Fitch Affirms France at 'AA+'; Outlook Stable

Fri Jun 13, 2014 1:02pm EDT

(The following statement was released by the rating agency) LONDON, June 13 (Fitch) Fitch Ratings has affirmed France's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA+'. The Outlooks are Stable. The issue ratings on France's unsecured foreign and local currency bonds have also been affirmed at 'AA+'. At the same time, the agency has affirmed France's 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 budget deficit improved by 0.6ppt to 4.3% of GDP in 2013, although this was slightly worse than the 4.1% target presented in the 2014 draft budget in October. Fitch no longer forecasts the French government will meet the EU threshold for the general government fiscal deficit of 3% of GDP by 2015, but any slippage will be modest. The government has provided more detail on its consolidation measures, in particular on the EUR50bn planned expenditure cuts (relative to prior rising trends) from 2015 to 2017, and the recent June supplementary budget detailed an extra EUR4bn of spending savings this year and additional tax relief to households than announced originally. However, the consolidation plans are unprecedented in recent times and meeting expenditure targets will be challenging. Fitch does not expect any material slippage from medium-term structural fiscal targets in the 2014 budget of close to balance by 2017, although this was loosened from the original benchmark of balance by 2016 in the September 2012 multi-annual public finance programme. In its latest assessment of public finances, the High Council of Public Finances (created to improve the credibility of fiscal policy) states the structural fiscal deficit in 2013 is significantly worse than the benchmark in the 2012 law, triggering the corrective action mechanism of the new fiscal framework. In the 2014 budget, the government has already increased its consolidation efforts by 0.3% of GDP this year and by 0.2% in 2015 to bring the structural balance closer to the trajectory of the benchmark. Government debt dynamics remain broadly unchanged from Fitch's previous rating review in December 2013. Gross general government debt (GGGD) is high (93.5% of GDP in 2013), more than double the 'AA' median of 37.7%, thus limiting the fiscal scope to deal with shocks. Close implementation of the consolidation plans should mean a peak of the debt to GDP ratio at around 96% in 2015, after which it should be on a downward path. The French government's latest forecast has been revised up to similar levels. The pace of decline in the debt ratio will ease slightly reflecting the modest loosening in fiscal targets in 2015 and 2016. Recent new national accounts data by the French national statististics office showed GGGD lowered by nearly 2pp in 2013. Fitch will base its forecast on the revised data after all countries in the EU switch to the new ESA2010 methodology by September. Economic activity should pick up in 2014 after virtually no change in GDP in the previous two years. Fitch expects growth to pick up from 0.3% in 2013 to 0.7% in 2014 and estimates medium-term potential growth at around 1.5%, broadly unchanged from the last review. However, economic performance has remained volatile in recent quarters with growth stalling in 1Q14, suggesting the economy is struggling for momentum. The unemployment rate is also elevated and the number of jobless people has reached a record high. There is also uncertainty over growth prospects in the medium term and on the impact of reforms already announced. France continues on a gradualist approach to economic reforms. Since coming into office in 2012, the socialist government has set out and started to implement a reform agenda. More recently there has been an increasing focus on supply side economic reforms. Among the main policy measures is the EUR10bn planned cuts in payroll tax, which is in addition to the EUR20bn tax credit to firms announced in 2012. Together they are commensurate with the increase in overall business taxation since 2010. Further measures to boost margins were also announced in a EUR25bn stimulus package for firms and households. However, the quantitative impact of recent structural reforms is uncertain, and in Fitch's view does not appear sufficient to reverse the trends in long-term growth and competitiveness. While the current account balance has generally been on a deteriorating trend for the past 10 years on France's loss of export market share, at 1.3% of GDP in 2013 the deficit is not excessive. Fitch projects the deficit to stabilise around current levels. However, France's net external debt is significantly higher than most rating peers. There is reduced risk from contingent liabilities. The financial sector in recent years 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 economic recovery of the single currency area. Fitch judges financing risk to be low, reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility. France has a wealthy and diversified economy. It has a track record of relative macro-financial stability including low and stable inflation. It also benefits from moderate levels of household debt and a high household savings rate. Political stability is entrenched by strong and effective civil and social institutions. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently broadly balanced. The main factors that could lead to a negative rating action, individually or collectively, are: - Public finances weakening compared with Fitch's baseline projections or greater uncertainty over the implementation of budget consolidation efforts. - Continued deterioration in competitiveness and decreased confidence in growth prospects. The main factors that could lead to a positive rating action, individually or collectively, are: - Sustained lower budget deficits, leading to a track record of significant decline in the GGGD ratio from its peak. - A significantly stronger economic recovery of the French economy and greater confidence in medium-term growth prospects owing to sustained implementation of deep and comprehensive structural reforms. KEY ASSUMPTIONS Fitch expects the French economy to grow at a slower pace than the eurozone aggregate for the first time in four years in 2014 at 0.7%. Economic growth will remain below France's long-term potential until 2016. Fitch expects the government to stick close to its budgetary targets, with modest slippage. Our deficit projections are slightly higher than official forecasts owing to weaker growth, more cautious assumptions on the elasticity of revenue to GDP and uncertainties on spending cuts. Fitch does not expect any additional debt increasing support to the eurozone than already budgeted. France's contribution to the financial assistance programmes of the single currency will climb to EUR68.7bn in 2014 (3.3% of GDP) mostly on further disbursements to Greece from the EFSF and capital contributions to the ESM. Fitch also does not expect further government debt raising interventions to support the French banking industry. Fitch assumes France and the eurozone as a whole will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. However, the weak inflationary environment will make the balance-sheet adjustment of the public and private sectors more challenging over the medium term. The agency assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Contact: Primary Analyst Enam Ahmed Director +44 20 3530 1624 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ed Parker Managing Director +44 20 3530 1176 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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