Fitch Affirms Germany at 'AAA'; Outlook Stable

Fri Jul 18, 2014 4:16pm EDT

(The following statement was released by the rating agency) LONDON, July 18 (Fitch) Fitch Ratings has affirmed Germany's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Germany's unsecured foreign and local currency bonds have also been affirmed at 'AAA'. Fitch has also affirmed the Short-term foreign currency IDR at 'F1+' and Country Ceiling at 'AAA'. KEY RATING DRIVERS The affirmation of Germany's sovereign ratings reflects the following key rating drivers: The general government debt to GDP ratio (GGGD) has already started falling in Germany, unlike its 'AAA' rated eurozone peers and France (AA+/Stable), UK (AA+/Stable) and the US (AAA/Stable). The debt ratio eased to 78.4% in 2013 from 81% in 2012. The outcome was slightly better than Fitch's estimate of 79.4% and the improvement was partly driven by the winding-down of the portfolios of Germany's two state-owned bad banks. Germany continues to have the components of a declining public debt path. The economy is growing, the budget position is relatively favourable and nominal interest rates are low. The downward trajectory of GGGD improves the shock-absorbing capacity of the sovereign. Furthermore, while the debt ratio remains elevated compared with the 'AAA' median of 45% and 'AA' median 37%, it is within the range considered by Fitch to be consistent with a 'AAA' rating for a sovereign with otherwise strong credit fundamentals. The government's targets to reduce public debt to below 70% of GDP by 2017 and to less than 60% within ten years are plausible. The government will continue to meet medium-term fiscal targets with a margin. The general government structural balance remained in positive territory in 2013 after moving into a surplus for the first time since re-unification in 2012. This is well within the 0.5% of GDP deficit medium-term objective. For a third consecutive year, the Federal budget was also below the 0.35% of GDP deficit limit set in the German constitution but starting from 2016. The government managed a general government fiscal surplus for the second consecutive year in 2013, a significant improvement from the 4.2% of GDP deficit in 2010. Official forecasts for headline balanced budget up to 2016 are realistic. Fitch expects the pace of economic expansion in Germany to accelerate, with domestic demand the main engine of growth. The private sector does not suffer from any major macro imbalances. The agency forecasts GDP to grow by 2% in 2014 on the back of the healthy opening quarter, with the pace maintained into next year. This is better than the 1.6% previously expected for both 2014 and 2015. The introduction of the minimum wage next year will likely have a small positive impact on consumption and raise the price level in the short term, but could also lead to a small increase in unemployment. Fitch continues to believe estimates of potential growth between 1.25% and 1.5% are plausible. The projected shrinking of the population is a key factor behind Germany's relatively low long-term potential growth. However, if recent high net immigration persists, it could boost growth prospects somewhat. The risk from contingent liabilities from the eurozone crisis has diminished further on the economic recovery and ECB policy and improvements in regional governance. This is also reflected by recent eurozone sovereign upgrades of ratings and Outlooks. Germany's contribution to the EFSF has already added about 2pp to the government debt to GDP ratio and the EFSF's total commitments add 1.3% of GDP to contingent liabilities. New programmes to support eurozone countries will now be funded via the ESM. However, commitments to the ESM are capped at German contributions paid in capital, which is around 0.8% of GDP. The risk to public finances from the prospects of further sovereign support for German domestic banks remains low. German banks have improved capitalisation and funding conditions remain favourable for most of them. They have also been repaying capital injected by SoFFin (Financial Market Stabilisation Fund), which has no outstanding guarantees. Like many peers, an ageing population will increase the sustainability challenge for German public finances in the medium to long term. However, the current favourable fiscal position means the required adjustment is not as large as for other countries. The European Commission estimates that an improvement in the budget balance of 2.1% of GDP will be needed to ensure long-term sustainability of German public finance on a no policy change basis. This compares with the EU average of 2.4%. Recent announcements to changes to the pension system are not yet fully factored-in but are unlikely to change the gap materially. Germany has a high-value added economy with a competitive manufacturing sector and effective political, civil and social institutions. It is the primary benchmark issuer for the eurozone, which gives it significant fiscal financing flexibility. As a consequence of safe-haven capital inflows, yields are low across the curve. Germany is a significant net external creditor with one of the strongest net international investment positions in the world and a large current account surplus. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could individually or collectively, result in a downgrade of the ratings include: - Re-intensification of the eurozone crisis. As the largest contributor to any eurozone rescue package, and financial sector exposure to peripheral eurozone economies, Germany remains exposed to the risks of spill-over from the sovereign debt crisis. - GGGD approaching 90% would start to put pressure on the rating, although Fitch does not view such an outcome as likely. Economic stagnation, a weakening in the underlying budgetary position, and/or further state support to the banking sector would lead to further increases in public debt over the medium term. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions. Fitch believes the authorities will closely implement their budgetary plan. While future asset sales by the state owned bad banks are likely their timing and size are unclear. Fitch therefore does not assume any such debt reducing transactions in its projections for public finances. In its debt sensitivity analysis, Fitch assumes an average primary surplus of 2% of GDP, trend GDP growth of 1.5%, GDP deflator growth of 1.7%, and a nominal effective interest rate of 2.7%. Under these assumptions, gross government debt as a share of GDP would decline to below 60%% of GDP by 2023. Fitch 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. Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. Fitch also does not expect any further increase in government debt from recapitalising the banking sector, for example following the ECB's asset quality review. Rather, as the workout of nationalised institutions progresses, the sale of existing assets could reduce public debt more than projected under Fitch's baseline. There will be changes to the accounting methodology for GDP and government debt by the end of this year. Fitch will base its forecast on the revised data after all countries in the EU switch to the new ESA2010 methodology by September. Contact: Primary Analyst Enam Ahmed Director +44 20 3530 1624 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gergely Kiss Director +44 20 3530 1425 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS OTHER THAN THROUGH THE MEDIUM OF ITS PUBLIC DISCLOSURE. Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. 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'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.