Scottish independence likely neutral for residual UK
22 October 2012
News, United Kingdom, Scotland
By Asia Asset Management
Scottish independence would probably be neutral for the sovereign credit profile of the residual UK (England, Wales and Northern Ireland), Fitch Ratings says. The UK's 'AAA' rating would therefore remain intact.
Any judgement on the possible rating of an independent Scotland is impossible at this stage. This is because of the absence of information on the nature and terms of any possible independence agreement, and the considerable uncertainty regarding key provisions such as the partition of assets and liabilities, the regime governing the financial sector, possible currency change, and the length of a transition period to independence.
Fitch Ratings made a preliminary assessment of the potential effect on the UK economy and public finances, and so on the UK sovereign rating (which the residual UK would inherit), in March.
If the public debt stock were divided in proportion to GDP, both the residual UK and Scotland would be left with identical public debt ratios, and the residual UK's debt profile would therefore be little changed.
Our current expectation is that Fitch-rated gilts would remain the responsibility of the residual UK, which would enter into a separate bilateral agreement with an independent Scotland regarding how the latter would contribute to servicing and repayment.
Dividing North Sea oil geographically would leave the residual UK with only 9% of reserves, if the split were made according to the Geneva Convention's median line rules. But direct loss of government revenue to the residual UK could be offset by a reduction in fiscal transfers to Scotland. This, and the fact that UK oil revenue is forecast to decline in any case, would make the budgetary impact marginal.
The impact on the balance of payments of a geographical oil split could be bigger, making the residual UK a net oil importer of about 2% of GDP. However, an improvement in the non-oil trade deficit of the residual UK, reflecting the higher non-oil goods and services deficit for Scotland, could partly offset the loss of energy export receipts.
A geographical division of oil is an extreme outcome, as is a per capita division that would leave the residual UK with 92% of reserves. A compromise would be probably be reached.
UK Prime Minister David Cameron and Scotland's First Minister Alex Salmond signed an agreement on last Monday (October 15) setting terms for a single-question referendum on Scottish independence, to be held in autumn 2014.
Fitch Ratings affirmed the UK's 'AAA' rating with a negative outlook on September 28.
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