FitchRatings has downgraded the U.K.'s foreign and local currency issuer default rating to AA+ from AAA on Friday, saying it reflects the country's weaker economic and fiscal outlook.
"Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the U.K. economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis," the agency said in a release announcing the downgrade.
Economic growth revised down
Fitch revised its forecast for the country's economic growth to 0.8 per cent in 2013 and 1.8 per cent in 2014, down from the 1.5 per cent and 2.0 per cent, respectively, it forecast in September 2012.
The global ratings agency said the country's strong credit profile and the fact that it has a "high-income, diversified and flexible economy" and a stable political and social environment is what prevented it from being downgraded more than one notch.
The move follows a similar downgrade by Moody's Investors Services earlier this year from AAA to AA1.
Fitch said it expects Britain's general government gross debt to peak at 101% of GDP in 2014-15 and not decline until 2017-18.
"The U.K. economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery," Fitch said in a release announcing the downgrade.
The agency had warned that it would go ahead with the downgrade if the U.K. did not get its government debt below 100% of GDP and demonstrate it was well on its way to getting it to 90% of GDP over the medium term.
Currency reserve, improvement in banking sector reduce risk
The British government has made progress in reducing its public sector net borrowing, Fitch said, but its budget deficit remains at 7.4 per cent of GDP.
"The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions (and/or tax increases) if public debt is to be stabilized and reduced over the medium term," the ratings agency said.
Assuming the government remains committed to reducing the budget deficit, government debt as share of national income will fall in the medium term, which is in part why Fitch assessed the country's outlook as "stable" the agency said.
"The international reserve currency status of sterling and the ability and willingness of the Bank of England to intervene in the U.K. government debt market largely eliminates the risk of a self-fulfilling fiscal financing crisis," Fitch said when justifying its stable outlook forecast.
"The gradual improvement in the U.K. banking sector's capital and liquidity position has further reduced contingent liabilities arising from this sector."
Fitch also kept U.K.'s country ceiling at AAA and its foreign currency rating at F1.