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Global Aging 2016: the U.K.'s Generous Age-Related Expenditure Could Lead to a Deteriorating Fiscal Position

S&P Global Ratings

S&P Global Ratings' Global Outlook 2019

S&P Global Ratings

Global Sovereign Rating Trends 2019

Countdown to Brexit: No Deal Moving Into Sight

How Much Will Global Sovereigns Borrow in 2018?

Global Aging 2016: the U.K.'s Generous Age-Related Expenditure Could Lead to a Deteriorating Fiscal Position

S &P Global Ratings' analysis of aging in the U.K. is part of a global study conducted to analyze the cost of aging. We presented our findings in "Global Aging 2016: 58 Shades Of Gray," published April 28, 2016. The comparative study explores various scenarios--including a no-policy-change scenario--and the implications that we currently believe these different scenarios could have on sovereign ratings over the next several decades. We included an additional eight sovereigns in this year's report, which expanded the scope of the study's coverage to a total of 58 sovereigns, representing 70% of the world's population. For the 50 sovereigns that we included in the previous edition of our Global Aging series, our findings this year provide an update of our analyses--including information on long-term demographic, macroeconomic, and budgetary trends--all in the context of the countries' current fiscal positions.

It should be noted that since we published our comparative findings in April 2016 we have re-run our simulation on the U.K. specifically for this article, factoring in our June 2016 two-notch downgrade (upon Brexit) and lower fiscal and growth outlooks for the U.K.


  • The U.K.'s overall population is expected to increase by 19.5% between 2015 and 2050, reaching 77.3 million by 2050. According to European Commission forecasts, the U.K. will become the most populated country in Europe by 2050, but the share of working-age population is expected to decline from 65.1% to 58.8% leading to higher age-related expenditure.
  • Under current policy, the government's annual age-related spending is projected to increase by about 2% of GDP. Absent any further reforms or compensating expenditure cuts in other areas, this could lead to a deterioration of the U.K.'s fiscal position, and a possible increase in net general government debt to 189% of GDP by 2050.
  • Since our last Global Aging report in 2013, the U.K. has extended the state pension age and put in place a policy framework for regular review of the retirement age, in an attempt to lower costs.
  • However, state pensions in the U.K. continue to be subject to a generous and costly rule, the "triple-lock", ensuring payments consistently rise in both real and nominal terms presenting a significant cost to the exchequer.

Results For The U.K.

Our analysis suggests that in the U.K., the old-age dependency ratio will rise to 40.7% in 2050 from 26.6% in 2015 (see table 1; the old-age dependency ratio is the number of people aged 65 and older divided by the number of those aged 15-64). Overall, we expect the U.K.'s population will continue to grow and exceed 77 million by 2050. The share of the working age population, however, is projected to fall to 58.8% by 2050 from the current 65.1%.

In our view, an aging population will likely place substantial pressure on economic growth and public finances. Demand for publicly provided health care and long-term care services and state pensions could increase. Without further government reforms, total age-related public expenditures in the U.K. are projected to rise to 18.9% of GDP in 2050 from 16.9% in 2015. Nevertheless, this forecast increase of 2% of GDP is less than the projected 3.7 percentage-point increase for the median of our 58-sovereign sample. We expect that the bulk of the U.K.'s age-related spending will go toward health-care outlays, followed by pension expenditures (see table 1).

State pensions are currently subject to a "triple-lock" guarantee, which requires that they rise each year by the highest of either CPI inflation, wage inflation, or 2.5%. This legislative constraint will contribute to long-term pressures on public spending. We anticipate that although the increase in age-related spending in the U.K. will be moderate until around 2020, spending will likely increase after this period, as more people enter retirement age.

Such a development could suggest a significant deterioration in the U.K's budgetary position in the long term. If unmanaged, the weight of general government spending--including social security--could rise significantly as age-related spending increases, coupled with a rising interest bill as deficits and debt mount. Our analysis suggests that without fiscal or structural policy reforms, net debt could rise to 189% of GDP by 2050 in the U.K., higher than the sample median of 134% of GDP.

