UK placed on rating watch negative
Rating Watches indicate that there is a heightened probability of a rating change and the likely direction of such a change, according to Fitch.
The statement says:
the UK's ratings reflects primarily the heightened uncertainty over the outcome of the Brexit process, and an increased risk of a disruptive 'no-deal' Brexit, where the UK would leave the EU without a withdrawal agreement in place. Fitch believes that a 'no-deal' Brexit would lead to substantial disruption to UK economic and trade prospects, at least in the near term. The extent of any disruption is also highly uncertain, and may be mitigated by UK government or bilateral or multilateral measures. The combination of UK political developments since the last review in October 2018, and the reducing amount of time until the UK's scheduled exit from the EU on 29 March, makes a 'no-deal' Brexit more likely, in our view.
Normally decision on European ratings take place on a schedule because of EU regulations but ratings agencies can deviate from them if there is a material change. Fitch believes that has taken place and didn't want to wait until the scheduled review on April 26.
They note that with less than six weeks until the March 29 headline, the scope for renegotiation with the EU is limited and that it will be difficult to get support for the current agreement in parliament.
Domestically, they note that the UK economy has weakened in recent months with growth at 1.4% over 2018. Fitch highlights that business investment was particularly soft and that may be due to Brexit uncertainty.
Fitch says a downgrade could come on a Brexit without a deal or a post-Brexit deal that undermines UK economic performance.
They say the watch could be removed and the rating affirmed on the:
Avoidance of a disruptive Brexit, potentially by the implementation of a withdrawal agreement, thereby ensuring a smooth Brexit transition process.
All told, none of this is a surprise. The market would instantly price in downgrades of the UK credit rating on a no-deal Brexit but it's still a longshot outcome (despite all the worries).
