British government’s Brexit stance could weaken its credit profile, Moody’s warns

Agency says government’s fiscal and economic strategy raises questions about its commitment to repaying debt from 2007-08 financial crisis

LONDON, ENGLAND - JULY 23: Newly elected leader of the Conservative party Boris Johnson gestures at Conservative party HQ in Westminster on July 23, 2019 in London, England. After a month of hustings, campaigning and televised debates the members of the UK's Conservative and Unionist Party have voted for Boris Johnson to be their new leader and the country's next Prime Minister, replacing Theresa May. (Photo by Jeff J Mitchell/Getty Images)

The new UK government's tax and spending pledges, combined with the likelihood of a no-deal Brexit, could further weaken the country's credit profile, Moody's Investors Service reported on Thursday.

Early insights into the government’s fiscal and economic strategy raise questions about its commitment to repaying debt from the 2007-08 financial crisis, the rating agency said.

But it stressed that it was still early days and that new Prime Minster Boris Johnson’s policy ambitions have yet to be followed up with measures.

Moody's said the period leading to the next government budget announcement in October or November should provide more detail.

"The new UK government has made tax and spending promises over recent weeks in the context of a challenging growth and debt environment," said Sarah Carlson, a senior vice president at Moody's and co-author of the report.

"At this early stage of the policy process, the negative fiscal impact of these promises is very difficult to estimate.

"However, taken at face value it seems likely that the overall fiscal impact would be at least 1.5 per cent of GDP, possibly more," she said.

Moody's said on July 23 that electing Mr Johnson as prime minister increased the risk of the UK leaving the EU without an agreement to replace their existing arrangements.

It said that a no-deal Brexit would further undermine the UK’s weakened economic growth prospects.

The agency said if the UK failed to agree on a workable exit deal within its parliament, let alone with the EU, it would lead to "a meaningful breakdown" of its policymaking institutions and "signal a further erosion in the UK's institutional strength".

Moody’s has downgraded Britain’s sovereign rating twice since it voted to leave the EU in June 2016.

Having previously been at Aa1 stable, it was downgraded to Aa1 negative on June 24, 2016. On September 22, 2017, it was downgraded further to Aa2.

Earlier on Thursday, Mark Carney, governor of the Bank of England, said Britain had a one-in-three chance of plunging into a recession at the start of next year as the uncertainty over Brexit weighs down the economy.

The central bank said business investment was stalling and a recession was still 33 per cent likely even if a new divorce deal was reached with the bloc.

The pound is dropping on the international currency markets. On Thursday, sterling fell by 0.2 per cent against the dollar to 1.2135 and 0.1 per cent against the euro to 1.0964.