Expected Impact Of A No-Policy-Change Scenario On The Ratings

Such macroeconomic and fiscal dynamics, if unaddressed, could lead to a change to the current 'AA' long-term foreign currency sovereign rating on the U.K. Based on the fiscal projections of our study, we derived hypothetical sovereign credit ratings for the U.K. (see table 1). In practice, S&P Global Ratings takes a large number of factors into consideration when determining sovereign credit ratings (see "Sovereign Ratings Methodology" published Dec. 23, 2014). In the very long term, prolonged fiscal imbalances and wealth (as measured by GDP per capita) tend to become the more dominant factors. Using this approach, and no mitigating policy response, our 'AA' rating on the U.K. could come under increasing pressure over the coming decades. By 2035, the U.K.'s fiscal indicators could have weakened such that they would be more in line with sovereigns currently rated in the 'bbb' category. And, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration.

When comparing our new post-Brexit results for the U.K. with what we found in our April 2016 pre-Brexit simulation, it seems that future budgetary challenges now appear to be more significant. This is a result of several factors, the main reason being our write-down of key fiscal and economic indicators for the sovereign.

When we compare our post-Brexit 2016 simulation with our 2013 report, we are now projecting specific age-related spending to be lower, mostly on the back of reduced specific health-care expenditures.

Alternative Scenarios Could Result In Drastically Different Economic And Fiscal Prospects

In addition to our no-policy-change scenario, we have considered several other long-term scenarios (see table 1). Two of these scenarios are: the U.K. undertaking radical structural reforms to its social security system, freezing all age-related spending at the current level (as a percentage of GDP); or the U.K. balancing its budget by 2019. Based on these scenarios, fiscal indicators in the U.K. appear to hold up much better--especially if the government were to undertake structural reforms to prevent age-related spending from rising or move to consolidate its budget for a sustained period.

The Effects Of Age-Related Spending On Sovereigns' Future Creditworthiness

The base-case scenario is not a prediction. Rather, it is a simulation that highlights the importance of age-related spending trends as a factor in the evolution of sovereign creditworthiness. In our view, it is unlikely that governments would, as a general matter, allow debt and deficit burdens to spiral out of control or that creditors would be willing to subscribe to such high levels of debt. In fact, as we have observed in many sovereigns in our 2016 Global Aging report, governments are often able to confront the prospects of unsustainably rising debt burdens by implementing budgetary consolidation or reforms of their social security systems.

