Scope affirms France's AA/Stable long-term credit rating
For the updated report accompanying this review, click here.
Scope Ratings GmbH (Scope) has today affirmed the French Republic’s long-term local and foreign currency issuer and senior unsecured ratings to AA with Stable Outlook. France’s short-term issuer ratings were affirmed at S-1+ in local and foreign currencies, with Stable Outlook.
Summary and Outlook
France’s AA/Stable rating benefits from i) a large and diversified economy with high value-added activities supported by a good record of structural reforms pre-Covid-19; ii) its core euro area membership with an important role of EU founding member and leading guarantor of the European institutional framework; iii) favourable debt profile and excellent capital market access under favourable financing conditions; and iv) a sound and resilient banking sector.
Rating challenges include i) elevated public debt to GDP, sustained primary fiscal deficits, and weak fiscal consolidation record; ii) growing political fragmentation and polarisation reducing the capacity to materially raise GDP growth potential through structural reforms; and iii) persistent labour market bottlenecks undermining a firm decline in unemployment.
The Stable Outlook reflects Scope’s opinion that risks to the credit ratings over the next 12 to 18 months are balanced.
The ratings/Outlooks could be upgraded if, individually or collectively: i) a sustained fiscal consolidation puts public debt to GDP ratio on a firm downward path; and/or ii) the growth outlook improves significantly due for example to a strong reform momentum.
Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) a sustained deterioration of the fiscal outlook results in a firm upward trajectory of public debt to GDP ratio; and/or ii) the growth outlook significantly deteriorates compared to current projections due for example to a weaker reform momentum.
The first driver underlying Scope’s affirmation of France’s AA/Stable rating is the large and diversified economy driven by high value-added activities. France is the second largest economy in the euro area, with a GDP of EUR 2,500bn in 2021 (EUR 3,602bn for Germany; EUR 1,782bn for Italy). It benefits from a large and diversified economy driven by high value-added activities. Despite dependance on European trade and integration in regional value chains, the large economic size and diversification of the French economy increases its resilience to external shocks. Income per capita, as measured by GDP per capita at purchasing power parity, is high, at about USD 50,730 as of 2021, below Belgium (USD 58,930), but in line with the euro-area average and above the United Kingdom (USD 49,680).
France’s large economic size and elevated wealth levels are key strengths to cope with a worsening macroeconomic environment. Following a strong post-Covid-19 rebound (+6.8% in 2021), Scope forecasts real GDP growth at 2.6% in 2022, primarily reflecting strong carry over from the previous year and better-than-anticipated quarterly growth in the Q2 and Q3 2022, at 0.2% and 0.5% respectively. Scope expects the economic momentum to slow down, with real growth declining to 0.5% in 2023 as inflation takes a toll on real wages and household consumption, while higher financing costs and heightened uncertainty hamper investment1,2. Still, France’s growth prospects for 2023 compare favorably with peers such as Belgium (+0.2%) and the United Kingdom (-0.6%). The economic momentum benefits from structural improvements that resulted from pre-Covid-19 reforms, which helped raise the employment rate, the continued recovery of the tourism industry, as well as the significantly more benign price dynamics relative to peers. CPI inflation is expected to average at 5.8% in 2022, 4.3% in 2023, well below euro area averages, which the European Commission forecasts at 9.3% and 7.0%, respectively. This results primarily from the country’s lower exposure to energy shocks thanks to its nuclear-oriented electricity mix, despite uncertainties on electricity supply in Q1 2023, and from the large government support measures, including a freeze on regulated gas retail prices and a cap on electricity price increases for households and small businesses, which is gradually scaled down (a 15% price increase cap in 2023, after 4% in 2022) and increasingly targeted to the most vulnerable. According to estimates from the national statistical office INSEE, the ‘tariff shield’ on energy reduced CPI inflation by around 3 percentage points between Q2 2021 and Q2 2022.
The second driver supporting France’s AA/Stable rating is its core euro area membership reflected in its role of EU founding member and leading guarantor of the European institutional framework. This was further underlined recently as the French authorities demonstrated strong leadership since Russia’s invasion of Ukraine. The French Presidency of the Council of the European Union coordinated member states on sanctions against Russia and energy security, while being a driving player of the cooperation between EU and NATO. In addition, France’s core euro area member status and leading role in European institutions is an important credit strength relative to Belgium (AA-/Stable), including in the negotiations on the European fiscal framework and on the inclusion of nuclear in the EU Green Taxonomy. Moreover, France benefits from strong and effective institutions, as well as highly credible and effective monetary policy framework through the European Central Bank (ECB), which includes the strengthening of the Eurosystem’s toolkit via the Transmission Protection Instrument. In Scope’s view, these key credit strengths support France’s funding flexibility and debt affordability as its leadership role in Europe is intertwined with the country’s benchmark issuer status.
