Moody’s Cut UK Credit Rating Outlook to Negative on Political Chaos

Britain has had weeks of turmoil which was reflected in extreme volatility in the British pound and Gilts eventually leading to the resignation of Liz Truss as Prime Minister. Rating service Moody’s has responded by cutting its rating outlook on UK sovereign debt to negative from stable. Moody’s, said the political chaos was at the core of its rerating. Moody’s also said it affirmed the Aa3 rating it has on UK sovereign debt which it said “reflects the UK’s economic resilience supported by its wealthy, competitive and diversified economy.

Liz Truss ended her short PM career in chaos

UK Political Chaos

British political have risen to a new level since Brexit. First there was Theresa May, it took after mutinous murmurs began, the Conservative Party nearly a year to throw her out. Next up it took about six months to remove Boris Johnson. Then stunningly it took just six and a half weeks to throw Liz Truss to the curb. This are not the signs of stable or inspiring leadership.

On Monday, the first round of results and candidates for the next PM begins. Each candidate will need the support of 100 Conservative MPs to continue. By Friday, the UK will have a new PM. How long will this one last? Morduant, Johnson and Sunak are the leading contenders. Incredibly Boris Johnson appears to have some momentum, but Sunak is the betting favorite.

Moody’s Statement Late Friday London time

“The evolution of policymaking, and the UK government’s ability to engender confidence in its commitment to fiscal prudence, will be a material consideration for Moody’s in resolving the negative outlook.” and “An outlook period typically lasts 12-18 months.”

Rating Change Highlights

  • “Despite the weakening in fiscal policy predictability in recent years, the country’s long-standing 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.”
  • “The first driver of the change in outlook to negative is the increased risk to the UK’s credit profile from the heightened unpredictability in policymaking amid a volatile domestic political landscape, which challenges the UK’s ability to manage the shock arising from weaker growth prospects and high inflation.
  • “Moody’s considers policy predictability a governance consideration under its ESG framework.”
  • “Moody’s expects the Bank of England will significantly further tighten monetary policy in light of the risk of more persistent inflation over the medium term and to ensure long-term inflation expectations remain anchored amid the heightened volatility in financial markets. The tighter monetary policy in turn will weigh on economic growth.
  • “Furthermore, medium-term economic growth will face headwinds from Brexit and lower labour participation following the pandemic as well as longstanding constraints to productivity growth.
  • “Even under the Trade and Cooperation Agreement reached with the European Union at the end of 2020, Brexit will continue to weigh on trade, investment and the labour market, reducing long-term productivity by around 4 per cent. Weaker medium-term growth will further exacerbate the already-evident tensions around fiscal policy settings.”

Prior to Moody’s Statement the UK had a slew of poor economic data released.

  • U.K.’s September Retail Sales were down 1.4% m/m (expected -0.5%; last -1.7%) and down 6.9% yr/yr (expected -5.0%; last -5.6%).
  • September Core Retail Sales fell 1.5% m/m (expected -0.3%; last -1.7%), dropping 6.2% yr/yr (expected -4.1%; last -5.3%).
  • September Public Sector Net Borrowing reached GBP19.25 bln (expected GBP12.30 bln; last GBP8.58 bln).
  • October GfK Consumer Confidence improved to -47 from -49 (expected -52).

This all following harrowing inflation numbers earlier in the week.

Source: Moody’s

From the TradersCommunity News Desk