Rating action

Scope Ratings GmbH (Scope) has today affirmed the United Kingdom’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at AA and maintained the Stable Outlook. The short-term issuer ratings are affirmed at S-1+ in foreign- and local-currency, and associated Stable Outlooks are unchanged.

The affirmation of United Kingdom’s AA long-term ratings represents several credit strengths, such as: i) the reserve-currency status of sterling, gilts as a global safe asset and deep capital markets; ii) strong institutions such as sound financial supervisory, economic and monetary governance institutions alongside an independent monetary policy; iii) a robust sovereign debt structure with long average maturities and strong market access; alongside iv) a large, wealthy and diversified national economy, which has proven resilient since the pandemic and cost-of-living crises.

Challenges for the long-term credit ratings of the United Kingdom include: i) elevated and increasing government debt, and an elevated budget deficit; ii) heightened financing costs and the recent increased volatility in gilt markets; iii) a weak external sector given recurrent current-account deficits; and iv) remaining uncertainties surrounding post-Brexit UK-EU trade relations.

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Key rating drivers

Reserve-currency status, gilts as a global safe asset and deep capital markets. The UK benefits significantly from its access to deep domestic capital markets, the City of London as one of the world’s leading financial centres, gilts’ status as a global safe asset and sterling’s standing as a primary global reserve currency. The share of global allocated reserves held in GBP has increased over the more recent decades despite significant institutional challenges such as Brexit and despite the rise of alternative reserve currencies – from 2.8% as of 2000 to 5.0% as of Q3 2024.

Strong institutional framework alongside an independent monetary policy. The UK rating is bolstered by robust financial-, economic- and monetary-governance frameworks – alongside an independent monetary policy managed by the Bank of England, among the oldest central banks globally. This strong institutional architecture allows for swift responses to and the capacity to withstand economic and financial-market crises, such as recently during September 2022 in an episode of market turmoil involving pension funds and unfunded expansionary budgetary measures.

Robust structure of the sovereign debt. The United Kingdom’s sovereign ratings are supported by strong market access, alongside an exceptionally-long average government debt maturity of 14.0 years¹, significantly longer than the averages of peer sovereign borrowers such as Belgium (10.2 years), France (8.1) and the United States (5.8). The Bank of England is the largest single holder of gilts and treasury bills (owning around 24% of the aggregate as of Q3 2024¹), although quantitative tightening is gradually reducing this share. As sovereign ratings are assigned on debt held by the private sector, this share owned by the Bank of England effectively trims the aggregate rated debt ratio.

A large, wealthy and well-diversified economy. The United Kingdom’s credit ratings are anchored by a large, wealthy and diversified economy, which has proven resilient since the pandemic and cost-of-living crises. Following the global pandemic, output reached again pre-pandemic levels already by late 2021. Although the economic outlook has recently remained fragile, comparatively high wealth and a diversified economic base are significant factors underscoring resilience of the economy. Output growth remained subdued last year at 1.1% after the 0.4% growth of 2023. Scope estimates growth this year to stay moderate around 1% before 1.3% growth next year. In its March 2025 economic and fiscal outlook, the Office for Budget Responsibility cut growth projections for 2025 to 1.0% (from 2.0%) while increasing that slightly for 2026 to 1.9%.² Support for growth comes from the government spending boost. Improvements in UK-EU relations could support growth longer run.

Rating challenges: Rising government debt, increasing structural risks in the UK government bond market, and a weak external sector.

Increased funding costs since October of last year increase the pressure on the budget. 10-year gilt yields rose to post-financial crisis highs at 4.9% by the middle of January. After the slight moderation in yields by February, rates increased again and remain elevated around 4.7% at the time of writing. More than 30% of outstanding government debt needs to be re-financed by 2029, and maintaining investor confidence in the sovereign’s debt sustainability remains crucial for anchoring the significant issuance plans of the Keir Starmer government. General government borrowing in the financial year to January 2025 amounted to GBP 139.5bn, GBP 5bn more than in the year to January 2024.³

In view of continued subdued output growth, higher financing costs and elevated financing requirements, Scope forecasts a continuous increase in UK general government debt reaching 114.2% of GDP by 2029, from the estimated 99.5% at end-2024. Net interest payments are projected to increase to 8.3% of general government revenues by 2029, a near tripling from the 3.1% at their 2020 lows. In the Spring Budget⁴, Chancellor of the Exchequer Rachel Reeves announced a rise in NATO-qualifying defence spending to 2.5% of GDP by 2027 while supporting growth through investment of GBP 13bn more in capital infrastructure over the next five years alongside an added GBP 2bn for social and affordable housing. Nevertheless, the Budget detailed GBP 14bn of spending reductions given the higher borrowing costs and slower economic growth assumptions.

