The kilts and sporrans of Clan Wallace, members of the Lonach Highlanders, marching on the road to the Lonach Gathering and Highland Games in Strathdon, Scotland.
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The Scottish Government on Thursday announced plans to issue its first sovereign bond in 2026/27, aiming to raise funds for infrastructure investment.
This is the first issue of a 1.5 billion pound ($1.97 billion) bond program that is expected to be rolled out during the next parliamentary term, starting with elections next May. But officials noted that the plan was dependent on the outcome of government elections.
Although Scotland is part of the United Kingdom, it operates as a devolved nation and has its own government. The Scottish Parliament has some limited powers over income tax and some aspects of the economy, but decisions regarding macroeconomic policy are reserved to the UK government.
On Wednesday, S&P Global and Moody’s gave the Scottish Government its first credit rating, with the agencies giving Scotland the same rating as the United Kingdom and higher than the governments of Spain, Italy and Japan.
“Investor-friendly destination”
Scottish First Minister John Swinney said in a statement on Thursday: “The Scottish Government’s high credit rating is evidence of Scotland’s strong institutions, track record of responsible fiscal management and business environment.”
He argued that the issuance of Scottish National Bonds, colloquially known as kilts, was a step towards “a prosperous future where our country takes responsibility for its decisions”.
“While specific issuance plans will depend on market conditions closer to the time, we will shortly begin working with banks as joint lead managers to ensure that the next Scottish Government can proceed without delay,” Swinney added on Thursday.
The Scottish Government was given powers to issue its own debt about a decade ago, but until now it had borrowed money from the UK’s National Loan Fund.
In 2023, the Scottish Government’s Investor Committee recommended issuing floating sovereign debt on the open market as a way to raise the country’s profile and attract inward investment.
Angus Macpherson, chairman of financial advisory firm Noble & Company and former co-chair of the investor panel, said Scotland’s credit rating would help the country move towards these ambitions.
“This is a positive step and shows they are serious about becoming a more investor-friendly destination,” he said in a statement Thursday.
Accounting giant EY is advising the Scottish Government on the bond issue.
Scottish independence
Moody’s and S&P Global this week emphasized that the credit ratings given to Scotland were given to the country as a devolved state of the United Kingdom.
“If Scotland takes significant steps toward independence from the United Kingdom, we could downgrade its rating,” S&P Global said on Wednesday. “Our ratings for Scotland reflect our view of the UK’s supportive and well-defined institutional framework for the devolved regions and of Scotland’s prudent financial policy.”
The agency noted that Scotland would continue to receive significant subsidies from the UK to cover much of its spending, including infrastructure investment.
“Total debt will remain very low at just 10% of operating revenues through 2027 due to limited borrowing requirements and phased debt maturities,” S&P Global added.
Meanwhile, Moody’s said a downgrade to the UK’s sovereign rating would likely have a similar impact on Scotland.
Explaining the basis for Scotland’s rating, the agency said: “Difficulties in balancing the budget as a result of rapidly increasing spending pressures and significant cuts to block grants will also put downward pressure on the rating.”
“Although not our base case, Scottish independence could place downward pressure on ratings by introducing increased uncertainty regarding the institutional framework and potentially increasing financial stability risks.”
Scottish voters narrowly voted against leaving the UK in a referendum in 2014, but Siwini’s government has insisted the country should continue to pursue independence.
“Scotland is a wealthy country with great potential, but too many people in Scotland today find it difficult to make a living,” he wrote in a paper advocating independence published last month.
“That’s because living standards in the UK have barely improved for more than 15 years due to decisions taken by the Westminster government, including the imposition of austerity and the disastrous decision to leave the European Union.”
Britain’s economic growth slowed to a weaker-than-expected 0.1% in the third quarter of this year, data released on Thursday showed. British Chancellor of the Exchequer Rachel Reeves is widely expected to raise the country’s tax burden later this month as the country struggles with a cost-of-living crisis triggered by the Covid-19 pandemic.
The UK currently has the highest long-term borrowing costs of any G7 government. 30 year government bond Yields are trading well above the key benchmark of 5%.
—CNBC’s Hugh Leask contributed to this report.
