Bangkok--24 Dec--Standard & Poor's
- The ratings on France continue to reflect our views of the wealth and depth of France's economy as well as its political environment, which we regard as stable and oriented toward prudent economic policies.
- We are affirming our 'AAA/A-1+' sovereign credit ratings on the Republic of France.
- The stable outlook reflects our opinion that the French government will sustain its budgetary consolidation effort and could reduce the general government deficit to approximately 3% of GDP in 2013.
Standard & Poor's Ratings Services said today that it has affirmed its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the Republic of France. The 'AAA' transfer and convertibility assessment is unchanged. The outlook is stable.
"The ratings reflect our views of the wealth and depth of France's economy as well as its political environment, which we regard as stable and oriented toward prudent economic policies," said Standard & Poor's credit analyst Marko Mrsnik.
In our opinion, France's growth prospects are supported by its economy's openness and resilience, its highly skilled and productive labor force, and its solid and efficient financial sector. Partially offsetting these strengths are France's relatively sizable tax burden and general government debt, and its labor market rigidities, though the government is addressing the latter through structural reform measures.
Following its GDP contraction in 2009, France's economy has been recovering in 2010, and we anticipate real GDP growth of 1.6% for the full year. In our view, France's growth dynamics since the onset in 2008 of the economic and financial crisis evidence the economy's resilience in the face of significant external shocks--a resilience reinforced by the government's fiscal stimulus program and the European Central Bank's loosening of its monetary policy. While the French government's planned withdrawal of the fiscal stimulus in 2011 will, in our view, restrain domestic demand, we expect the economy in 2011 to grow broadly at the same pace as in 2010--1.7%--on the back of what appears to be steadily rising domestic demand (though more slowly than previously) as investment begins to increase following two years of moderate decline.
We anticipate a general government deficit of 7.7% of GDP in 2010, declining to just below 6.2% in 2011. Our 2011 estimate is largely in line with the government's target of 6% of GDP, with the difference being explained by our lower forecast (than the government's) of France's underlying economic growth and the resulting impact on the budget. We believe that the government's proposed strategy, mainly involving withdrawing its fiscal stimulus, reducing tax exemptions, and complying with its three-year freeze on central government spending, will likely be effective in reducing the deficit to the target level in 2011. Consequently, we forecast an increase in gross debt to about 86% of GDP in 2011, from about 83% estimated in 2010. In the medium to long term, we believe that the government's recently adopted pension reform program--which includes an increase in the retirement age, an extension of the required contribution period, and an increase in taxes related to pensions--should lead to savings in social security outlays.
In its medium-term stability program, the government has committed itself to reaching a deficit of 3% of GDP in 2013. In addition to achieving the anticipated 1.7% growth figure, meeting this target will likely depend on the government implementing additional structural budgetary measures. In our view, the budgetary measures implemented to date will likely be insufficient to achieve the proposed 3% target. That said, we believe that the government will likely adopt further deficit and debt reduction measures, despite what we view as risks of political maneuvering in the wake of the 2012 presidential and general elections. In this respect, we note that the government managed to push through its pension reform program largely unscathed, despite heightened social tensions and political sensitivity.
"The stable outlook is based on our view of the French government's substantial achievements with its budgetary consolidation strategy, enabling it to meet its fiscal targets through 2013," said Mr. Mrsnik.
If economic growth is more in line with our forecasts than this those of the government, we believe that the government would likely take additional fiscal measures to achieve its targets in order to stabilize the government debt burden. The stable outlook also reflects our view that the government will pursue structural reforms to build the foundations for improving the economy's competitiveness and enhancing the economy's growth potential. If the government fails to meet its budget deficit targets, the long-term sovereign credit rating could come under downward pressure.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
Sovereign Credit Ratings: A Primer, May 29, 2008.
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Moritz Kraemer, Frankfurt (49) 69-33-99-9249