UK Aaa rating to withstand economic challenges, says Moody’s

Despite a weak post-crisis balance sheet and challenging economic outlook, the UK is able to meet these challenges whilst maintaining its Aaa credit rating, Moody's Investors Service said in its annual credit report on the UK. The rating therefore retains a stable outlook.
"The global financial crisis of 2008-09 caused serious long-term damage to the British government's balance sheet. The country's economic outlook is also more challenging because private sector deleveraging, the uncertain state of the financial sector and slower growth in the UK's main trading partners are not conducive to allowing GDP growth to return to its pre-crisis trend rate," said Kenneth Orchard, Moody's lead analyst for the UK. "Nevertheless, Moody's believes that the UK has the wherewithal and ability to meet these challenges whilst maintaining its Aaa rating."
Moody's stable outlook on the UK's Aaa rating — implying that the rating is not expected to change in the foreseeable future — is largely driven by the government's commitment to stabilise and eventually reverse the deterioration in its financial strength. Government debt is also well-structured, thus limiting re-financing risk.
Moreover, the UK economy appears sufficiently flexible and robust to grow moderately, even in the face of the challenges mentioned above and austere fiscal consolidation, the rating agency added.
The Aaa rating is premised on Moody's central scenario that the UK economy will maintain a moderate pace of growth over the medium term, that the primary budget balance will be in surplus by around 2014, and that the restructuring of the country's banking sector will only incur small additional costs.
"However, the explosion in the government's deficit and debt metrics over the past three years has eroded the cushion that previously existed," Orchard said.
According to Moody's annual credit analysis, the UK scores "very high" for economic strength and institutional strength, which are the first two factors. The country also scores "very high" for government financial strength, and "very low — low" on susceptibility to event risk, the remaining factors.