Dagong Maintains the Sovereign Credit Ratings of France at A with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
April 19, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided to maintain both local and foreign currency sovereign credit ratings of the French Republic (hereafter referred to as "France") at A, each with a stable outlook. The country’s political situation tends towards stability following the general election; additionally, the domestic financial system is relatively sound, economic growth is picking up, fiscal deficits are narrowing, and the government debt burden registers a slow growth rate, thus government solvency is stable.
The main reasons for maintaining the sovereign credit ratings of France are as follows:
First, the French political situation is tending towards stability, yet the implementation of policies faces obstruction, while the financial system is sound across the board. In May 2017, President Macron was elected to lead the country while his centrist La Republique En Marche party secured over a half of the parliamentary seats available, hence bringing political stability in the short term. However, confronted with differing interests of and requests from trade unions, as well as traditional ruling parties and so forth, the national and economic policies of France will meet varying degrees of opposition, so key areas - including the labor market - will defer reform or make slow progress. In terms of credit environment, strident regulations afford the banking sector greater ability to guard against risks, thus asset quality improves while the financial system remains sound overall.
Second, the short term will see France sustain moderate growth while various structural factors still limit its growth potential in the medium and long term. Thanks to stronger domestic demand, in 2017, the economy of France expanded by 1.8%. The year-end of 2017 witnessed France launch a five-year investment plan and the country plans to heighten the threshold of corporate tax to ease enterprises’ tax burden in 2018. It is forecasted that the aforementioned policies will allow the French economy to grow by 2.0% in 2018, which will decline to 1.6% in 2019, given the European Central Bank’s (ECB) tightened liquidity. In the medium and long term, relatively heavy private debt loads, a rigid market reform, and relatively high unemployment among youngsters and low-skilled workers will be unfavorable to the improvement of growth potential. Therefore, it is expected that in the medium and long term, French growth will average 1.7%.
Third, the fiscal deficit continues shrinking, thus repayment sources are stable. In the short term, fiscal consolidation policies to cut social welfare and reform pensions will progress slowly, yet moderate growth, a higher environmental tax rate and enhanced tax collection will generate more tax revenues. Hence, it is expected that in 2018, the French general government primary fiscal deficit will remain 1.2% and could fall to 0.9% in 2019, while the ratio of financing needs to fiscal revenues at the same period is 16.5% and 17.9%, respectively. Nevertheless, given Europe’s loose monetary policy, comparatively low financing costs can assure stable repayment sources.
Fourth, government solvency is stable. Thanks to economic recovery and fiscal consolidation, it is projected that in 2018 and 2019, the French general government debt burden will hit 96.9% and 97.2%, while the ratio of that burden to fiscal revenues at the same period will reach 179.5% and 179.7%, respectively. Debt growth will tend towards slowing down and is likely to enter into the downward channel in 2020. French government debt is mainly comprised of euro-denominated debt with a rational debt structure, thus government solvency is stable.
In the short term, although the new French government will make slow progress in reform, yet the continued improvement in domestic demand will bring about moderate economic growth. Given the sufficient liquidity released by ECB and fiscal consolidation, government debt growth will indicate a further slowdown, thus government solvency is stable. In consideration of all factors discussed above, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for France in the following one to two years.