Scope Ratings AG today confirms the French Republic’s long-term local-currency issuer rating at AA, following the release of its revised sovereign rating methodology, and converts its status from subscription to public. The agency also assigns a long-term foreign-currency issuer rating of AA, along with a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency was also rated at AA. All Outlooks are Stable.

Rating drivers

The ratings are underpinned by France’s euro area membership with a large common market, a strong reserve currency, an independent European Central Bank effectively acting as a lender of last resort, and an economic governance and macro prudential framework which supports credible macroeconomic policies. Scope believes that these are important elements which reflect better protection of the euro area from adverse shocks, underpinning sovereign creditworthiness of member states.

France’s AA sovereign ratings are supported by a highly diversified and wealthy economy, the second largest in the euro area. A highly developed and efficient institutional framework together with robust macro-financial stability also constitute positive rating factors. The management of government debt benefits from French government bonds’ international 'safe haven' status, which provides proven market access for debt refinancing at relatively moderate costs even in times of market turbulence.

French economic activity has remained substantially below long-term averages in recent years. Scope believes there is potential for a stronger economic recovery in the near term. After real GDP growth of 1.2% in 2016, economic activity is set to accelerate thanks to a pick-up in euro area and world trade. Real GDP is forecast to grow by 1.4% and 1.7% for 2017 and 2018 respectively, which should have a positive impact on employment, with the unemployment rate expected to keep decreasing below 10% of the workforce. This will help to strengthen domestic demand.

Employment growth is also supported by policy measures to foster job creation by reducing the cost of labor and some of the rigidities that traditionally raise the cost of doing business in France. Both tax credits for employment and hiring subsidies have yielded positive results. The impact of recent government measures on corporate investment and competitiveness is credit positive. The return of economic activity to potential GDP growth rates of around 2% would help to put the public debt ratio back on a downward trend.

The French banking sector has demonstrated relative resilience during the global financial crisis and banks have increased capital ratios. This is also due to the fact that the stability of the French non-financial sector was less impaired by the global financial crisis than that of many other euro area countries due to lower levels of indebtedness. The private sector has continued in relative good health despite weak economic conditions. This has helped to keep risks to the government’s balance sheet in check.

Subdued GDP growth and low inflation have led to rising general government debt in relation to nominal GDP over the past years. The debt ratio is expected to stabilize at around 97% until 2018, gradually decreasing afterwards. Stronger economic growth would also help to further support the downward trajectory of the general government deficit in relation to nominal GDP. This deficit ratio has averaged 3.7% in the past four years and is set to flatten out at around 3% in 2017 and 2018.

The recent path of the deficit ratio, at levels substantially above 3%, is also a reflection of a gradual approach to fiscal consolidation taken during a fragile economic recovery. The expenditure-to-GDP ratio is set to decline only slightly, with public investment and interest rate payments projected to increase. Scope believes that France is likely to continue treading a narrow path between fiscal consolidation and economic growth in the medium term, given the large share of public spending at 57% of GDP – the largest in the EU.

Notwithstanding the recent improvements, France faces important challenges related to a weak competitiveness and low productivity growth. The substantial improvement in export performance slowed down in 2016 with the current-account deficit increasing to -1.1% of GDP. Current-account deficit is expected to only gradually improving over the medium term. Wage moderation is continuing, but the decline in productivity growth is preventing a faster recovery of France’s cost competitiveness. Scope expects that recent product market reforms and continued efforts to reduce red tape for firms could contribute to an improvement of non-cost competitiveness over the medium term.

After winning presidential and general elections, Scope believes that President Emmanuel Macron may be in a relatively good position to pursue his reform agenda for the French economy and to promote free trade and further European integration. Since the global financial crisis erupted in 2008, economic activity in France remained largely below potential, with average growth rates at around 1%. Mr Macron wants to act on corporate and labour taxation to create incentives for business and jobs. In order to finance tax cuts he intends to reduce public spending to around 52% of GDP, from the current 56.2%. This should also help to keep the deficit ratio within the governing rules for the euro and to initiate a downward trajectory for the public-debt ratio.

Scope believes that there is potential for the implementation of reforms to bolster the economic recovery and public-debt control. However, there is growing discontent in French society over the past decade following the 2008 crisis, with rising support for anti-establishment parties. This may complicate the reform process, despite Macron’s comfortable parliamentary majority, which will have to strike a fine balance between continuity, reform and vested interests.

Sovereign rating scorecard (CVS) and qualitative scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on relative rankings of key sovereign credit fundamentals, signals an indicative “AA” (“aa”) rating range for the French sovereign. This indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis. For France the QS signals relative credit strengths for the following analytical categories: 1) market access and funding sources; 2) vulnerability to short-term shocks; and 3) perceived willingness to pay.

Relative credit weaknesses are signalled for fiscal performance. Combined relative credit strengths and weaknesses generate no adjustment and signal a sovereign rating at AA for France.

The results have been discussed and confirmed by a rating committee.

For further details, please see the Appendix 2 in the rating report.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s assessment that the challenges which France faces are manageable. The ratings could be downgraded if: i) GDP growth proved weaker than expected and low inflation led to a rising share of general government debt relative to GDP; or ii) reform policies and implementation run into difficulties, leading to weaker medium-term growth and fiscal consolidation prospects.

Conversely, the ratings could be upgraded if fiscal consolidation and further structural reform efforts were to buoy up the economy leading to substantial declines in the public-deficit and debt ratios.

For the detailed research report please click HERE.

Rating committee

The main points discussed during the rating committee were: (1) France’s economic outlook, (2) public deficit and debt sustainability analysis, (3) resilience of the financial sector, (4) structural reforms, (5) latest electoral outcome and political developments, (6) sovereign peers considerations.

Methodology

The methodology applicable for this rating and/or rating outlook “Public Finance Sovereign Ratings” is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.
Rating prepared by Dr Giacomo Barisone, Lead Analyst
Person responsible for approval of the rating Dr Stefan Bund, Chief Analytical Officer
The ratings /outlook was first assigned by Scope as subscription rating on January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.
The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on French Republic are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation¹.

¹Editor's note: The above paragraph was corrected on 17 July 2017 following the publication of the credit rating action on 30 June 2017. The original wording was: Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. It was replaced with the following: As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on French Republic are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: Ministry of Economy and Finance, Insee, Banque de France, Agence France Trésor, High Council on Public Finances, IMF, OECD, European Comission, United Nations, World Bank, Eurostat, and Haver Analytics.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

Scope Ratings AG, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 161306, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund; Chair of the supervisory board: Dr. Martha Boeckenfeld.