Gilts, historically a safe-haven asset and a stable store of liquidity and value, have faced disproportionate sell-offs more recently. While the increase in volatility illustrates structural risks in the marketplace, it is not necessarily unique to UK markets and has been partially driven by the effects of the cost-of-living crisis on elevated rates and global sovereign risks.

The British economy displays a comparatively weak external position, given recurrent current-account deficits over the recent decades. Before the pandemic, this deficit averaged 3.4% of GDP over 2017-19, wider than the averages for the economies of sovereign peers. The deficit moderated to 0.4% of GDP during the pandemic in 2021 before increasing again to 2.7% of GDP in 2024. The International Monetary Fund estimates the current-account deficit to average 2.7% of GDP over years 2025-29.

While uncertainties concerning post-Brexit EU-UK relations remain, the Labour government has repeatedly voiced an aim of ‘resetting’ EU-UK relations. Amid elevated geopolitical uncertainties, cooperation on security and defence appears probable. The next EU-UK summit takes place in May. Nevertheless, the adverse effects for trade from Brexit are unlikely to be fully compensated for by new trading arrangements with non-EU economies⁵.

Although political divisions in Northern Ireland remain after the exit from the European Union, British-Irish relations are being strengthened. After a two-year boycott, the Democratic Unionist Party reached an agreement in early 2024 with the British government and a Northern-Irish government was restored. During a summit in early March of this year, Ireland and the United Kingdom agreed on a programme of cooperation. Stronger bilateral relations will also help to address Northern Ireland’s unique challenges, even if this may be unlikely to materially change the long-run economic costs of leaving the EU.

Rating-change drivers

The Stable Outlook represents the opinion that risks for the ratings are balanced over the next 12 to 18 months.

Downside scenarios for the long-term ratings and Outlooks are if (individually or collectively):

1. There were observable challenges for gilts’ long-held status as a global safe haven and/or the attenuation of sterling’s status as a global reserve currency;
    
2. Protracted fiscal deterioration results in weakened debt sustainability beyond the present expectations; and/or
    
3. The medium-run growth outlook weakened significantly.

Upside scenarios for the ratings and Outlooks are if (individually or collectively):

1. The agency observed an unexpected significant upgrading of the fiscal outlook such as the perceived stabilisation of the public-debt ratio through the cycle; and/or
    
2. External vulnerabilities are curtailed significantly.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘a+’ on the United Kingdom. Under the methodology, this indicative rating receives a further: i) one-notch positive adjustment from the model reserve-currency adjustment; and ii) no negative adjustment from the methodological political-risk quantitative adjustment. On such bases, a final SQM quantitative rating of ‘aa-’ is determined. This indicative rating is thereafter reviewed by the analyst-driven Qualitative Scorecard (QS) and the rating can be adjusted by up to three notches up or down from the model rating depending on the size of the qualitative credit strengths or weaknesses of the sovereign compared against an SQM-assigned sovereign peer group.

Through the QS assessment, the following analytical categories are identified as being the relative credit strengths of the sovereign against the model-assigned sovereign peers: i) monetary policy framework; ii) macro-economic stability and sustainability; iii) debt profile and market access; iv) banking sector performance; and v) financial sector oversight and governance. Conversely, the following QS analytical categories are identified as being relative credit weaknesses of the sovereign: i) fiscal policy framework; and ii) external debt structure.

On the aggregate, the QS generates a one-notch positive adjustment against the model rating of the United Kingdom and indicates AA long-term foreign- and local-currency issuer ratings.

