Moody's: Risk of UK exit from EU stronger credit driver than uncertainty over election outcome

The uncertainty over the outcome of the forthcoming general elections in the United Kingdom (UK, Aa1 stable) is not affecting the sovereign's credit profile, says Moody's Investors Service in a report published today. In contrast, the rating agency notes that an increased likelihood of the UK leaving the EU could result in negative rating pressures over the medium-term.

According to Moody's, neither a period of political uncertainty following the elections nor the composition of the next government would likely affect the UK's credit profile. The rating agency notes that all major parties are committed to further fiscal consolidation, even if the approach and pace differ to some extent. Moody's also points to the UK's strong and stable institutions, which should ensure a smooth running of government during any interim period. The potential transfer of fiscal responsibilities to Scotland and other sub-national governments would not pose a significant risk to the UK government's fiscal strength, says Moody's.

The rating agency notes that the election outcome will provide greater visibility on whether a referendum on the UK's membership in the European Union will be held. While it remains unclear whether this would indeed lead to an exit, if the likelihood of the UK leaving the EU were to increase, Moody's would analyze the impact on the UK's growth prospects. As the EU accounts for around 50% of the UK's goods and 36% of its services exports, a withdrawal from the EU could have negative implications for trade and investment, both ahead of the event and following it.

The medium-term impact -- which is the relevant timeframe from a credit perspective -- would depend on what alternative trade agreements the UK could negotiate with the EU. Moody's expects that the UK would manage to negotiate some form of new settlement that replicates at least part of the current trade freedoms, but notes that the absence of such a settlement would adversely affect investment and growth and have negative implications for the UK's credit standing and rating.