Moody’s changes UK government sovereign bond outlook to negative after Brexit vote

Moody’s Investors Services Friday June 24, 2016 changed the UK government’s sovereign bond outlook from stable to negative.

In an announcement sent to ghanabusinessnews.com, Moody’s says the outlook on the UK’s long term issuer and debt ratings have been changed to negative from stable. Both ratings are affirmed at Aa1, it said.

According to Moody’s the majority vote in favour of leaving the European Union (EU) (Aaa, Stable) in the referendum held on 23 June will herald a prolonged period of uncertainty for the UK, with negative implications for the country’s medium-term growth outlook.

Moody’s notes that during the several years in which the UK will have to renegotiate its trade relations with the EU, it expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth. Over the longer term, should the UK not be able to secure a favourable alternative trade arrangement with the EU, it adds.

While acknowledging that the UK’s institutional framework will not change, Moody’s considers that policy predictability and effectiveness of economic policy-making — an important aspect of institutional strength – might be somewhat diminished as a consequence of the vote.

“The UK government will not only need to negotiate the UK’s departure from the EU but will likely also aim to embark on significant changes to the UK’s immigration policy, broader trade policies and regulatory policies. While we consider the UK’s institutional strength to be very high, the challenges for policymakers and officials will be substantial,” it says.

Moody’s also believes that as a consequence of the weaker GDP growth outlook and institutional strength, the UK’s public finances will also likely be weaker than it has assumed so far.

“In Moody’s view, the negative effect from lower economic growth will outweigh the fiscal savings from the UK no longer having to contribute to the EU budget. The UK government has one of the largest budget deficits among advanced economies, and lower GDP growth will further complicate the implementation of the government’s multi-year fiscal consolidation plan. Consequently, the public debt ratio will likely remain higher than the rating agency previously expected,” it argues.

It notes further that concurrent with the rating action on the sovereign, it has also changed the outlook to negative for the Aa1 rating of the Bank of England from stable. The Aa1/P-1 ratings were affirmed. The UK’s long-term and short-term foreign and local-currency bond and deposit ceilings remain unchanged at Aaa/ P-1, the rating agency says.

By Emmanuel K. Dogbevi