Aging Population Data And Scenario Results: United Kingdom
2015 2020 2025 2030 2035 2040 2045 2050
Demographic and economic assumptions
Population (mil.) 64.7 66.9 68.8 70.6 72.3 74.0 75.7 77.3
Working-age population (% of total) 65.1 63.0 61.9 60.8 60.0 59.6 59.4 58.8
Elderly population (aged over 65; % of total) 17.3 18.7 19.8 21.4 22.7 23.3 23.5 23.9
Old-age dependency ratio (%) 26.6 29.6 31.9 35.2 37.9 39.1 39.6 40.7
Real GDP (% change) 2.3 1.1 1.3 1.7 2.0 2.1 2.0 1.8
Age-related government expenditure (% of GDP)
Pensions 7.6 7.4 7.8 7.9 8.2 8.4 8.1 8.1
Health care 7.9 8.1 8.3 8.5 8.7 8.8 8.9 9.0
Long-term care 1.2 1.2 1.3 1.3 1.4 1.4 1.4 1.5
Unemployment benefits 0.3 0.2 0.3 0.2 0.2 0.2 0.2 0.2
Total 16.9 16.9 17.6 17.9 18.5 18.9 18.8 18.9
Scenario 1: No policy change (% of GDP)
Net general government debt 83.5 87.7 98.4 112.7 128.5 146.8 166.7 189.0
General government balance (4.4) (3.6) (5.8) (6.9) (8.2) (9.5) (10.3) (11.5)
General government expenditure 43.2 42.3 44.5 45.6 46.9 48.2 49.0 50.2
Interest payments 2.4 3.5 5.0 5.7 6.4 7.3 8.2 9.3
Hypothetical long-term sovereign rating AA a aa a bbb bbb bbb bbb
Scenario 2: Balanced budget in 2019 (% of GDP)
Net general government debt 83.5 81.2 74.0 69.1 65.0 62.6 60.6 58.9
General government balance (4.4) (0.2) (1.4) (1.5) (1.9) (2.1) (1.9) (1.9)
Hypothetical long-term sovereign rating AA aa aaa aaa aaa aaa aaa aaa
Scenario 3: No additional age-related spending (% of GDP)
Net general government debt 83.5 87.6 95.7 104.4 111.7 118.6 126.2 134.9
General government balance (4.4) (3.5) (4.9) (5.3) (5.7) (6.0) (6.4) (6.8)
Hypothetical long-term sovereign rating AA a aa a a a a a
Scenario 4: Lower interest rate (% of GDP)
Net general government debt 83.5 86.2 90.0 95.0 100.9 108.2 116.2 125.0
General government balance (4.4) (3.0) (3.8) (4.4) (5.2) (5.8) (6.0) (6.4)
Hypothetical long-term sovereign rating AA aa aa aa a a a a
Scenario 5: Higher growth (% GDP)
Net general government debt 83.5 84.9 90.3 98.3 107.2 117.6 128.6 140.4
General government balance (4.4) (3.4) (5.3) (6.0) (7.0) (7.8) (8.2) (8.9)
Hypothetical long-term sovereign rating AA aaa aa aa a a a a

S&P Global Ratings' Global Outlook 2019

 A deep dive into S&P Global Ratings’ insights on the credit outlook for 2019 and what are the risks and vulnerabilities to look out for.

Access all the Global Outlook
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Global Sovereign Rating Trends 2019


- On balance, our outlooks on global sovereigns are slightly positive (plus six).

- Eastern Europe is the region with the most sovereign ratings assigned a positive outlook, while the American sovereigns are the most negative. In Asia-Pacific, the Middle East, and Africa, the outlook balance is slightly positive.

- The rise in populism and protectionism, as well as the U.S.-China trade war, could restrict the options available to sovereign policymakers.

Jan. 14 2019 — As of Dec. 31, 2018, S&P Global Ratings rates 133 sovereigns globally (see chart 1), and the overall credit quality of these still remains a full notch below the pre-2008 global financial crisis level, at a 'BBB-' average, or 'A+' if weighted by GDP. That said, the overall outlook balance (positive versus negative outlooks) is at positive six, continuing a process of slow improvement in the ratings that started in November 2017.

This trend is more notable in Eastern Europe, where we see the highest concentration of positive outlooks globally because of a steady growth performance and improved fiscal outcomes, particularly of smaller and more flexible economies. In the Americas, on the other hand, sovereign credit quality has deteriorated since its peak nearly five years ago, and the ratings outlook balance is negative two. In the rest of the regions, the outlooks are slightly tilted to the positive.

The year 2019 brings several and difficult challenges for sovereigns. As the developed world normalizes its economic trajectory and the monetary stimulus of the last decades fades away, a complicated political landscape in both developed and developing economies restricts the room to maneuver of politicians. Protectionism and populism are on the rise, threatening to derail the weak recovery on global growth. If these conditions worsen over the upcoming year, and the policy reaction is not timely and appropriate, pressures can start building again in the asset class.

