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UK universities face deficits next year - but are likely to bounce back, predicts Moody's

The coronavirus outbreak will lead to temporary budget deterioration and operating deficits for some UK universities next year, but the sector's finances are likely to bounce back in two to three years, according to a new report from the ratings agency Moody's.

Three scenarios modelled to test universities' financial resilience forecast that UK universities will lose fee income next year and some will incur operating deficits as a result. However, strong balance sheets support their ability to absorb a one-off deficit and credit quality, and in the longer term, underlying strong demand trends for higher education support a recovery over the next two to three years, the report says.

In addition to a rising participation rate and a sharp and favourable demographic shift, the sector is expected to benefit from a supportive policy environment for research funding and international students.

The report observes that prior to the coronavirus outbreak, UK universities reported strong growth in undergraduate applications for the 2020-21 academic year despite adverse demographic trends. Applications from domestic students were up 1 per cent from the previous year.

"This was a strong result given the corresponding decline in the university-age population, and we expect this demographic trend to reverse sharply from 2021," Moody's said, adding: "Although enrolments may be considerably lower than in past years given the coronavirus outbreak and the high degree of uncertainty it entails, strong previous growth in applications underlines the UK's global appeal as a destination for higher education."

Health and safety concerns are likely to have only a temporary effect on international student demand, and just as the number of international students continued to rise following Brexit, the agency said it expected the medium-term reputation of the UK to continue to be resilient.

Commenting on recent government policies on research funding and a more favourable immigration regime for international students and staff, Moody's said it expected policy "to continue to be supportive overall".