DBRS Confirms the United Kingdom at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the long-term foreign and local currency ratings of the United Kingdom of Great Britain and Northern Ireland (the UK) at AAA, and the short-term foreign and local currency ratings at R-1 (high). All ratings have a Stable trend.

The Stable trend reflects DBRS’s assessment that the challenges faced by the UK are manageable and are being addressed proactively. As a result, DBRS does not anticipate downward pressures on the rating. The trend could be changed to Negative if adverse shocks stemming from either the external or the private sector were to significantly slow the economic recovery, adversely impacting the public finances or the banking sector. The ratings would also face downward pressure if government policies failed to stabilise the UK's debt burden during the multi-year fiscal adjustment.

The ratings on the UK are underpinned by the country’s large, diversified and open economy; its resilient labour market; and its flexible fiscal and monetary policy framework coupled with its credible commitment to implement a far-ranging fiscal consolidation program. In addition, the UK benefits from having deep, efficient domestic capital markets, a long average debt maturity and from Sterling’s status as a secondary reserve currency. A strong institutional framework also supports the rating.

After a period of disappointing growth in 2011 and 2012, the prospects for the UK economy improved significantly with GDP accelerating to 1.9% in 2013 from 0.3% in 2012. Economic activity picked up supported by a turnaround in private sector confidence, continued monetary stimulus, a recovery in the housing market, diminishing headwinds from the EMU crisis and a more gradual pace of household and public sector deleveraging. To date, the recovery has been predominantly demand led, driven by stronger household consumption and housing investment. Growth is projected to broaden further in 2014 and 2015 averaging 2.3%, mainly supported by an upturn in gross fixed investment and exports.

DBRS expects the economic recovery to support the government's fiscal consolidation efforts over the medium term but cautions that the outlook for the public finances remains highly dependent on as yet unspecified spending cuts to be implemented after the 2015 election. According to the independent Office for Budget Responsibility (OBR), the budget deficit under the Maastricht definition is expected to narrow to 6.2% of GDP in 2013-14 from 11.4% in 2009-10.

General government gross debt remains high and is expected to reach 90.7% of GDP in 2013-14 and to peak at approximately 94.7% of GDP in 2015-16 before gradually declining thereafter. DBRS notes that general government debt is likely to remain at high though sustainable levels over the medium-term. The long average maturity of the public debt stock, at more than 14 years in 2013, is by far the longest among advanced economies. This limits refinancing risk and reduces the sensitivity of the consolidation plan to interest rate shocks.

The gradual improvements in the UK banking sector's capital and liquidity position have further reduced contingent liabilities. The financial sector is also increasingly able to support the economic recovery by better transferring easy monetary conditions to borrowers. DBRS expects the Bank of England's highly accommodative policy stance to continue to help to keep private-sector debt-servicing costs moderate and support the recovery. Financial sector policies aimed at improving the oversight framework and increasing the capacity to deal with systemically important financial institutions should help reduce systemic risks.

Several challenges confront the British economy in the longer term. Despite recent improvements, growth in the Euro area is likely to be moderate, and the re-emergence of market tensions cannot be ruled out, with the potential for continued spillovers via the trade and financial channels, higher funding costs, and reduced confidence. Were such uncertainty to persist over the medium-term, investment would likely be subdued and keep productivity from accelerating. On the domestic front, the continued need for deleveraging in the public sector and a highly indebted household sector could pose further headwinds to growth over the medium term.

Other challenges facing the country relate to the still sizeable current account deficit of 5.1% of GDP in 2013Q3, up from 3.6% in 2012Q3. The high current account deficit primarily reflects the UK’s structural dependence on imports and export underperformance driven by the UK’s relatively high exposure to low-growth advanced economies, and by its underexposure to the fastest growing emerging markets and relatively unfavourable export product mix.

Finally, while economic uncertainties are waning, DBRS believes that political uncertainties are likely to increase in 2014 and over the medium term, with the EU parliament elections and Scotland’s independence referendum in 2014, UK general election in 2015 and possible referendum on EU membership in 2017. DBRS believes these events could create uncertainties over the UK’s medium-term fiscal outlook, potentially adversely affecting business confidence and leading to changes in the UK’s political structure.

Notes:
All figures are in Sterling pound (GBP or £) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include IMF, OECD, BIS, European Commission, Bank of England, European Central Bank, Office for Budget Responsibility, Debt Management Office, Her Majesty Treasury, Office for National Statistics, Bloomberg, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone
Rating Committee Chair: Roger Lister
Initial Rating Date: 22 January 2013
Most Recent Rating Update: 19 July 2010

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