14th Oct 2024 12:11
(Alliance News) - Scope Ratings on Friday maintained the outlook on its credit rating for the UK, citing the positive impact of the country's strong institutions and "robust" debt structure.
The ratings agency maintained a 'stable' outlook on the UK's long-term currency issuer default rating to reflect the view that ratings risk over the next 12 to 18 months are comparatively balanced.
Scope affirmed the IDR at 'AA', the second highest credit quality.
"Sterling's reserve-currency status, deep capital markets, a robust institutional framework and large and diversified economy support the ratings. Rising public debt, a weak external sector and post-Brexit uncertainty remain challenges," Scope explained.
Scope added that the UK's credit rating is supported by strong market access and a notably longer average government debt maturity of 14.2 years.
This compares favourably to other countries such as France and the US with their average maturity of 8.4 and 5.9 years respectively.
"The UK's funding costs rose since 2021 due to higher inflation and tighter monetary policy even though UK sovereign yields are currently slightly off their peaks as inflation has declined and the Bank of England has begun gradually to cut rates. However, [over] 30% of outstanding government debt will need to be re-financed by 2029, and maintaining investor confidence in the sovereign's fiscal sustainability remains crucial to support the significant debt-issuance plans of the (Keir) Starmer government," Scope said.
Going forward, the UK government debt ratio is expected to exceed 111% of gross domestic product by 2029, up from 100% in 2022 and 86% in 2019 before the Covid-19 pandemic.
"The British economy displays a comparatively-weak external position, given recurrent current-account deficits over the recent decades. Before the pandemic crisis, this deficit averaged 3.4% of GDP over 2017-19, wider than the averages of economies of sovereign peers," Scope said. "It moderated to 0.4% of GDP during the pandemic crisis in 2021 before re-rising to a moderate 2.2% by the year to Q2 2024. The IMF estimates the current-account deficit to average 2.8% of GDP over years 2024-29."
Despite "more-constructive engagement" with the EU as demonstrated by the Windsor framework agreement in 2023, Scope believes post-Brexit challenges will remain problematic with the Office for Budget Responsibility concluding that Brexit will cut trading intensity by 15% compared to the scenario of the UK remaining an EU member state.
The UK's output growth was just over 0.3% in 2023 and Scope estimates real growth to remain subdued at around 0.9% in 2024 before climbing to 1.4% in 2025.
The primary downside scenarios alluded to by Scope include weakened medium-term growth, protracted fiscal deterioration results in weakened debt sustainability, and changes to the historically positive status of UK gilts.
By Elijah Dale, Alliance News reporter
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