September 1, 2017 / 8:08 PM / a year ago

Fitch Affirms Germany at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 01 (Fitch) Fitch Ratings has affirmed Germany's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The 'AAA' ratings reflect Germany's diversified, high value-added economy, strong institutions and history of sound public debt management. A large structural current account surplus, above 7% of GDP since 2014, supports the country's net external creditor position. Government debt, at 68% of GDP in 2016, is higher than the 'AAA' median of 41% but is on a firmly downward path. Fitch forecasts general government surpluses of 0.6% of GDP in 2017 and 0.4% in 2018 and 2019, within Germany's Stability Programme targets and only slightly lower than last year's surplus of 0.8%. Revenue/GDP is expected to remain broadly flat this year as higher receipts from buoyant economic conditions are offset by cuts to income tax rates. Despite a further fall in debt interest costs, overall expenditure/GDP is forecast to increase by 0.2pp in both 2017 and 2018, partly due to higher health, pension and social expenditure, and with a refund of a nuclear fuel tax costing 0.2% of GDP this year. General government debt fell from 79.9% of GDP in 2012 to 68.1% in 2016 and we forecast a further reduction to 62.5% in 2018. Germany's constitutional debt brake rules, together with broad-based political commitment to a balanced budget, provide a strong anchor for sustained, medium-term debt reduction. Under our debt sensitivity projections, which assume a gradual decline in the primary surplus, from 2.1% of GDP in 2016 to 1.0% in 2026, public debt falls below the 60% Maastricht threshold at the beginning of 2020 and below 50% in 2026. Fitch forecasts GDP growth this year will match the 2016 rate of 1.9%, and moderate to 1.7% in 2018 and 1.4% in 2019. Strong household fundamentals, rising consumer confidence, and positive labour market developments continue to support private consumption. Employment growth quickened somewhat in 1H17, to 1.5%, while the unemployment rate edged down to 3.8% in June, from 4.2% a year earlier. This is partly offset by the dampening effect on real income growth of higher average HICP inflation, which we forecast to rise to 1.7% this year from 0.4% in 2016, mainly due to higher oil prices. Rising house prices, up 6% in the year to July, are having a positive wealth effect, with risks of a sharp correction mitigated by excess demand, still-moderate household credit growth and a long average duration of low, fixed-rate mortgage rates. Investment has also picked up this year, helped by strong housing construction and business confidence. Unlike in 2016, net trade is expected to positively contribute to GDP growth this year and next, but weaker external demand, including from uncertainties over Brexit negotiations and US trade policy, represents a downside risk to the forecast. Longer term, we assess Germany's trend growth at 1.3%. Fitch forecasts a moderate reduction in the current account surplus from 8.3% of GDP last year, to 8.0% of GDP in 2017 due to weaker terms of trade, and to 7.5% in 2019 driven by lower net export volumes as domestic demand strengthens. Other components of the current account have been broadly stable so far in 2017, and Fitch expects the net income surplus to remain close to 1.7% of GDP. Germany's net external creditor position is forecast to further strengthen, to 20.4% of GDP in 2017, compared with 1.9% in 2012 and the 'AAA' peer median of 14.8%. Fitch's rating Outlook on most German banks and the sector as a whole is Stable. Loan impairment charges are expected to remain low this year, helping support capital generation, which was slightly higher in 1Q17 than six months earlier, and is unevenly distributed across the sector. The key challenges remain ultra-low interest rates weighing on profitability, regulatory pressures, relatively high cost bases, and intense competition. Private sector credit has risen steadily, contributing to the above-trend GDP growth. The CDU/CSU is currently around 15pp ahead of their SPD coalition partner in the opinion polls, making Chancellor Merkel the clear favourite to continue to head a coalition government following the federal elections on 24 September. A number of different coalition configurations remain possible, but we expect broad continuity in Germany's economic and fiscal policy. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Germany a score equivalent to a rating of 'AAA' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year-centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. 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 negative rating action include: - A marked increase in the general government debt/GDP ratio; - Crystallisation of contingent liabilities, for example further state support to the banking sector or to other eurozone countries. As a member of the currency union, Germany is financially exposed to a re-intensification of the eurozone crisis. KEY ASSUMPTIONS - Fitch's long-run debt sustainability calculations are based on a primary surplus averaging 1.2% of GDP from 2017-2026, average GDP growth of 1.3%, GDP deflator inflation of 1.8%, and a gradual increase in marginal interest rates from 2017. - Fitch does not assume any debt-reducing transactions such as from the sale of financial assets in its projections for government debt. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'AAA'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'AAA'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'AAA' Issue ratings on short-term senior-unsecured local-currency bonds affirmed at 'F1+' Contact: Primary Analyst Douglas Winslow Director +44 20 3530 1721 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Maria Malas-Mroueh Director +44 20 3530 1081 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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