UK’s Credit Rating Could Drop Amid The Brexit Fiasco
14 Nov 2019
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- Credit rating agency Moody’s say UK rating could be downgraded amid the ongoing Brexit gridlock
- Anticipated general election and divisions hindering policymaking
- Major political parties promise to capitalize on low rates to ramp up borrowing
According to rating agency Moody's, there is a possibility of downgrading the UK credit rating. The agency lowered its economic outlook after Brexit talks hit a wall. The agency changed the outlook to negative from stable raising questions about debt repayment.
UK credit rating to fall
Currently, the UK is rated Aa2, which is the third-highest rank in terms of credit-worthiness. Usually, credit ratings agencies rate institutions and countries using their credit-worthiness. It, in turn, can have an impact on how much the institution or country can borrow. In 2013 Moody’s downgraded UK from AAA rating before downgrading it again two years ago.
Moody's has equally criticized the anticipated general election that has promised an increase in spending. However, there is no clear path of how to finance the spending following deep divisions in the political space. As a result of the divisions, it has turned out to be hard when it comes to making policy decisions.
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In a report, Moody's indicates Brexit fiasco has shown that the predictability and capability of the institutional framework have reduced. However, Moody's has said that despite paralysis of the policymaking process it is possible institutional strength will hold past Brexit.
Political parties promise to ramp up borrowing
This development comes a week barely after UK legislators supported the call for a general election. The election hopes to break the stalemate between the EU and the UK regarding Brexit.
UK's major political parties have been campaigning ahead of the general election and have promised to ramp up borrowing. Also, they have indicated that they are looking to capitalize on the low-interest rates. However, Moody's outlook suggests that this could change going forward.
The agency indicated that there are still some positives in the economy. It includes having a flexible labor market, a variety of economic activity as well a sound monetary policy. Nonetheless, the change in outlook indicates that downgrading to the actual rating is imminent.
The political situation in the UK hindering policymaking
Moody's indicates that the main concern is that the current political situation could see debt level grow. There is no meaningful initiative in terms of policies aimed at minimizing debt. Rathbone Investment Management's Jane Sydenham indicates that the UK is a risky prospect from the view of international debt investors. It is because of the spending plans announced without a clear financing strategy.
In 2017 when the credit rating of the UK dropped, it had a minimum impact on the cost of borrowing. Therefore even if there is downgrading, the UK will still be in band A although not at par with the likes of Germany. Although the impact will be minimal, it comes at a time when politicians are making promises of shaping policy. Conservative and Labour parties indicated that they would use low rates to enhance borrowing to fund the spending.