A rating committee has discussed and confirmed these results.

Factoring of environment, social and governance (ESG)

Scope explicitly factors in ESG issues within its rating processes via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight within the qualitative overlay (QS).

The UK receives an above-average SQM score on the model’s environmental-risk sub-pillar, representing lower carbon-emissions intensity per unit of output and lesser risks from climate-change-associated natural disasters, the latter as captured by indices managed by the Notre Dame Global Adaptation Initiative, compared against the exposures of sovereign peers. Nevertheless, the country receives weaker marks regarding its ecological footprint of consumption compared against the available biocapacity. Alongside the SQM evaluation on environmental risks, Scope assesses the UK’s performance on environment vis-à-vis a QS analytical sub-category evaluating environmental factors. This QS assessment remains at ‘neutral’ against the sovereign’s peers – resulting in no adjustment for the credit ratings. The UK’s Climate Change Act (2008) provides a framework for climate change adaptation and mitigation actions. The UK has committed to reaching net zero greenhouse gas emissions by 2050. The government has set up Great British Energy, a publicly-owned clean energy company and is working on the Great British Energy Bill.

Regarding social considerations (‘S’), the United Kingdom receives slightly below-median scoring on the SQM social-risk sub-pillar, with strong scoring from: i) the high labour-force participation; and ii) below-median levels of income inequality – as measured by the share of incomes held by the poorest 90% of the population – offsetting a weak score on the old-age dependency indicator. Scope expects the fragile economic outlook and elevated mortgage rates to aggravate the balance-sheet pressures of vulnerable households, in turn raising the risk of social exclusion and increasing the need for future government support. Between December 2021 and 2023, increases in interest rates are estimated to have pushed up mortgagor poverty rates by 1.4pps⁶. On the complementary QS assessment on qualitative ‘social factors’, this assessment against the sovereign peers remains ‘neutral’.

Under governance-related factors as captured by the SQM governance sub-pillar, the UK achieved a stronger-than-average score on the five World Bank Worldwide Governance Indicators (WGIs) used by the SQM governance pillar. In addition, on the separate methodological political-risk adjustment – based on the WGIs’ political-risk indicator, this risk is assessed as being low, resulting in no negative adjustment for the indicative model rating. The UK benefits from high-quality institutions under parliamentary democracy, which has helped steer the nation through domestic political tribulations after the vote to leave the European Union in 2016. At the same time, scoring on five of the six WGI categories has weakened since the EU referendum and scoring on categories of government effectiveness, voice and accountability, the rule of law, regulatory quality and control of corruption is either at or near its all-time lows since WGI rankings began in 1996. Election results from July 2024 are largely perceived as having strengthened political stability. After an agreement with the UK government in January 2024, political tensions have eased in Northern Ireland. The summit in early March this year between the United Kingdom and Ireland strengthened bilateral cooperation. On the complementary analyst assessment under the QS’ ‘governance factors’ qualitative analytical category, this assessment against the sovereign’s peers remains ‘neutral’.

Rating Committee
The main points discussed by the rating committee were: i) rating history; ii) the skew of risk for the ratings; iii) the safe-haven status of gilts and sterling as a reserve currency; iv) fiscal performance and the public debt trajectory; v) spring budget 2025; vi) defence spending; vii) external sector; viii) the economic outlook; ix) financial-system outlook and deregulation; and x) sovereign peers considerations.

Rating driver references
1. UK Debt Management Office. Quarterly Review (October – December 2024)
2. Office for Budget Responsibility: Economic and fiscal outlook – March 2025
3. ONS. Public Sector Finances, UK: January 2025
4. His Majesty’s Treasury: Spring Statement 2025 (published 26 March 2025)
5. Office for Budget Responsibility. Economic and fiscal outlook (March 2024)
6. UK Institute for Fiscal Studies. Living standards, poverty and inequality in the UK: 2024 (25 July 2024)

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 27 January 2025), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 4.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties did not participate in the Credit Rating process. The rating was not requested by the rated entity or its agents. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    YES
With access to internal documents                                  NO
With access to management                                           YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Senior Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 11 October 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.  

Conditions of use / exclusion of liability
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