Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit rating’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the United Kingdom (long-term issuer and senior unsecured debt ratings in foreign- and local-currency of AA; Outlook Stable; short-term issuer ratings in foreign- and local-currency of S-1+; Outlook Stable) on 22 April 2024.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

The United Kingdom’s AA long-term credit ratings and associated Stable Outlook reflect multiple sovereign credit strengths including: i) the reserve-currency status of the sterling, deep capital markets, and an independent monetary policy; ii) strong institutions; iii) a robust structure of the sovereign debt; and iv) a large, wealthy and well-diversified economy.

The outstanding challenges for the United Kingdom’s credit standing include: i) elevated public debt and a challenging fiscal and economic outlook; ii) a weak external position and recurrent current-account deficits; and iii) prolonged uncertainties surrounding the post-Brexit UK-EU trading relationship.

Real GDP grew only 0.1% last year. For this year, the agency expects output to grow only 0.5% (compared against Office for Budget Responsibility expectations as of March 2024 of 0.8% for this year) as constraints on the economy, such as higher interest rates for longer, remain. A weak external position including persistent current-account deficits and prolonged uncertainties around the post-Brexit UK-EU trade relationship present added challenges for the recovery. Nevertheless, Scope anticipates growth to pick up to 1.4% next year, with unemployment staying near its record lows of 4.2% of the active labour force in 2024 and in 2025. Inflation continues to decline but is seen staying comparatively sticky and above 2% price-stability objectives: at 2.8% on average this year before 2.7% next year. The Bank of England is expected, however, to begin rate cuts by the 2H of this year.

The fiscal situation remains constrained. The fiscal framework defines five-year objectives over a rolling horizon resulting in limited pressures to achieve ambitious budgetary consolidation near term. Changes to the framework are feasible absent significant hurdles and have occurred comparatively frequently. Forthcoming elections might add additional fiscal pressures such as regarding election handouts.

In the run-up to general elections – which are likely to occur by the second half of this year, the Labour Party is currently leading opinion polling having around 43% of voting intentions – compared against the Conservative Party’s 24%. Even with a potential change of government, we do not expect large-scale changes of policy making. The Labour Party has already communicated it does not plan any significant changes of current fiscal rules regarding the net public-debt ratio.

The Stable Outlook for the United Kingdom reflects the view that risks to the ratings remain balanced.

The ratings/Outlook could be downgraded if, individually or collectively: i) there are observable challenges to UK gilts’ long-held status as a global safe haven and/or attenuation of sterling’s status as a reserve currency; ii) protracted fiscal deterioration results in weakened debt sustainability; and/or iii) the medium-run growth outlook weakened significantly.

Conversely, the ratings/Outlooks could be upgraded if, individually or collectively, i) the agency observed an unexpected significant upgrading of the fiscal outlook such as perceived stabilisation of the public-debt ratio through the cycle; and/or ii) external vulnerabilities were curtailed significantly.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Dennis Shen, Senior Director

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