United Kingdom: Risk Assessment
Country Risk Rating
|A3||Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Uncertainties related to “Brexit” will weigh on short term growth
Growth has been resilient during the first half. Nevertheless, on June 23th, the UK voted in favor of leaving the EU (52% has voted to leave. 48% to remain), calling into question the continuation of this trend. In the short term uncertainty and volatility are likely to prevail on financial markets. In this context consumer and business confidence has already deteriorated sharply, which could weigh on private consumption, moreover penalized in the future by the gradually increasing inflation (through the depreciation of the sterling against the dollar and the euro). Nonetheless, the “Brexit” shock will essentially impact private investment which has already shown weak performances since the beginning of the year. The lowering of interest rate by the Central bank (BoE) in August to 0.25% for the first time since 2009 and the bond purchase program aim to prevent the expected activity slowdown. Moreover, this confidence shock might imply a price correction on the real estate market, notably commercial. Early July, a number of British property funds have frozen their transactions. The risk of transmission to the banking sector is high due to the number of SMEs which rely on real estate as collateral to secure their borrowings. The risk is however subdued by a strong capitalization of the banks. Furthermore, household indebtedness is important (125% of GDP) and the risk of a housing bubble burst needs to be monitored. A positive point, the exporting sectors should benefit from the sterling depreciation to gain in price competitiveness.
Fiscal consolidation, a government priority in the past years, could be questioned
The government is still on a program of fiscal consolidation, even if the deficit is reduced slower than expected. This is being carried out through spending cuts (public sector wage moderation. cuts in health spending). On the revenue side the budget includes tax cuts on investments as well as lower corporate tax (lowered to 15% after the vote). If for the time being no emergency plan has been announced, a deterioration of public finances is likely to happen considering the economic slowdown, and stimulus measures could be implemented in case of a sharp downturn in activity.
The current account deficit hit a record high in 2015 and should not significantly improve this year: import prices should increase with the sterling depreciation which reached a low point against the dollar in July. However in a second step this depreciation should help to gain in price-competitiveness and therefore boost exports, and imports should decrease with the internal demand slowdown.
Strong uncertainties over UK’s future
David Cameron announced his resignation the day after the vote, replaced by Theresa May, former Home Secretary, in July 2016. Article 50 of the Lisbon treaty, which regulates the process of withdrawal from the EU, should not be activated by the end of the year. May announced her willingness to negotiate a new deal before invoking the article. Three types of agreements are possible: (i) EEA membership, like Norway, with a full access to the single market but loosing voting rights on regulatory framework and EU decisions –the most likely scenario-; (ii) a “customized” bilateral agreement, like Switzerland, which establishes access to the single market for specific sectors and (iii) WTO rules with existing custom tariffs and no access to the single market.
Moreover Scotland announced its wish to remain in the EU (in accordance with its vote) and a new referendum could take place with the risk of leaving the UK. Northern Ireland’s case could be an issue too.
The country has gained two places in the Doing Business rankings and is in first place among the G7 countries. The business climate is improving: it takes only 4.5 days to set up a business (compared with an average of 20 in other countries), with a cut in corporation tax and increased exemptions on social security payments helping to improve the country's attractiveness.