March 3, 2017 / 9:13 PM / 9 months ago

Fitch Affirms France at 'AA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, March 03 (Fitch) 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 long- and short-term local currency bonds have also been affirmed at 'AA'/'F1+'. Fitch has affirmed the Short-Term Foreign and Local Currency IDRs 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, a track record of macro-financial stability, and strong and effective civil and social institutions, with a high general government debt/GDP ratio as well as a large fiscal deficit. The ratings are supported by the strong financing flexibility of France, as a core eurozone member with access to the eurozone's deep and liquid capital markets, and with government debt entirely denominated in euros. Budget deficits spurred by high government spending have resulted in general government debt that is projected by Fitch to peak at close to 98% of GDP in 2018, limiting France's ability to deal with shocks. Preliminary data suggests that the 2016 budget deficit target of 3.3% of GDP was met. For 2017, a less ambitious draft budget relative to the 2016 Stability Programme, a lower growth projection than used in the budget law, and risk of pre-election slippage, led Fitch to revise up its deficit forecast in its December 2016 review to 3.2% of GDP, above the government and European Commission targets. Fitch will reassess its fiscal forecasts following presidential elections this spring, taking into account the policy direction of the incoming administration, as well as Fitch's updated assessment of the economic outlook. Real GDP grew 1.2% in 2016 (non-calendar adjusted). A modest pick-up in 2017 will continue to be supported by domestic demand, underpinned by the labour market's recovery, while the boost to real disposable incomes from low energy prices will gradually diminish. Fitch is projecting GDP growth of 1.4% in 2017 (0.2pp higher than projected in December), and 1.2% in 2018 (unchanged), with the slight upward revision reflecting positive spill-overs expected from stronger growth in key trading partners, and an expected rebound in the aeronautics and agricultural sectors following a weak performance in 2016. Latest polls continue to suggest that a victory for Marine Le Pen from the National Front (FN) party in the upcoming two-round elections (23 April and 7 May) is unlikely; the polls give centrist candidate Emmanuel Macron a lead of around 24pts over Le Pen in the second round and centre-right (LR) Francois Fillon a lead of around 16pts. However, the surge in anti-establishment sentiment globally, reflecting a host of grievances including economic malaise and fears over security and immigration, increases the risk of a political shock in France. The emergence of Macron as a potential second-round contender to Le Pen has altered the election dynamics since Fitch reviewed France in December 2016. With the final vote still more than nine weeks away, Fitch does not discount the possibility of another shift in the political contest. Based on public statements, likely policies for Macron and Fillon would include, to varying degrees, a reduction in public spending and tax relief measures. Fillon's programme also includes an increase in the VAT rate, abolishing the 35-hour work week, and raising the retirement age. Macron, in contrast, has promised an extension of welfare benefits and confirmed his commitment to EU fiscal integration. As was the case for the Hollande administration, Fitch expects that reform implementation would be challenged by strong political and social opposition in the context of frustrations with moderate growth and still high unemployment. Fitch would expect to review France's ratings in the event of a Le Pen victory in the second round of the elections, taking into consideration heightened policy uncertainty and potential market volatility. Le Pen's policy agenda is likely to face institutional constraints, with polls suggesting a centre-right majority in the June legislative elections that would deliver the FN a minority position in parliament leading to a 'cohabitation' scenario. A low probability but high impact event for France and Europe would be if Le Pen were to win the presidency and overcome constitutional hurdles to follow through on her vow to hold a referendum on France's exit from the EU. The current government has implemented structural reforms that have contributed to a reduction in labour and production costs (including through corporate tax credits and decreased employers' social contributions). The government has also implemented measures aimed at market deregulation, including through a series of labour market reforms, of which the August 2016 labour law addresses rigidities mainly by providing economic dismissal guidelines and allowing for firm (versus branch) level collective bargaining. France has run moderate current account deficits, which have averaged less than 1% of GDP for the 10 years to 2015. After having achieved an almost balanced position in 2015, the current account is expected to have worsened in 2016, reflecting temporary factors including weak external demand, aeronautic delivery delays, low agricultural harvest, and a rise in capital imports (ahead of the expiry of a government over-amortisation scheme). In 2017-2018, Fitch expects the unwinding of favourable conditions, particularly low oil prices, to weigh on the current account balance. Net external debt is estimated by Fitch at 34.4% of GDP at end-2016, compared with a creditor position of over 40% for the 'AA' peer group. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns France a score equivalent to a rating of 'AA' 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, which means Fitch does not expect developments with a high likelihood of leading to a rating change. However, the main factors that could lead to negative rating action, individually or collectively, are: - An electoral outcome that adversely affects the coherence and credibility of economic policymaking, economic performance, public finances, or financing flexibility; - 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 smaller 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 Fitch's base case is for France to remain a member of the EU and the eurozone. Our long-run debt sustainability calculations are based on assumptions of GDP growth averaging 1.4% for 10 years from 2015, a GDP deflator of 1.4%, and an average balanced primary budget position for the same 10 years. Fitch expects the global economy to perform broadly in line with assumptions set in its Global Economic Outlook (November 2016), in particular, of eurozone GDP growth of 1.4% in 2017 and 2018. Contact: Primary Analyst Maria Malas-Mroueh Director +44 20 3530 1081 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Marina Stefani Associate Director +44 20 3530 1809 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 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 Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020054 Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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