Dagong Global Credit Rating Co., Ltd.
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the United Kingdom of Great Britain and Northern Ireland (hereafter referred to as “the United Kingdom”) at A+, each with a stable outlook. The debt repayment environment of the United Kingdom remains relatively stable under pressure. Economic growth has been slowed down by Brexit risks, although a continued narrowing of the fiscal deficit will lead government debt to enter a slow downward track. That, coupled with low financing needs and a convenient financing environment, renders government solvency stable.
The key reasons for maintaining the sovereign credit ratings of the United Kingdom are laid out below:
First, the debt repayment environment of the United Kingdom remains relatively stable under pressure and the banking system tends to be more stable. As Theresa May lost her bet and formed a weak coalition government, governance has been undermined by impediments of the opposition and the coalition government. Brexit negotiations are going through a difficult period, while the pace of structural reform and fiscal consolidation will thereby slow down. In terms of the credit environment, in response to anticipated shocks arising from Brexit uncertainty, the Bank of England has been improving the balance sheet of the British banking system, thus profitability and liquidity have improved slightly, and the banking system tends to be stable.
Second, Brexit risks drag down short-term economic growth, and structural problems limit growth potential in the medium and long term. Rising inflation and sluggish wage growth have eroded the real income of residents while uncertainty brought on by Brexit and the snap election has sapped business and consumer confidence. The British economy is expected to slow to 1.5% in 2017. In the short term, the normalization of monetary policy and Brexit risks will further dampen private consumption and investment demand. The British economic growth rate is expected to drop to 1.4% and 1.3% respectively in 2018 and 2019. In the medium and long term, structural problems such as lower labor productivity, industrial hollowness, and an ageing population will all constrain the country’s growth potential.
Third, the fiscal deficit continues to narrow and repayment sources remain stable. Thanks to the continuous promotion of fiscal consolidation and increased efficiency in tax collection, the British general government’s fiscal deficit will go down to 2.3% in FY2017/18. In the short term, the government will levy a new tax upon the self-employed, while tax relief measures adopted to stimulate economy will help increase tax revenues. The British general government’s fiscal deficit is expected to amount to 1.9% and 1.5% in FY2018/2019 and FY2019/2020 respectively, while the primary fiscal surplus will stand at 0.1% in FY2019/2020. That, combined with lower financing needs, renders stable repayment sources.
Fourth, government debt gradually declines, and thereby solvency remains stable. As fiscal deficits continue to narrow, it is forecasted that the British general government debt burden in 2018 and 2019 will be 90.6% and 90.4% respectively, and will enter a slow downward track in 2019. Despite a relatively high level of external debt, the current account deficit continues to narrow and external debt is largely denominated in pound sterling, which achieves full convertibility. That, combined with a convenient financing environment and a large amount of external assets, aids the United Kingdom to pay its foreign debt, thus renders stable foreign-currency solvency in the medium term.
In the short term, Brexit risks constrain the United Kingdom’s structural reforms, impede economic growth, and increase pressure upon the government's fiscal consolidation. However, the government’s fiscal deficit continues to narrow while low financing needs and convenient financing channels will help ensure the stability of the government's solvency. Therefore, Dagong has decided to maintain a stable outlook for the local and foreign currency sovereign credit ratings of the United Kingdom for the next one to two years.