Chart 1

Rating Trends

Sovereign securities remain the most important asset class globally in terms of borrowing (see "Sovereign Debt 2018: Global Borrowing To Remain Steady At US$7.4 Trillion," published on Feb. 22, 2018). Close to 54% of all rated sovereigns are investment grade ('BBB-' or above). This is a slight increase from the all-time low observed midyear 2017 (see chart 2), when the ratio stood at 51%. The historically low ratio in the past few years is due not only to new sovereign ratings, which tend to be in lower rating categories, but also to some "fallen angel" sovereigns, which we downgraded over the last three years from investment grade to speculative grade, such as Brazil, South Africa, and Oman.

Throughout the past decade, sovereigns rated in the 'B' category have made up the single-largest cohort, currently 41, up from 29 five years ago.

At the other end of the spectrum, the number of 'AAA' rated sovereigns has declined to 11, from an all-time high of 19 in June 2011, mostly because of downgrades in the eurozone. But downgrades in other regions over the last few years have also contributed to the shrinking group of 'AAA' rated sovereigns--the last ones being Hong Kong to 'AA+' in September 2017, and the U.K. to 'AA' in June 2016 following the Brexit referendum. The share of 'AAA' ratings in the total universe of rated sovereigns has gradually dropped to 8% today from more than 16% before the global financial crisis. All 'AAA' rated sovereign have a stable outlook, and no 'AA+' or 'AA' rated sovereign has a positive outlook, which could indicate that, over the longer term, the share of 'AAA' rated sovereigns is not likely to increase.

Chart 2

The eroding credit quality of rated sovereigns goes some way to explain the mild decline we have seen in the unweighted average sovereign rating, as governments across the world have had to inject fiscal resources to cope with the different waves of shocks over the last decade. Since mid-2008, sovereign downgrades have generally outnumbered upgrades (see chart 3; for further details see "Sovereign Ratings History," published monthly). However, this trend has reversed in the second half of 2018, and, as of Dec. 31, 2018, upgrades outnumbered downgrades by three, on a rolling-12-month basis.

Another reason for the decline in the unweighted average rating is that most of the new sovereign ratings we have assigned have been to countries in emerging or frontier markets and have been in the lower rating categories. For example, our new ratings on Sub-Saharan African sovereigns have predominantly been in the 'B' category.

Chart 3

Also, sovereigns with larger and wealthier economies, and therefore higher ratings, have experienced a deteriorating trend. The downgrade of the U.S. in August 2011 clearly stands out (see chart 4), because it is the world's largest economy, as do the downgrades of several eurozone sovereigns, includingFrance, Italy, and Spain in January 2012, as well as the U.K. in June 2016 and China in September 2017.

Chart 4

2019 Outlook: Balance Remains Cautiously Positive

Currently, we have six more positive outlooks than negative, up from three one year ago and considerably up from the -24 at midyear 2017 (see chart 5). The number of negative outlooks is the lowest in over a decade, and the marginally positive outlook balance suggests that globally we have reached the trough of average sovereign ratings. Our rating outlooks are intended to indicate our view of the potential direction of a long-term credit rating, typically over six months to two years for investment-grade ratings ('BBB-' and higher) and six months to one year for speculative-grade ratings ('BB+' and lower). A positive or negative outlook is intended to designate at least a one-in-three likelihood of a rating change in the indicated direction.

A continued ratings recovery looks possible in 2019, considering the current positive outlook balance. We remain cautiously optimistic given the dynamics behind the balance and the several issues threatening to derail the economic recovery that began a few years ago. Populism has gained traction in both developing and developed markets, propelling anti-immigration sentiments and economic protectionism like the world has not seen in many decades. The trade war between the U.S. and China, which has begun to affect world growth and has increased volatility in the financial markets, stands as clear sign resulting from these negative dynamics in world politics. Continued uncertainties about Brexit is another example of the political polarization that exists now in many countries in Europe, Asia, and Latin America. In this context, the degrees of freedom for policymakers to react to adverse shocks are limited and may lead to governments trying heterodox policy responses that could exacerbate the problems, putting pressure on or reversing the ratings trends of the last few years. The events in Turkey and Argentina in 2018 are an example of these risks.

