in 2013 and to 1.8% in 2014. That’s better than the 0.1% by which the UK economic probably shrank in 2012, according to the BCC forecast, but less than the 1.2% growth in 2013 and the 2.2% growth in 2014 the BCC had predicted three months earlier.
Public-sector borrowing is expected to reach £104.1 billion ($157.2 billion) in 2013, about 13% higher than forecast in March 2012, according to the BCC. Moody’s projected that the UK’s gross general government debt level will peak at about 96% of GDP in 2016.
Moody’s and the BCC blame the UK’s sluggish recovery on weaker-than-expected global economic growth, including in the euro zone and China.
Moody’s expected the rating to remain in place for 12 to 18 months.
Related CGMA Magazine content:
“Concerns About Europe, Global Economy Drive Down Economic Optimism”: Revenue and profit projections dropped sharply in the second quarter, according to a global CGMA survey of finance executives. Those and several measures of economic sentiment led to a decline in optimism worldwide.
“Foreign Investors Not Scared of Europe, but More Selective”: The ongoing euro-zone crisis hasn’t scared foreign investors away from Europe, but it has made them more selective, according to Ernst & Young research.
“UK CFOs Less Optimistic About Revenue Growth”: Revenue expectations are down, and talk of cuts is up amongst CFOs of private-equity-backed businesses in the UK. The euro-zone debt crisis also appears to be sapping expectations for initial public offerings—and not just in Europe.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.