A vote to leave the EU would be moderately credit negative for the UK, raising risks to its medium-term growth and investment prospects, its external position, and the future of Scotland within it, Fitch Ratings says. Longer term, the economic impact of leaving the EU is highly uncertain, but the impact on the rating dynamics would be less pronounced as many of the UK’s key rating fundamentals would remain intact assuming UK-EU trade relations are not meaningfully disrupted.
We forecast the UK referendum on EU membership to be held in 2H16 following negotiations around the UK government’s proposals for reform. Our baseline is that the UK will remain in the EU, but the risk of “Brexit” is significant.
We expect the UK to be able to secure a deal reforming the terms of its EU membership. But there is a risk that the government may not get agreement to restrict “in-work” and family benefits for EU nationals working in the UK. It would then be harder for the pro-EU campaign to rally around the call to stay in a “reformed Europe”.
The often unpredictable nature of such referendums means there is a significant possibility that the vote will tip towards Brexit and lead to short-term volatility in financial markets. Market turbulence need not have any sovereign ratings impact, but how Brexit would be achieved is highly uncertain and the negotiations could be lengthy and complicated. This would raise at least three key risks from a ratings perspective.
The first is the inevitable uncertainty a “Leave” vote would generate for medium-term growth and investment. This would be likely to have at least a short-term economic cost. Major foreign direct investment decisions could be delayed until the UK’s relationship with the EU is clarified. The duration and scale of the economic impact would depend on whether a clearly defined EU-UK relationship can ultimately be achieved in an orderly way. If so, the longer-term economic impact may be modest.