Chart 5

Looking at the performance by regions (see chart 6), Europe has seen the strongest improvement of all the regions in its outlook balance, particularly since 2011. Back then, Europe accounted for almost the entire global negative outlook bias--largely because of the eurozone debt crisis. Having overcome the acute phase of the crisis, a vast majority of the European Monetary Union members now carry a stable or positive outlook. As of Dec. 31, 2018, we only had four negative outlooks on the continent, of which one is within the eurozone (Italy).

The positive trend is more notable in Central and Eastern Europe (CEE), where we see the highest concentration of positive outlooks globally--albeit at rating levels that remain below where they were prior to the global financial crisis. CEE economies have experienced a cyclical recovery, particularly over the past two years, reflecting pent-up consumer demand and tightening labor markets, driven by the region's increasing integration into Germany's manufacturing supply chain. As the economic cycle is maturing, we expect moderating growth rates, and, with that, a decrease on the risks of overheating, particularly in the housing and labor markets. Domestic consumption will become a more important source of economic growth, which will weigh on external performance. This, however, does not represent a major concern given the currently strong external position of the region, including current account surpluses in the majority of CEE sovereigns.

In the Americas, sovereign credit quality has deteriorated since its peak nearly five years ago, and the ratings outlook balance is negative two. Although the outlook balance has improved in the past two years, this is primarily due to downgrades from negative outlooks, where the outlook has subsequently been revised to stable. The reasons for this performance vary from country to country, but the common denominator across the region is a deterioration of the political landscape that has delayed an appropriate reaction to adverse factors.

Decelerating world GDP growth, higher U.S. interest rates, and concerns about new barriers to cross-border trade set the background for economic trends in the Americas in 2019. Within the region, the evolution of sovereign ratings will be shaped by sluggish GDP growth and new political developments based on recent and upcoming national elections.

We project the world economy to grow around 3.6% in 2019, similar to its pace in 2018. Emerging market economies are likely to grow just under 5%, more than double the pace of growth in advanced economies (around 2.1%). The Latin America and Caribbean region (excluding Venezuela) is likely to grow only 2.2% in 2019, slower once again than emerging Asia and Sub-Saharan Africa.

In the rest of the regions, the outlooks are quite close to balanced, marginally tilted to the positive.

In Asia-Pacific, we expect most sovereign ratings to remain unchanged as the majority of them carry a stable outlook, except Japan and The Philippines, which are positive. However, continued uncertainty over the U.S.-China trade tensions will continue to threaten investment sentiment in the region, increasing risk aversion.

In this context, the continued concerns over future financial instability in China could renew investor worries about emerging markets more generally, given the importance of the Chinese economy to global demand.

Elsewhere in the Asia-Pacific region, preparing their economies for the possible consequences of the above scenarios may not be the top concern for some policymakers. Many of them face more immediate domestic political concerns in the coming year. India, Indonesia, the Philippines, and Thailand will hold important elections in 2019.

Finally, in the Middle East, the Commonwealth of Independent States (CIS), and Africa region, which we group into one, the small positive balance remains unchanged compared with one year ago, with only a small number of positive or negative outlooks.

Particularly for the Middle East and North African (MENA) sovereigns, we expect growth to remain modest in 2019. Supported by a slower pace of fiscal consolidation, coupled with strong government capital expenditure and positive spillovers from a pickup in oil production, non-oil activity in MENA oil exporters will remain supportive of growth over the medium term. We expect the 1.2 million barrel-per-day oil production cut agreed by OPEC and its oil-producing allies, on Dec. 7 2018, will be mostly borne by Saudi Arabia. We expect economic growth in hydrocarbon exporters to recover to 2.2% in 2018 and 2.4% in 2019, after falling sharply in 2017.

