Agency says government borrowing levels are set to rise and outlook remains negative for Britain’s sovereign debt score

The ratings agency Fitch has cut Britain’s sovereign debt rating to AA-, saying debt levels will jump as the government ramps up its spending to offset the near shutdown of the economy in the face of coronavirus.

Fitch downgraded the country by one notch to the same level as its rating for Belgium and the Czech Republic. It said a further cut could follow as it kept the rating on negative outlook.

“The downgrade reflects a significant weakening of the UK’s public finances caused by the impact of the Covid-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent,” Fitch said. “The downgrade also reflects the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship.”

Fitch said the coronavirus shutdown was likely to shrink Britain’s economy by nearly 4% in 2020, assuming the drastic containment measures could be relaxed in the second half of the year, leading to a 3% bounce in growth in 2021. But doubts about Britain’s future trading ties with the European Union posed a further risk, Fitch said.

Facing what some economists say could be Britain’s deepest recession in a century after the government ordered many businesses to close to slow the spread of coronavirus, the chancellor, Rishi Sunak, announced a string of stimulus measures to try to prevent a surge in unemployment.

Central to his plan is a commitment for the state to pay 80% of the wages of workers who are temporarily laid off.

The Bank of England, like other central banks around the world, has expanded its bond-buying programme by a record £200bn and cut its main interest rate to a record low of 0.1%.

Fitch said the measures were necessary to cushion the economy but it now expected Britain’s public debt, as a share of gross domestic product, would rise to 94% in 2020 and 98% in 2021, from 84.5% in 2019. “Over the medium term we expect public debt to peak at well above 100% of GDP beyond 2025 assuming a gradual reduction in fiscal deficits and trend GDP growth of 1.6%.”

Britain’s former top-notch AAA rating has been cut steadily over the past seven years as the country struggled to bring down its debt levels that doubled after the global financial crisis and then voted to leave the European Union, weighing on its long-term growth prospects in the eyes of the ratings agencies.

– The Guardian UK