Fitch Downgrades UK’s Rating in Light of COVID-19 Impact

Brexit uncertainty, fiscal easing also factored into downgrade and ‘negative’ outlook.

The economic impact of the COVID-19 pandemic on Britain’s public finances has led ratings agency Fitch to downgrade the UK’s long-term issuer default ratings to an “AA-” from an “AA” and give the country a “negative” outlook.

“The coronavirus outbreak has inflicted an unprecedented shock on financial markets and economic activity,” Fitch said in its ratings report. “The UK has shut down parts of its economy to slow the spread of the disease, which will cause a deep contraction.”

The firm said the government response to contain the coronavirus “will result in a sharp rise in general government deficit and debt ratios, leading to an acceleration in the deterioration of public finance metrics over the medium term.”

But the pandemic wasn’t the only reason for the downgrade, which Fitch said also reflects a fiscal loosening stance that was implemented before the crisis, as well as the lingering uncertainty regarding the post-Brexit UK-European Union trade relationship.

“The UK’s public finances were already set to weaken following the stimulus measures announced in the budget on March 11, and they are now set to deteriorate more rapidly,” Fitch said.

Additionally, Fitch said its “negative” outlook is based on its belief that reversing the deterioration in the fiscal metrics beyond 2020 will not be a political priority for the UK government. 

Fitch revised its previous forecast to reflect the lockdown measures across the UK and now estimates that UK gross domestic product (GDP) could fall by close to 4% in 2020. The firm said if containment measures can wind down during the second half of the year, this could lead to a sharp recovery in growth to around 3% in 2021.

The firm forecasts the general government deficit to increase to approximately 9% in 2021 from 2.1% of GDP in 2019 and estimates that the Coronavirus Job Retention Scheme will cost 1.3% of GDP, assuming that 4.7 million employees will be supported over the three month duration of the plan. Overall, it estimates that the whole COVID-19 response fiscal package will cost 4.4% of GDP in 2020.

However, Fitch warned that there is material downside risk to its economic forecasts because so much depends on the extent and duration of the outbreak. It said a plausible downside case includes a second wave of infections and a longer lockdown period, which it said would result in an even larger decline in output in 2020 and a weaker recovery in 2021.

“The strength of the recovery is subject to lingering Brexit uncertainty, as the final shape of any future trade deal with the EU remains unknown and the risk of the transition period ending without a deal persists,” Fitch said.

For 2021, Fitch said the expected recovery in GDP growth should support a rebound in revenue growth. It expects general government debt will rise to 94% and 98% in 2020 and 2021, respectively, from 84.5% in 2019, and that the deficit will narrow in 2021. Over the medium term, the firm expects public debt to peak at well above 100% of GDP beyond 2025, assuming a gradual reduction in fiscal deficits and trend GDP growth of 1.6%.

“We fully recognize that timely and targeted policies can help reduce the risk of a more sustained loss of economic output,” Fitch said. “The likelihood that temporary stimulus measures are unwound will reflect policy choices and political developments.”


Related Stories:

Coronavirus News for CIOs

S&P Global Forecasts Global Recession Due to Coronavirus

UK Defined Benefit Code Revision ‘Biggest Revolution’ in 15 Years





Tags: , , , , , ,