MENA oil importers will continue to outperform their regional hydrocarbon-endowed peers. We expect countries with less wealth to have higher economic growth rates. However, stronger growth also reflects ongoing reforms, strong domestic consumption, and continued external demand. We expect growth to reach about 4% on a weighted-average basis in 2019 and to improve marginally to 4.5% over the remainder of the forecast period.

Chart 6

Countdown to Brexit: No Deal Moving Into Sight


The risk of a no-deal Brexit, while still not our base case, has increased sufficiently to become a relevant rating consideration, reflecting the inability thus far of the U.K. and EU to reach agreement on the Northern Irish border issue.

Economics: A no-deal Brexit could push the U.K. economy into a moderate recession and lower the economy's long-term growth potential. Most of the economic loss of about 5.5% GDP over three years compared to our base case would likely be permanent.

Sovereign: Our economic, fiscal and debt, and external assessments would come under pressure in the event of no-deal and the U.K. sovereign ratings are likely to be lowered.

Corporate: Contingency plans are unlikely to insulate companies fully from market volatility, legal and regulatory uncertainty, border delays, rising input costs and tariffs, and weakening competitiveness and operating performance in many sectors.

Financial institutions: U.K. banks will likely be the most vulnerable in a no-deal Brexit.

Structured finance: Potential operational and counterparty risks from a no-deal Brexit may be significantly higher than the credit risk of the securitized assets if counterparties can no longer perform on existing contractual arrangements, in particular if this leads to the termination of derivative agreements.

Insurance: While insurers have been planning for post-Brexit business continuity, negative rating pressure would likely result from any downward revision to the U.K. sovereign rating, economic downturn, financial market volatility, or material operational challenges.

U.K. public sector: About half of social housing providers would likely suffer negative rating pressure if real estate prices declined consistent with our no-deal Brexit scenario.

When it voted to leave the EU in the June 2016 referendum, the United Kingdom decided against "business as usual" with the EU. As a result, the U.K.'s business model will change, but at this point, it is still uncertain when this change will happen and how significant it will be.

Our base-case economic forecasts assume that the U.K. and the EU will agree and ratify a Brexit deal, leading to a transition phase lasting through 2020, followed by a Free Trade Agreement (FTA). But given our increasing doubts that the U.K. and EU will agree to the terms of a Withdrawal Treaty required to facilitate a 21-month status-quo transition, we see an increasing risk that the U.K. will secede from the EU and, importantly, the EU single market, without any deal at the end of March 2019. This would constitute an abrupt and very significant change to the U.K.'s business model overnight, although policy measures might soften the short-term blow to the U.K. economy.

In a no-deal Brexit, the U.K. would become a third country from the EU's perspective, reverting to World Trade Organization (WTO) rules for goods trade not only with the EU, but also with third countries currently covered by EU Free Trade Agreements (FTA), such as Canada, together affecting around 65% of U.K. goods exports. A no-deal Brexit would also mean a lapse of EU regulatory recognition of U.K. rules in many areas, including financial services. Even U.K.-issued credit ratings might not be usable in the EU absent a deal. The U.K. might also be required to create regulatory supervisory procedures to substitute for those currently conducted by the EU.

This report analyzes various economic and credit-related implications of such a no-deal Brexit scenario for entities we rate in various sectors from a U.K. perspective, even though we would expect also some negative, albeit lesser, impact for other exposed EU economies and companies.

What No Deal Could Mean To The U.K. Economy

Key Takeaways

 - A no-deal Brexit could push the U.K. economy into a moderate recession, representing a cumulative loss of about 5.5% GDP compared with our baseline forecast over 2020-2021. Although severe, this projected loss is still only about 60% of that caused by the 2008 financial crisis.
 - The U.K.'s direct loss of trade globally could amount to 1.9% of U.K. GDP over the scenario horizon.
 - Regulatory and infrastructure challenges, lack of investment, trade bottlenecks, and lower immigration would push down the U.K. economy's long-term growth potential.
 - As a result, we believe it likely that the U.K. economy would have limited scope to emerge from this moderate recession and regain pre-Brexit output levels over the next three years.

