12 Jun 2015 4:10 PM
Fitch Ratings-London-12 June 2015: Fitch Ratings has affirmed France's
Long-term foreign and local currency Issuer Default Ratings (IDR) at
'AA' with Stable Outlooks. The issue ratings on France's unsecured
foreign and local currency bonds have also been affirmed at 'AA'. At the
same time, Fitch has affirmed the Short-term foreign currency IDR at
'F1+' and the Country Ceiling at 'AAA'.
KEY RATING DRIVERS
The affirmation and Stable Outlooks reflect the following factors:
France's
ratings balance a wealthy and diversified economy, track record of
relative macro-financial stability, moderate levels of household debt
and strong and effective civil and social institutions with a high
general government debt/GDP and fiscal deficit.
The budget
deficit is high relative to peers and will decline only gradually. In
March 2015 the European Council recommended to France that it correct
the country's excessive fiscal deficit (defined as above 3% of GDP) by
2017. The initial deadline was 2012 when the Council opened the
Excessive Deficit Procedure (EDP) in April 2009. It was first postponed
by the Council to 2013 in December 2009, then to 2015 in June 2013.
The
government's new deficit target of 2.7% by 2017 (revised from 2.9% in
the 2015 budget) represents a moderate pace of fiscal consolidation,
with the fiscal deficit better than expected at 4% of GDP in 2014
(compared with 4.4% in the 2015 budget) and recent better than expected
economic performance. The government's fiscal effort, as measured by the
change in the structural balance, is lower than the effort recommended
by the European Council in March but with a realistic forecast for a
headline deficit below 3% of GDP by 2017, Fitch does not expect this to
trigger any further action by the EU on France under the EDP. Fitch
previously expected the fiscal deficit to be slightly above 3% in 2017.
The
economy has recently performed better than expected and the risks to
the outlook are more balanced as euro weakness and lower oil prices
provide some boost. Fitch has revised up near-term growth prospects for
France on 1Q15 GDP data from INSEE, which showed the economy expanded by
0.6% from 4Q14 - the fastest pace since 2Q13. For 2015, the agency now
expects GDP to expand by around 1.2% (revised up from 0.8% previously)
and 1.5% in 2016 (up from 1.2% previously). Fitch does not expect the
economic recovery will be strong enough to make a significant dent in
France's high unemployment rate. We expect the labour market will remain
a drag on the recovery. The jobless rate averaged around 10.3% in 2014
according to Eurostat and Fitch expects it to remain broadly unchanged
this year.
The lower budget deficits and better growth
performance in the near term means Fitch now expects the public debt to
GDP ratio to peak at 97% of GDP in 2016 (previously 99.4% in 2017) after
which it should be on a declining path. The ratio remains more than
double the 'AA' median of 36%, limiting the fiscal scope to deal with
shocks. Fitch expects government indebtedness to remain high in the
medium term.
Uncertainty remains over France's long-term
economic growth potential. The government has already started
implementing a programme of structural reforms and stated its intention
to continue on this path, including territorial reform and the 'Macron'
law on growth, economic activity and equal opportunities. However, the
quantitative impact of the reform programme is uncertain, and in Fitch's
view does not appear sufficient to reverse the adverse trends in
long-term growth and competitiveness. Although the 'Macron Law' is wide,
it does not seem to us particularly deep. Fitch has maintained its
long-term potential growth estimate at 1.5%.
Fitch judges
financing risk to be low, reflecting an average debt maturity of seven
years, low borrowing costs and strong financing flexibility. Government
debt is entirely euro-denominated.
While the current account
balance has generally been on a deteriorating trend for most of the past
20 years, partly due to France's loss of export market share, the
deficit is moderate at 1% of GDP in 2014 and has stabilised more
recently. Fitch projects the deficit to remain around this level.
However, France's net external debt is significantly higher than most
rating peers at 31% of GDP at the end of 2014
There is low risk
from contingent liabilities. In recent years, the financial sector has
been cleaning up its balance sheets, strengthening funding, liquidity,
capital and leverage. The risks from the eurozone crisis management
mechanism including the EFSF and ESM have also eased owing to the
actions of the ECB and the on-going gradual economic recovery of the
single currency area.
RATING SENSITIVITIES
The main factors that could lead to negative rating action, individually or collectively, are:
- Weaker public finances reducing confidence that public debt will be placed on a downward trajectory.
- Deterioration in competitiveness and weaker medium-term growth prospects.
Future developments that could individually or collectively, result in positive rating action include:
- Sustained lower budget deficits, leading to a track record of a decline in the public debt to GDP ratio from its peak.
-
A stronger recovery of the French economy and greater confidence in
medium-term growth prospects particularly if supported by the
implementation of effective structural reforms.
KEY ASSUMPTIONS
In
its debt sensitivity analysis, Fitch assumes a primary surplus
averaging 0.7% of GDP over the next 10 years, trend real GDP growth
averaging 1.6%, an average effective interest rate of 2.5% and GDP
deflator of 1.5%. On the basis of these assumptions, the debt-to-GDP
ratio would peak at 96.9% in 2016, before declining to 83.6% by 2023.
Fitch's
base case is that Greece (CCC) will remain a member of the eurozone,
though it recognises that 'Grexit' is a material risk. Although a Greek
exit would represent a significant shock to the eurozone that could
spark a bout of financial market volatility and dent confidence, Fitch
does not believe it would precipitate a systemic crisis like that seen
in 2012, or another country's rapid exit
