Credit ratings agencies are not, on the whole, noted for a reckless, devil-may-care approach to either personal or national finances. It’s not too often that you hear one say “Well, we don’t exactly know what’s coming in the future but what the heck, it’ll probably all work out fine in the end”.
So we were naturally more than a little curious to see the analysis released by Standard & Poor’s, one of the world’s key ratings agencies, of the likely state of an independent Scotland’s economy today.
Our interest was further piqued by the fact that the report was buried in the press – for example, the BBC hid it a long way down in its doom-laden coverage of Standard Life’s rather innocuous statement about its independence contingency plans.
We rather cynically assumed from this that the report must contain something positive about Scotland, and we weren’t wrong. (Our emphasis below.)
“Even excluding North Sea output and calculating per capita GDP only by looking at onshore income, Scotland would qualify for our highest economic assessment. Higher GDP per capita, in our view, gives a country a broader potential tax and funding base to draw from, which supports creditworthiness.
We view Scotland’s trend growth as closely matching that of the UK. While North Sea output (again on a geographical, rather than population-derived basis) accounts for 16% of Scottish GDP (calculated using data from the Scottish government’s experimental national accounts project), this does not, under our methodology, lead us to conclude that the economy is excessively concentrated. We typically only adjust for excess economic concentration should a single sector exceed one-fifth of a country’s GDP.”
This, of course, is a view somewhat at odds with “Better Together” chairman Alistair Darling, who constantly warns that an independent Scotland’s economy would be dangerously over-reliant on that pesky volatile oil revenue that causes such terrible problems for Norway, Saudi Arabia and all the other poverty-stricken petro-nations, and that as a result of that instability Scotland would pay more for its borrowing because it wouldn’t be considered creditworthy.
As the UK struggles to hang onto its own credit rating, which was downgraded by two agencies last year, the Standard & Poor’s report is a powerful endorsement of Scotland’s economic position, and even notes that it would be strong without any oil at all. (It does, in fairness, apply some caveats if Scotland and the rUK don’t agree a currency union, but notes that alternatives are viable.)
But there’s an intriguing twist at the end.
“The composition of Scotland’s external balance sheet is as yet hypothetical, but our initial observation is that the Scottish financial sector is unusually large, with total assets estimated at 12.5x GDP. 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’s not the oil industry S&P is worried about being over-large, but the financial services one. (It wasn’t, after all, oil that caused the global economic crisis.) Its proposed solution? Dump chunks of it back on the UK.
Or in other words, the very thing that the entire Scottish media is bellowing from the rooftops today as a potential disaster is the best thing that one of the world’s primary credit-rating agencies thinks an independent Scotland could do to protect the stability of its economy.
It’s quite the unfathomable mystery why the media has chosen to focus on Standard Life’s announcement today rather than Standard & Poor’s, eh readers?