In our no-deal scenario, the U.K. would experience a moderate recession lasting four to five quarters, with GDP contracting by a cumulative 2.7% over two years, after which the economy would return to growth, although the pace of growth would be moderate. By 2021, economic output would still be 5.5% less than what would have been achieved had a deal been struck and a transition occurred. Unemployment would rise from current all-time lows of 4% to above 7% by 2020 (a rate last seen in the aftermath of the financial crisis). House prices would likely fall by 10% over two years.

How A No-Deal Brexit Could Unfold

In our scenario, the short-term impact would start with a fall in share prices, a rise in corporate borrowing costs, and a further substantive weakening of sterling in the first quarter of 2019, even before the end of March 2019 as markets start to discount a no-deal Brexit. Significant disruption and further market volatility could then ensue, following the no-deal Brexit. In a set of technical notes, the U.K. government has identified key stress points, including transport, customs, financial and insurance contracts, and medicine supply. However, the economic consequences of these disruptions is uncertain. These consequences will also depend in part on the effectiveness of preventative measures taken by the U.K. and EU. We expect both the U.K. and the EU will try to limit disruption, at least in critical areas, such as customs and transportation. We do, however consider it almost certain that most goods shipments would be delayed. This would in particular affect U.K. sectors with supply chains that are heavily integrated with the EU.

Moreover, in a no-deal Brexit the U.K.'s financial sector would immediately lose financial passporting rights, which we estimate would directly cost the U.K. economy, without considering second- and third-round effects, about 0.4% of GDP per year. These direct costs are relatively moderate, partly because financial institutions have already been preparing for this case. The most immediate concern for the financial sector would be the serviceability of certain derivatives and insurance contracts. If required, the Bank of England (BoE) and the European Central Bank (ECB) would likely also introduce measures to mitigate financial stability risks.

Given our expectation that sterling will depreciate by 15% initially and that WTO import tariffs will apply to imports from the EU and countries covered by EU FTAs, inflation would likely rise: we see it peaking at 4.7% in mid-2019. Similarly, the EU would impose tariffs. As a result, goods exports from the U.K. could be an estimated 1.9% of U.K. GDP less than in our baseline forecast, although the weaker sterling exchange rate would offset the impact somewhat by making U.K. goods cheaper to import abroad.

We also expect that the BoE would likely see through temporarily higher inflation by cutting its policy rate to zero. It might not be necessary to relaunch a full-fledged quantitative easing (QE) program, in our view. The share of foreign investors in U.K. Gilts (treasury securities) is relatively low (28%) and, more importantly, it has not declined following the referendum. U.K. sovereign debt also has much longer average maturity than that of many peer countries. Rather than a full QE we believe the BoE might deploy a form of QE that specifically targets corporate bonds. As businesses adapt to the new and weaker business environment, many would need to cut costs, including by letting workers go. We expect that the U.K.'s unemployment rate could rise to above 7% by early 2020. The weaker business environment will also likely mean weaker wage growth and, along with higher inflation, real wages could fall for at least a two-year period, weighing substantially on consumer spending. We estimate that household income could decline by £2,700 per year on average over 2019-2021. Declining household spending and weaker demand would also, by 2021, lead to significant house price declines, ending up 15% below the levels that we expect in our base-case forecasts. We expect a moderate decline in fixed investment spending as the government would need, in our view, to increase its own investment spending to cope with a no-deal Brexit. Businesses will also need to spend on Brexit-related investment. Public sector recruitment levels would also likely need to rise, which would offset some decline in household incomes.

