Mubasher: Moody's Investor Service on Friday said it downgraded the UK's long-term issuer and debt ratings to negative from stable. Both ratings are affirmed at Aa1.
In a statement, ratings agency highlighted a number of key drivers that the rating action reflects. It noted that the majority vote in favour of leaving the European Union (EU) 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 said it expects "heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth" in the UK in the several years in which the country will have to renegotiate its trade relations with the EU, according to the statement.
Should the UK, on the long term, be unable to secure favourable alternative trade arrangements with the EU and other countries, its growth prospects would be materially weaker than currently expected.
Although 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," it said on its official website.
The UK government will not only need to negotiate the country's exit from the EU but it will also likely implement notable 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," Moody's stated.
Moody's has assumed that the UK's public finances are likely to be weaker, as a result of weaker GDP growth outlook and institutional strength.
"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," the statement revealed.
In addition to the rating downgrade, Moody's 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.
