Worth a read I think The future of Scotland’s currency and the economy’s fiscal strength may be at the center of the political debate on Scottish independence but they are also key questions that will determine how the separate economy is received by markets. Scotland’s economic future Yet more political divisions have emerged in the past week concerning the fiscal position of Scotland if it becomes independent, after figures from the Scottish government revealed that the country’s deficit had grown bigger than the UK’s deficit as a whole in the past year as a result of declining North Sea oil revenues. The Treasury also issued a report the day before these figures were released stating that public spending during the first year of independence would be between £8.8bn and £9.3bn higher than its tax revenue. This contrasts with the Scottish National Party’s earlier prediction in its white paper on independence, which estimated that a newly independent Scotland would have a deficit of £5.5bn. Citigroup is the most recent group of analysts to weigh-in on the Scottish independence debate, arguing that an independent Scotland would likely be faced with a “relatively weak and risky fiscal position” that would result in a “sizeable” borrowing premium. Research from Capital Economics also released this week did acknowledge that Scotland would not necessarily have any “immediate problem” with public finances if it became independent. However the report did highlight that the country’s fiscal future is “probably more difficult that the Scottish government has been hoping for” due to the link between declining North Sea oil revenues and economic performance. “Official data on government expenditure and revenue related to Scotland, published today, show a fall in North Sea revenues from £10.1bn in 2011/12 to just £5.6bn in 2012/13. That has inevitably produced a worsening in the overall deficit that Scotland would have, if it were already independent,” it says. Looking ahead to the crucial 2016/17 period that would immediately follow independence, Capital Economics also point out that the North Sea revenue forecasts from the Office of Budget Responsibility were “already much weaker” than those set out by the Scottish government for this year and have since been revised down again by the OBR. Currency The Scottish and UK governments are currently at loggerheads over which currency Scotland would adopt if it becomes independent, with UK chancellor George Osborne dismissing the possibility of sharing the pound while Scotland’s first minister Alex Salmond insists that this formal currency union can and will go ahead following independence. But what to the analysts think is the best currency option for both the rest of the UK and an independent Scotland? Citi says it finds the current stalemate on the proposed shared currency and lack of alternative plan by the Scottish government as “astonishing”. “We regard a sterling monetary union as unlikely but we are genuinely unsure what currency and monetary policy would be adopted by an independent Scotland. In our view, it is astonishing that the Scottish government, in seeking independence, has reached this stage: seeking a currency union without agreement with the rest of the UK and without a clear alternative plan,” it says. “The painful euro area strains make it clear that the set-up for the currency and monetary policy is crucial: it cannot be ignored or assumed to “be alright on the night.” S&P believes that the plan to set up a formal currency union with the rest of the UK would give “considerable support” to Scotland’s rating and fiscal position as an independent country. As for the alternative option of creating a new currency for an independent Scotland, S&P says this would likely pose “some initial risks to external financing”. An earlier report issued by ratings agency Moody’s toward the end of 2013 argues alternatively that even a sterling currency zone would lead to “uncertainty” in markets. “As the intensification of the eurozone crisis showed in 2012, a monetary union without fiscal and banking union is unstable and the prospect of an exit from a monetary union could lead to high volatility and market turbulence, potentially detrimental to all members,” it says. Credit rating S&P says it will not issue any rating until after the referendum and subsequent negotiations between the Scottish and UK governments have been completed. However it did hint that Scotland has “all the attributes of an investment-grade sovereign credit”, but also stressed that its current AAA rating for the UK as a whole is reliant on its current use of sterling. “Our ‘AAA’ rating on the UK is supported by the country’s power to issue a global reserve currency and the depth of its local capital markets, denominated in this currency,” it adds. Analysts at Citi estimate a separate Scotland would most likely receive a high ‘single A’ rating. It says: “An independent Scotland would fall short of the top AAA rating, but would be comfortably above the threshold for investment grade. An initial rating in the high ‘single A’ region would seem likely. Speaking as a witness to the Treasury Select Committee’s inquiry into Scotland’s economic future last year, Fitch managing director David Riley also said he was “not aware of a situation Fitch has ever given a AAA rating to a new sovereign country.
Posted on: Tue, 18 Mar 2014 12:08:26 +0000