The EU’s agreement of a short extension of Article 50 reduces the likelihood of a no-deal ‘Brexident’ next week. Even if Scope has expected the UK to avoid a no-deal exit, the consequences of prolonged uncertainty for the UK’s credit ratings are growing.
The EU agreed Thursday to a short Article 50 extension until 22 May, less than the UK’s request for an extension to 30 June and conditional on the Brexit deal being approved in the UK Parliament next week. If the Brexit deal is not approved in the UK next week, the EU agreed to an extension only to 12 April and may instead offer a further extension later on. These options do little to resolve the uncertainty clouding the UK’s political and economic future.
Here is Scope analyst Dennis Shen’s six-point explanation regarding why investors should not underestimate the full domestic economic impact of Brexit, notwithstanding the credit strengths of the UK (rated AA/Negative):
- “A short Article 50 extension phase resulting in an eventual Brexit with May’s deal in hand would have the benefit of ensuring an orderly exit, but uncertainty and its associated adverse impacts on the UK economy would continue during the transition period.”
- “Any lengthier Article 50 extension, especially one past 1 July, is more difficult politically and legally and would hold uncertain rating implications for the UK especially, as this could involve a May resignation and Tory leadership contest, early elections and/or a second referendum that leads to a more significant rethink on the UK’s Brexit strategy.”
- “The UK’s credit rating cannot withstand Brexit-related uncertainty indefinitely. Scope estimates that the economic cost of Brexit is already greater than 1% of GDP since the 2016 referendum – and is continuing to rise.”
- “The UK’s ratings could be at risk of a downgrade in the long run even if the country avoids a no-deal exit from the EU if, for example, the costs of economic uncertainty grow due to questions around exactly what sort of trade agreement the UK can strike.”
- “Prolonged uncertainty over the outcome of exit negotiations through a very short Article 50 extension could continue to hobble coherent policy making in London and further impair the UK’s economic performance.”
- “At the same time, we don’t want to underplay the UK’s significant credit strengths – reflected in the country’s AA ratings: The economy has proved more resilient than many expected around the time of the referendum, recent budgetary developments have been better than expected, and the UK continues to benefit from sterling’s global reserve currency status.”