OREANDA-NEWS. The UK vote to leave the European Union (EU) is negative for the UK higher education sector and for NHS Trusts and Foundation Trusts (FTs), due to the likely impact of Brexit on staff and research funding, Fitch Ratings says.

As we have stated previously, the full impact of Brexit, and any potential ratings impact, will depend on the exit terms negotiated, which remain uncertain. For the higher education sector, a favourable exit deal would limit the reduction in research grants from EU funds. Even so, restrictions on free movement could reduce projected student demand and increase pressure on universities' revenues. The impact may be greater on English than on Scottish universities due to their different tuition fee arrangements for non-UK EU students, although we do not currently rate any Scottish universities.

Unfavourable exit terms for universities could be rating negative, primarily due to lower research grants from EU funds. This would hinder the recruitment and retention of academic talent and could create difficulties in collaborating with EU countries on international research development. Press reports indicate that some UK institutions and academics have been asked to withdraw from applications for joint EU-funded research projects by their EU partners. This would reduce their appeal to more lucrative international students.

UK Universities could also lose access to EU regional development, structural and cohesion funds to build new infrastructure. Modernization and expansion to attract overseas students is one reason sector debt has increased, reaching 26% of income in FY14.

Reductions in EU funding could be mitigated by savings on contributions for EU funding from the UK government. However, EU funding has significantly risen in the last five years to 15% or more of UK universities' total revenue, while Britain's own national research budget is below international averages and is facing existing pressure.

An unfavourable exit with greater restrictions on inward migration would also have a more pronounced direct effect on student demand and staff levels. According to advocacy group Universities UK, 15% of teaching and other staff at British universities are non-British EU nationals. The ERASMUS EU student exchange programme accounts for about 5% of UK students. A reduction in numbers of EU students applying to UK universities would affect revenues and may result in pressure on ratings. Continued student demand from non-EU countries could partly mitigate this impact.

For the NHS, staffing is a key Brexit-related issue: 55,000 of the NHS's 1.3 million workforce and 80,000 of the 1.3 million workers in adult social care come from the EU. The NHS is struggling to recruit enough staff, with a shortage of about 50,000 staff. The ability of providers and social care services to recruit EU staff will be crucial for Trusts and FTs to maintain patient care income from NHS Commissioners.

The UK has been able to develop its medical research through collaboration across the EU in the same way that higher education has benefitted from access to European talent and funding. Between 2007 and 2013, the UK contributed GBP5.4bn to EU R&D, while it received GBP8.8bn from the EU for R&D and innovation. As it is unlikely that NHS Trusts and FTs would be able to cover the shortfall if EU funds were no longer available, funds spent on R&D would probably be significantly reduced.

If UK pensioners currently living elsewhere in the EU lose local healthcare coverage under the Brexit terms, this may also increase demands on the UK health and social care sector if these individuals return to the UK.

If the Brexit vote leads to a UK economic slowdown, further cuts to public spending are a possibility. Although the health budget may continue to be protected, further cuts to social care would impact NHS Trust and FT revenues and may impact their ratings.

The level of oversight and support provided by the regulator and other Department of Health bodies will remain an important part of our credit assessment.