The challenges facing an independent Scotland’s economy are significant but not unsurpassable, according to global ratings firm Standard and Poor’s.
The company set out its “broad conclusions” on the creditworthiness of the potential new sovereign state in a report.
S&P makes clear in its report that it is not passing judgement on the actual rating of an independent Scotland, and it takes no view on the merits or otherwise of independence.
“In brief, we would expect Scotland to benefit from all the attributes of an investment-grade sovereign credit characterized by its wealthy economy (roughly the size of New Zealand’s), high-quality human capital, flexible product and labor markets, and transparent institutions,” it concludes.
“Nevertheless, the newly formed sovereign state would begin life with comparatively high levels of public debt, sensitivity to oil prices, and, depending on the nature of arrangements with the EU or UK, potentially limited monetary flexibility.
“At the same time, Scotland’s external position in terms of liquidity and investment could be subject to volatility should banks leave.
“On the other hand, if this were to happen, it could bring benefits in terms of reducing the size of the Scottish economy’s external balance sheet, normalizing the size of its financial sector, and reducing contingent liabilities for the state.
Support for currency union
“In short, the challenge for Scotland to go it alone would be significant, but not unsurpassable.”
It concludes that agreeing a currency union with the rest of the UK would provide “considerable support” for the country’s rating.
The Scottish Government wants to formally share sterling after a Yes vote in the referendum on September 18.
But Chancellor George Osborne, backed by Labour and Liberal Democrat leaders at Westminster, said he would rule out the key aim earlier this month.
GDP ‘slightly below New Zealand’
The alternative of a new currency or using sterling without an agreed union or lender of last resort “could pose some initial risks” to external financing, according to S&P.
‘“Specifically, we think Scotland would be hard-pressed, under a new currency regime, to quickly replicate the deep capital markets it enjoys today as part of the larger UK,” the report states.
“Nevertheless, with a GDP (including North Sea oil output) only slightly below that of New Zealand, a developed economy and developed financial system, there is no fundamental reason why Scotland could not successfully float a currency.”
The financial sector is “unusually large”, according to the report.
“We would therefore likely view the financial sector as a significant contingent risk to the state. At the same time, a large part of this activity could be re-domiciled to the UK,” it adds.
The Scottish economy conforms with the typical profile of sovereigns rated BBB or higher, the report notes.
Sturgeon welcomes AAA comparability
Scotland’s Deputy First Minister Nicola Sturgeon said: “This is a hugely welcome endorsement of Scotland’s economic strength from an internationally respected and independent agency.
“Standard & Poor’s have concluded that Scotland’s wealth levels are comparable to those of AAA-listed nations, and that as an independent country - even without North Sea oil - Scotland will qualify for S&P’s highest economic assessment.
“That is a glowing assessment of the Scottish economy from an impartial source and completely demolishes the scaremongering of the No campaign.
“The anti-independence campaign was already guilty of massive hypocrisy on this issue following the UK’s downgrading from AAA status by leading credit agencies, but this endorsement puts the scare stories to bed and is a massive endorsement of the Scottish Government’s vision of a prosperous, economically successful independent Scotland.”
McDougall: SNP’s ‘achilles heel’
But Blair McDougall, campaign director of the pro-UK Better Together group, said: “The lack of a credible plan for what money Scotland would use has become the Achilles heel of the SNP’s campaign. Alex Salmond and the Yes Campaign say we could use the pound without a currency union, even though their own experts ruled out this option. Now one of the top ratings agencies has said this would impact on Scotland’s credit rating.
“Coming on the same day the RBS and Standard Life raise concerns over the lack of a clear plan for currency in an independent Scotland, this will only further dent confidence in the SNP’s already discredited currency plans.”