Fitch Ratings has downgraded the UK's credit rating outlook to 'negative' from 'stable', citing the economy's vulnerability to adverse economic shocks due to high indebtedness and weak economic outlook.
The revision reflects "the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery," the agency said.
The 'negative' outlook indicates a slightly greater than 50 percent chance of a downgrade over a two-year horizon, given still large structural budget deficit, government debt and considerable uncertainty around the economic and fiscal outlook, including the risks posed to economic recovery by the ongoing Eurozone crisis.
At the same time, Fitch affirmed the country's long-term foreign and local currency Issuer Default Rating as well as country ceiling at AAA. The rating firm said that this reflected the progress made in reducing the government's structural budget deficit and the credibility of the fiscal consolidation effort.
Meanwhile, it said developments such as discretionary fiscal easing, adverse economic shocks, and a material downward revision of the assessment of the UK's medium-term growth potential, are likely to prompt a rating downgrade.
It noted that the evolution of the Eurozone debt crisis has significant implications for the UK in light of the substantial trade and financial linkages between the two. However, Fitch also said that in the absence of adverse shocks, it will not resolve the 'negative' outlook until 2014.
The warning comes just days before Chancellor of the Exchequer George Osborne presents the annual Budget on March 21. Last month, a similar warning was issued by Moody's Investors Service, which also cut the debt outlook to 'negative'.
The Office for Budget Responsibility has forecast the public debt to peak at 78 percent of gross domestic product in 2014-15. Fitch forecast the debt to be around 94 percent of GDP in 2014-15.
While applauding UK's efforts to reduce the deficit, Fitch said the broader economic impact of an intensification of the Eurozone crisis on the UK government's ability to meet its deficit reduction targets and place the debt to GDP ratio on a downward path in 2015-16 would be of "greater concern."
by RTT Staff Writer
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