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Fitch Affirms Germany at 'AAA'; Outlook Stable
March 10, 2017 / 9:06 PM / 9 months ago

Fitch Affirms Germany at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, March 10 (Fitch) Fitch Ratings has affirmed Germany's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'AAA' with Stable Outlooks. Fitch has affirmed the Short-Term Foreign and Local Currency IDRs at 'F1+' and Country Ceiling at 'AAA'. The long- and short-term issue ratings on Germany's senior unsecured debt have also been affirmed at 'AAA'/'F1+' respectively. The 'AAA' ratings primarily reflect Germany's diversified, high value-added economy, strong institutions and history of sound public debt management. A large and sustained structural current account surplus supports the country's net external creditor position. Government debt, at 68% of GDP in 2016, is higher than the 'AAA' median of 42% but is on a firmly downward path. The 2016 general government surplus was above target, at 0.8% of GDP, and marginally higher than the 2015 surplus of 0.7%. Debt interest costs fell by a further 0.2% of GDP, while strong tax revenue and lower-than-budgeted migrant-related expenditure accounted for the fiscal outperformance. Fitch forecasts only a small reduction in the general government surplus to 0.6% of GDP in 2017 and 0.5% in 2018. This is based on expectations of further robust revenue growth on the back of above-trend GDP growth and positive labour market dynamics, together with continued expenditure restraint. General government debt has fallen steadily from a peak of 79.9% of GDP in 2012 to an estimated 68.1% in 2016, having spiked by 15pp after the financial crisis. Germany's broad-based political commitment to a balanced budget and the constitutional debt brake rule provide a strong anchor for sustained debt reduction, and Fitch forecasts a further decline to 62.6% of GDP in 2018. According to our long-term debt sustainability analysis, which assumes a gradual fall in the primary surplus to 0.9% of GDP in 2025 from 2.2% in 2016, government debt falls below the 60% of GDP Maastricht threshold early in 2020 and below 50% in 2025. The current account surplus increased to 8.5% of GDP in 2016, from 8.3% the year before, largely due to positive terms of trade. Net primary income also remained high in 2016, at 2% of GDP. Germany's current account surplus has averaged 7.6% of GDP since 2012, strengthening the net external creditor position to 17% of GDP in 2016, which compares favourably with the 'AAA' median of 10%. We forecast a trade-driven moderation in the current account surplus, to 8.1% in 2017 and 7.8% in 2018. GDP rose 1.9% in 2016, compared with 1.7% the year before, driven by stronger consumer spending and investment, and Fitch forecasts growth of 1.8% in 2017 and 1.7% in 2018. The dampening effect of higher inflation on real wages this year is mitigated by strong household fundamentals, confidence, and labour market dynamics. The unemployment rate fell to 4.1% in 2016 from an average 4.6% in 2015, while monetary stimulus is also gaining more traction. Uncertainty related to Brexit negotiations and US trade policy is expected to weigh on net trade, with the German economy exposed to downside risks to external demand. Longer-term, Fitch maintains its forecast that GDP growth will slow to a trend rate of around 1.3%, largely due to unfavourable demographics. The impact of the 0.9 million asylum seekers that arrived in 2015 is likely to be mildly positive for growth. New migrant inflows have since fallen to close to a third of the 2015 rate and the average for 2012-14. Fitch expects a rise in average HICP inflation in 2017 to 1.4%, mainly due to oil price dynamics. Core inflation is expected to be broadly flat, at close to 1.1%, with still moderate wage increases of around 2.5%. The pace of house price growth quickened in 2H16, averaging 7.6% for the year as a whole, but risks of a sharp correction are mitigated by still limited household credit growth, low interest rates supporting affordability, and the prevalence of long-term fixed-rate mortgages. Fitch's rating outlook for most German banks and the sector as a whole is stable. Loan impairment charges are expected to remain low this year, supported by banks' strong domestic focus (except for those with large shipping exposures). This will help capital generation, which increased slightly in 2016 and remains 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. The recent closing of the gap in public support between the SPD and the CDU/CSU has made the outcome of September's federal elections more uncertain. Polls also indicate a wider distribution of seats after the election, and several coalition configurations are possible, including another grand coalition. In all likely scenarios, either CDU or SPD would be the leading coalition partner, and we expect broad continuity in Germany's fiscal framework and overall economic 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 a downgrade 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-term debt sustainability analysis assumes a primary surplus averaging 1.2% of GDP to 2025, average GDP growth of 1.4%, 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. 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: peter.fitzpatrick@fitchratings.com. 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