Daily Management Review

Rating Agency Downgrades Economic Outlook For The UK To ‘Negative’


Moody's has downgraded the UK's economic prospects from "stable" to "negative" due to political instability and high inflation.
Moody's attributed the change in outlook to "heightened unpredictability in policymaking amid weaker growth prospects and high inflation," as well as "risks to the UK's debt affordability from likely higher borrowing and risk of a sustained deterioration in policy credibility."
Rating agencies assess a country's economic strength and assign a score based on the likelihood that it will be able to repay its debts.
The rating influences the cost of borrowing money in international financial markets for governments. An outlook period, according to the agency, "typically lasts 12 to 18 months."
Despite the fact that the UK's economic outlook has been rated "negative," Moody's credit rating for the country remains unchanged at Aa3.
According to the agency, this rating reflects the UK's economic resilience "despite recent deterioration in fiscal policy predictability."
 “The country’s longstanding institutional framework remains strong and will continue to support the UK’s ability to respond to shocks, as seen during the pandemic. Furthermore, the structure of the UK government debt, with a very long average maturity of around 15 years, as well as a deep domestic investor base adds a degree of resilience to the credit profile in the face of shocks,” it added.
“The UK’s local and foreign currency country ceilings remain unchanged at Aaa. The three-notch gap between the local currency ceiling and the sovereign rating is driven by the government’s relatively small footprint in the economy, a fairly robust external payments position and a diversified economy.”
Jeremy Hunt, the chancellor, has pledged to do "whatever it takes" to reduce government debt now since official figures divulged that borrowing increased to £20 billion in September.
The Office for National Statistics (ONS) reported that a rise in debt interest increased borrowing beyond economists' expectations, highlighting the challenge that the chancellor and new prime minister face before the fiscal event at the end of this month.
The latest borrowing reading, excluding state-owned banks, was the second-highest on record, only surpassed during the height of the Covid-19 pandemic, according to the ONS.
Borrowing in September exceeded economists' predictions of £17 billion for the month, and was significantly higher than the £14.8 billion estimated by the Office for Budget Responsibility (OBR) in March.
“Strong public finances are the foundation of a strong economy. To stabilise markets, I’ve been clear that protecting our public finances means difficult decisions lie ahead. We will do whatever is necessary to drive down debt in the medium term and to ensure that taxpayers’ money is well spent, putting the public finances on a sustainable path as we grow the economy,” Hunt said.
The newly appointed chancellor has already reversed a number of key financial policies announced by predecessor Kwasi Kwarteng last month, including plans to scrap the 25% corporation tax increase.
According to the most recent ONS data, increased borrowing was driven by £7.7 billion in debt interest payments for the month, representing a £2.5 billion increase over the same month in 2021.
It was the highest level of September interest since records began in 1997.
The increase was driven by significantly higher debt interest payments linked to retail price index (RPI) inflation, according to the ONS.