FITCH PLACES FRANCE'S 'AA+' IDR ON RATING WATCH NEGATIVE - RTRS
Full text from Fitch below:
LONDON, October 14 (Fitch) Fitch Ratings has placed France's 'AA+' Long-term foreign and local currency Issuer Default Ratings (IDR) on Rating Watch Negative (RWN). The issue ratings on France's unsecured foreign and local currency bonds have also been placed on RWN. At the same time, Fitch has affirmed the Short-term foreign currency IDR at 'F1+' and the Country Ceiling at 'AAA'.
Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's sovereign rating on France was 12 December 2014, but Fitch believes that developments in France warrant such a deviation from the calendar and our rationale for this is laid out below.
Fitch will seek to resolve the RWN at its next scheduled rating review of France, with the outcome to be published on 12 December 2014.
KEY RATING DRIVERS
The RWN reflects the following factors and their relative weights:
On 1 October, the French government presented its draft 2015 budget and confirmed a material increase in its budget deficit targets. The slippages were initially announced in August but the full details underpinning the new deficits were not available at that time. The government now projects the general government budget deficit at 4.4% in 2014 (previously in the April Stability Programme it was 3.8%) and at 4.3% in 2015 (previously 3.0%), both slightly worse than the 4.1% of GDP achieved in 2013. It has postponed its commitment to meet the headline EU fiscal deficit threshold of at most 3% of GDP from 2015 until 2017. France's budget deficit compares with a 0.2% surplus for the 'AA' category median.
Fitch commented at the time of its previous rating review in June that a weakening in public finances compared with our baseline projections or greater uncertainty over the implementation of budget consolidation efforts could trigger negative rating action. The agency's latest forecasts show wider fiscal deficits into the medium term, with a deficit of 3.3% of GDP in 2017, a negative variance of more than 1.5ppt compared with our previous projection. The French government's own forecasts show material deviations from prior forecasts. Previously, they had projected the deficit to fall to 1.3% of GDP by 2017. This has been revised up to 2.8% in the latest projections. The wider deficits have negative consequences for public debt dynamics.
Fitch now expects the gross general government debt (GGGD) to GDP ratio to peak two years later and higher at 99.7% in 2017 with a slower decline to 94.9% by the end of the decade. The revised projections for France compare with Fitch's previous forecasts in June of GGGD peaking at around 96% in 2015 from 93.5% in 2013 and falling below 90% by 2020. Even under the government's own updated forecasts, the capacity of the public finances to absorb shocks has been significantly reduced. The authorities project the debt ratio to peak higher at 98% in 2016 (previously 95.6% in 2014 and 2015) and fall to 97.3% in 2017 (previously 91.9%) and 92.9% in 2019. The projections compare with the 'AA' category median for GGGD of 37%. The only 'AA' range country with a higher debt ratio is Belgium (AA/Stable).
Risks to Fitch's fiscal projections remain on the downside owing to the uncertain outlook for GDP growth and inflation in the near term and the increased uncertainty over the government's ability to deliver on a fiscal consolidation path. The French High Council of Public Finance's (HCPF) opinion on the government's latest economic forecast was that the lower GDP growth rates projected for 2016-2017 were more realistic than previous forecasts but still reflect an optimistic view of the external environment and domestic investment potential. The HCPF's opinion on the government's fiscal projections was that there was a risk of deviation from the medium-term objective of lowering the structural deficit from 2.5% of potential GDP in 2013 to 0.4% by 2019. Reflecting these concerns, Fitch's medium-term growth forecasts are weaker and budget deficits wider than official projections.
The outlook for the French economy has deteriorated, impairing the prospects for fiscal consolidation and stabilising the public debt ratio. The French economy underperformed Fitch's and the government's expectations in 1H14 as it struggled to find any growth momentum, in common with a number of other eurozone countries. Fitch has revised down its near-term GDP growth projections to just 0.4% in 2014 and 0.8% in 2015 in the latest review, down from 0.7% and 1.2% previously. Continued high unemployment at 10.5% is also weighing on economic and fiscal prospects.
The on-going period of weak economic performance which started from 2012 increases the uncertainty over medium-term growth prospects. The French economy is expected to grow less than the eurozone average this year for the first time in four years. The quantitative impact of recent structural reforms is also uncertain, and in Fitch's view does not appear sufficient to reverse the trends in long-term growth and competitiveness. Therefore, we believe there are downside risks to France's long-term growth potential.
In Fitch's view, the latest deviations from budget targets and EU excessive deficit procedure commitments weaken fiscal credibility. This is the second time the French government has postponed meeting the EU 3% headline deficit threshold since end-2012. This is despite the introduction of a High Council of Public Finances and new fiscal framework in France and the reinforced EU policy framework. The reaction of the European Commission to the revised French targets remains to be seen. The revised projections for larger fiscal deficits are largely explained by the weaker growth and inflation outlook and technical adjustments to tax credits, but France could nonetheless be asked by the Commission to adopt further reforms or additional fiscal tightening in response. However, Fitch does not expect any sanction or request by the European Commission to materially affect the path of France's debt dynamics.
The creditworthiness of France is supported by the following main factors:
France has a wealthy and diversified economy. It has a track record of relative macro-financial stability including low and stable inflation. It also benefits from moderate levels of household debt and a high household savings rate. Political stability is entrenched by strong and effective civil and social institutions.
While the current account balance has generally been on a deteriorating trend for the past 10 years due to France's loss of export market share, at 1.3% of GDP in 2013 the deficit is not excessive. Fitch projects the deficit to stabilise around current levels. However, France's net external debt is significantly higher than most rating peers.
Fitch judges financing risk to be low, reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility.
There is low risk from contingent liabilities. In recent years, the financial sector has been cleaning up its balance sheets, strengthening funding, liquidity, capital and leverage. The risks from the eurozone crisis management mechanism including the EFSF and ESM have also eased owing to the actions of the ECB and the on-going gradual economic recovery of the single currency area.
The RWN reflects the following risk factors that may individually or collectively result in a downgrade of the ratings:
- The absence of a material improvement in the projected trajectory of public debt dynamics following the publication of the European Commission's opinion on France's 2015 budget will likely lead to a downgrade of the ratings by one notch. The Commission is due to publish its opinion on the budget in November.
- In this context, Fitch will also review any new structural reform measures announced by the government up to the time of its next rating review in December to assess the extent of their potential impact on the outlook for growth and public debt dynamics.
In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 0.5% of GDP over the next 10 years, trend real GDP growth averaging 1.5%, an average effective interest rate of 2.7% and GDP deflator inflation of 1.5%. On the basis of these assumptions, the debt-to-GDP ratio would peak at 99.7% in 2017, before edging back to 87.8% by 2023.
Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. Fitch also assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term.
Fitch's projections for the French economy and public finances are based on the new European System of National and Regional Accounts (ESA 2010) which replaced ESA 1995 this year. The changes for example led to the decline in GGGD to 92.2% of GDP in 2013 from the previous 93.5% at the time of the June rating review.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome.
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Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available atwww.fitchratings.com.
Applicable Criteria and Related Research: France
Sovereign Rating Criteria