Regarding the assumption of certain regulatory responsibilities by the U.K. authorities, we expect that these authorities' capabilities and efficiencies will develop over time. We expect that certain physical and digital infrastructure will need to be developed rapidly to cope with the new post-Brexit reality. Some of the current supply chains would likely be impaired and require reorganization. These factors, in conjunction with lower net immigration and contraction of investment spending, would translate not only into lower economic potential of the U.K. economy, but also lower trend growth. This latter feature is important, as it is key in determining how much and how quickly the economy might be able to recover from a no-deal Brexit. In our scenario, we project that the effects of a no-deal Brexit will likely extend at least to our three-year forecast horizon. Incidentally, a slowdown in trend growth was a key reason why the U.K. economy was thrown onto a lower growth trajectory following the global financial crisis: the impairment of the financial system, which is a crucial part of market infrastructure, had negatively affected the economy's operating capacity.

How Much Will Global Sovereigns Borrow in 2018?

Our annual survey of global sovereign debt and borrowing compiles data pertaining to all rated sovereigns. We project that the sovereigns we rate will borrow an equivalent of $7.4 trillion from long-term commercial sources in 2018--roughly the same as in 2017. We forecast gross long-term commercial borrowing to drop slightly to 9% of rated sovereigns' GDP in 2018, from an average of 9.5% during the three preceding years.

Some 73%, or $5.4 trillion, of sovereigns' gross borrowing will be to refinance maturing long-term debt, resulting in an estimated net borrowing requirement of about $2 trillion, or 2.5% of the GDP of rated sovereigns (see table 1). Net borrowing as a share of GDP has been decreasing gradually from 5.4% in 2014 as a result of governments extending their maturity profiles in a low interest rate environment and gradual improvements in fiscal consolidation in several countries. But they also reflect exchange rate movements, as all numbers presented here have been converted into U.S. dollars. Consequently, we project that the commercial debt stock of sovereigns we rate will rise by 2.5% to reach an equivalent of $47.3 trillion by the end of 2018. We expect that outstanding short-term commercial debt will remain unchanged at $4.8 trillion at year-end 2018, or 10% of total commercial debt stock.


  • We forecast that the sovereigns we rate will borrow some $7.4 trillion in 2018, roughly in line with 2017.
  • The U.S. and Japan will account for over 50% of the total, followed by China, Italy, France, and Brazil.
  • Absolute debt levels continue to increase. We project that the global sovereign commercial debt stock will rise during 2018 by over $1.1 trillion to reach an all-time high of $47.3 trillion by the end of this year--up by 2.5%, at projected market exchange rates.

Table: Sovereign Commercial Issuance And Debt*

(Bil. USD) 2014 2015 2016 2017 2018f
Gross long-term commercial borrowing 7,042 6.729 7,161 7,457 7,386
-Of which amortization of maturing long-term debt 988 32,505 5,328 5,406 5,346
-Of which net long-term commercial borrowing 4,126 2,407 1,833 2,065 2,044
Total commercial debt stock (year end) 41,783 40,716 42,722 46,124 47,295
-Of which short-term debt 3,624 3,181 4,609 4,809 4,837
-Of which debt with original maturity greater than one year 38,159 37,535 38,113 41,315 42,458
(% GDP)
Gross long-term commercial borrowing (% GDP) 9.2 9.3 9.7 9.6 9.0
-Of which amortization of maturing long-term debt (% GDP) 1.3 44.8 7.2 6.9 6.5
-Of which net long-term commercial borrowing (% GDP) 5.4 3.3 2.5 2.6 2.5
Total commecial debt stock (year end) (% GDP) 54.5 56.1 58.1 59.1 57.4
-Of which short-term debt (% GDP) 4.7 4.4 6.3 6.2 5.9
-Of which debt with original maturity greater than one year (% GDP) 49.7 51.7 51.8 52.9 51.6

f--Forecast. *Excluding Venezuela due to distortions caused by hyperinflation and multiple exchange rates.