June 20, 2017 / 2:20 PM / a month ago

CORRECT: Fitch: French Election Boosts Reform Prospects

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(The following statement was released by the rating agency) LONDON, June 20 (Fitch) This report, originally published on 19 June 2017, has been amended to correct the size of the investment plan, and clarify the reference to planned expenditure savings. All other content is as of the original publication date. France's National Assembly election has provided new president Emmanuel Macron with parliamentary backing to enact his reform programme, Fitch Ratings says. Implementing the programme would be positive for growth and hence for France's public finances, but it may still face opposition outside parliament. The two-round election has given Macron's La Republique En Marche! (EM) party a large majority with 308 out of 577 seats (53.4%), and another 42 seats for the centrist EM ally Democratic Movement party, giving the president 350 seats (60.7%). It underscores the breakdown of traditional party politics, with the previously dominant Socialist and Republican parties winning a combined total of 142 seats, down from 474 in the previous parliament. EM's large majority ensures parliamentary backing for the president's centrist programme, which features labour market reforms, a EUR50 billion investment plan, and some tax cuts, including a reduction in corporate tax to 25% from 33%. However, as in the presidential election, a high abstention rate (of 57% in the second-round relative to an average of 37% since 1993) suggests that the outcome may overstate the level of public endorsement of Macron's proposals. An early test of the new administration's ability to deliver will be its labour market reforms. Proposed measures include allowing negotiations to be conducted in-house and directly with employers rather than negotiations with unions at national or branch level, capping severance packages in cases of unfair dismissal, reducing employee and employer contributions, and cutting labour costs through incentives for permanent contract hiring. We think these would contribute to a reduction of France's 9.6% unemployment rate (versus a ratings peer median of around 4%). However, some attempts by previous governments to pass similar reforms have been met with strong resistance from labour unions and the general public, and have triggered protests and strikes that have resulted in some measures being abandoned or watered down. The president has been in consultation with labour unions since May and is expected to issue detailed proposals reflecting these consultations in the coming weeks. Civil opposition groups and unions, including the French Democratic Confederation of Labour, have said they will hold protests against Macron's proposals, if their counter-proposals and interests are ignored. Macron's plans for stronger eurozone integration could also face popular resistance, after 48% of first-round presidential election voters supported anti-EU candidates in May. Stronger growth would be positive for France's sovereign credit profile because it would improve the public finances, which remain a major weakness in France's 'AA'/Stable rating. Budget deficits spurred by high government spending have resulted in general government debt reaching 96% of GDP in 2016, limiting France's ability to deal with shocks. France's economy has underperformed the eurozone in the last two years, but growth momentum has improved as the temporary, terror-and-weather related weakness of mid-2016 fades (GDP increased by 0.4% qoq in 1Q17, following 0.5% in 4Q16). France should also benefit from the broader recovery in the eurozone. President Macron's stated commitment to reducing the budget deficit to below 3% of GDP suggests that he will strive to meet the European Commission deadline for closing the "excessive deficit" this year. Macron's fiscal plans, which will be revealed in more detail in the 2018 budget, include a reduction in household and business taxes worth at least EUR20 billion per year (around 1% of GDP), lower corporate tax, expenditure savings of up to EUR60 billion (2.5% of GDP), and a reduction in civil service posts. Our next scheduled review of France's sovereign rating is on 28 July. Contact: Maria Malas-Mroueh Director, Sovereigns +44 20 3530 1081 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Ed Parker Managing Director, Sovereigns +44 20 3530 1176 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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