The uncertainties around the United Kingdom (UK)’s future economic relations with Europe continue to present significant challenges to the country’s economic outlook. Given the significant costs associated with a ‘hard Brexit’, Scope’s view is that some form of ‘soft Brexit’ remains the most likely outcome. This should come with an extended negotiation horizon and/or multi-year transitional arrangement beyond 2019. However, alternative ‘no Brexit’ and hard Brexit scenarios remain on the table. Scope examines the potential rating effects of the three core scenarios.
Brexit negotiations are under way, as the 29 March 2019 deadline for an exit from the European Union (EU) approaches. Scope’s view is that the most likely scenario remains some form of eventual soft Brexit arrangement, maintaining full or partial access to the single market. However, to reach such an arrangement, the UK may need to compromise on important issues, including the free movement of people. Negotiations surrounding a soft Brexit scenario could last significantly past the two-year window given under Article 50, potentially requiring an extension of Article 50 negotiations and/or post-Brexit transitional arrangements.
Scope considers a no Brexit (or reversal) scenario to be the second most probable scenario. With the multi-year horizons relevant to Brexit in mind, Scope believes that there is the potential for shifts in public opinion. This was shown in recent opinion surveys that found more respondents for ‘Remain’ if another referendum were held than for Brexit. While the EU would likely welcome such a ‘Breversal’, Scope however believes there is reason for caution in that a scenario in which the UK eventually remains in the EU could revive momentum towards a multi-speed Europe.
Given the limited foresight shown in current negotiations, the stated intention of the current government to seek a hard Brexit, and the low likelihood that any transitional arrangement will be concluded in the near term, concerns of the third scenario – a hard Brexit – are however likely to remain central to the discourse, in Scope’s view, and grow if no deal prevails as the 2019 deadline approaches.
The rating implications under each of the three core scenarios – soft, no and hard Brexit – depend on the path of Brexit negotiations, how much uncertainty is generated prior to any end-state, and how much policy regression occurs meanwhile. Soft and no Brexit scenarios might be the most conducive to a stabilisation of the UK’s rating outlook. However, Scope notes that under each of the three scenarios, there remains the possibility for a rating downgrade if the terms of an exit or deterioration in macroeconomic conditions or public finances materially weaken the UK’s sovereign credit profile.
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