DBRS Confirms United Kingdom at AAA with Stable Trend Following UK Vote

DBRS Ratings Limited has confirmed the long-term foreign and local currency issuer ratings of the United Kingdom of Great Britain and Northern Ireland (the UK) at AAA, and the short-term foreign and local currency issuer ratings at R-1 (high). The trend on all ratings remains Stable. (See ‘DBRS Confirms the United Kingdom Following Referendum on EU’.)

The majority of British voters voted to leave the European Union on a referendum held on 23rd June. The referendum on EU membership resulted in a win for the ‘Leave’ campaign with 52% of the votes against 48% obtained by the ‘Remain’ campaign. The outcome has intensified financial market volatility and weakened Sterling, and is likely to lower capital inflows and deepen the economic slowdown. The outcome has also shown a stark difference in support for EU membership across the countries of the UK, with Scotland and Northern Ireland voting to remain in the EU, and England and Wales voting to leave. Nevertheless, DBRS does not expect the UK government’s debt repayment capacity to decline in the period directly after the vote. The Stable trend reflects DBRS’s assessment that the challenges the UK faces, including those related to higher uncertainty over the vote to leave the EU, are manageable in the immediate future given the UK’s favourable debt dynamics, strong institutional framework and large, wealthy economy.

The ratings are supported by the country’s large and advanced economy, with labour market and exchange rate flexibility supporting its resilience. The UK’s institutional strength also supports the ratings, as the country ranks highly in governance indicators and benefits from a credible central bank, a sound fiscal framework, and enhanced financial supervision. The ratings are further supported by the very favourable maturity structure of public debt, with the longest average maturity among advanced economies, significantly easing short-term refinancing requirements. The UK’s deep domestic capital market and Sterling’s status as a global reserve currency provide the sovereign with substantial funding flexibility.

Nevertheless, the UK faces important credit challenges. Firstly, the UK vote to leave the EU is likely to generate years of uncertainty over the UK’s trade arrangements, the attractiveness of the UK as a financial centre and destination for investment, the mobility of foreign workers in the UK, and the UK’s own political unity. The Prime Minister’s announcement of his resignation has also added to the uncertainty. Over time, these factors could result in weaker growth, higher interest rates, and a deterioration in public finances. Thus, whether the UK’s repayment capacity will decline in the longer term is less clear. Moreover, despite important progress in fiscal deficit reduction, public debt remains high, limiting the government’s fiscal flexibility to respond to the expected economic downturn. Also of concern is the current account deficit which is large, at 7.0% of GDP in Q4 2015, and a source of external vulnerability.

RATING DRIVERS
The ratings could be subject to downward pressure if rollover risk rises significantly, or if economic and financial dislocations impair economic prospects or result in a deterioration in the banking sector or the fiscal position. There is potential for a severe negative impact from a UK departure from the EU on British investment, trade and the political environment. If prolonged economic and policy uncertainty and changes to the economy stemming from the UK’s new trade arrangements result in an important loss in output, this could erode the government’s capacity to pay its debt and put downward pressure on the ratings. A break-up of the UK, emerging from a potential second referendum on Scottish independence, could also put downward pressure on the ratings, since this would likely create uncertainty.

As specified in EU Regulation 462/2009, amending Regulation 1060/2009 on credit rating agencies, DBRS’s ratings on the UK are subject to publication restrictions, as set out in Article 8a of the Regulation, including publication in accordance with a pre-established calendar. (See "2016 Planned Publication Calendar for EU Sovereign Rating Reports,” which DBRS published on 23 December 2015). Under Article 8a, a deviation of the publication of sovereign ratings from the calendar must be accompanied by a detailed explanation of the reasons for the deviation. The next pre-established calendar date for publication of our UK ratings is 8 July 2016. This review deviates from the calendar because of the economic and political significance of the UK’s referendum on EU membership and its potential implications for our ratings on the UK.

Notes:
All figures are in pounds sterling (GBP) 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. These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

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

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

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: Adriana Alvarado, Assistant Vice President
Rating Committee Chair: Alan G. Reid, Group Managing Director
Initial Rating Date: 19 July 2010
Last Rating Date: 8 January 2016

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