The third key strength supporting France’s AA/Stable rating relates to its favourable debt profile and excellent capital market access. Issuance of medium- and long-term debt (net of buybacks) has been revised to EUR 270bn in 2023 (EUR 260bn in 2022), despite a lower fiscal deficit (EUR -14.1bn at EUR 158.5bn in 2023), as Agence France Trésor has reduced its drawdown from the Treasury’s account to EUR 18.0 bn (from EUR 49.8bn). Funding conditions have tightened markedly in recent months, in line with the ECB monetary policy, with yields on 10-year bonds averaging at 2.77% in October 2022 (up from 0.31% in January). At the same time, conditions remain favourable, including relative to euro area peers. France’s excellent market access is supported by benchmark issuer status, as well as strong public financial management and innovation capacity, as demonstrated in May 2022 with the inaugural issuance of an inflation-linked green OAT€i (EUR 4bn; 0.10%; 2038). Inflation-linked bonds account for about 11% of outstanding government debt, which is significantly higher than Belgium (less than 0.2% of total) but lower than the United Kingdom (25%). Finally, a large share of fixed-rates securities (88% of total), long average maturity (8 years; 15 years for the United Kingdom), and significant Eurosystem holdings of government debt securities (22%) mitigate liquidity risks stemming from high public debt amid rising interest rates.
Finally, France’s AA/Stable rating is supported by a sound and resilient banking sector. Banks have a good level of shock-absorption capacity (CET-1 and liquidity coverage ratios of 15.3% and 147.2% as of Q2 2022) that could increase further as the High Council for Financial Stability signaled its intention to raise the countercyclical capital buffer rate from 0.5% to 1.0%3. The aggregate return on equity recovered close to pre-pandemic averages (6.2% as of Q2 2022) and the tightening of monetary policy moderately supports higher interest margins. Still, near-term headwinds, including rapidly rising deposit rates on regulated savings and higher cost of risk, as well as structural challenges, relating to elevated cost-to-income ratios, weigh on profitability. The banking sector’s strong financial position should enable it to support credit growth and accommodate a tighter access to liquidity as the ECB recalibrates the TLTRO III. The reliance of small and medium enterprises as well as non-financial corporates (20% of assets) on bank funding should remain high as the State gradually withdraws support measures introduced during the Covid-19 crisis (‘Prêts Garantis par l’Etat’) and as persistent pressure on energy prices erode liquidity buffers. Non-performing loans, which are broadly in line with the euro area average (at 1.8% of gross loans as of Q2 2022), could rise moderately as the economic growth outlook deteriorates, although fixed rates on housing loans mitigate risks for households (22% of assets). Main risks on financial stability relate to i) high debt of non-financial corporates (165% of GDP) relative to the euro area (109%) and ii) a correction of the housing market, although risks are mitigated by prudential measures with limits on loan maturity and debt-service-to-income ratio.
Despite these credit strengths, France’s AA/Stable rating is challenged by the following weaknesses:
First, France’s fiscal trajectory has weakened in view of the deterioration of medium-term growth prospects. The general government primary deficit should remain elevated in the medium-term, around 3% of GDP on average by 2027. The pace of (expenditure based) fiscal consolidation (more than 2 points of GDP) is slightly higher than Belgium, although it is among the slowest in the euro area and weaker than the United Kingdom4. The withdrawal of countercyclical measures introduced by the French government to offset the rise in energy prices (estimated at EUR 30bn in 2022, net of indirect tax revenues from renewable producers) could be delayed given rising demand for social safety nets. Notwithstanding the enhanced governance framework for public finances introduced in 2021 to strengthen multiannual management, budgetary transparency, and accountability, fiscal consolidation could be slower than expected as the government’s ability to deliver on a material reduction in expenditures has been weakened by this year’s legislative election with the ruling coalition losing absolute majority in the National Assembly. Long-term investments among which the green transition also constitute impediments to the government’s plan to bring the budget deficit below 3% of GDP in 2027, despite the EU Recovery and Resilience Facility (EUR 39.4bn of grants) that contributes to climate investments. Scope forecasts the fiscal deficit to average 4.6% of GDP by 2027, which is below the EU fiscal rules and the government’s fiscal targets, to capture consistently upward bias in fiscal projections5. France’s gross financing needs (27.3% of GDP in 2021) are higher than Belgium (18.2%) and the United Kingdom (16.0%), but its debt affordability compares favorably on net interest payment to revenue (2.5%; 2.9%; 5.5%, respectively), net interest payment to GDP (1.3%; 1.4%; 2.0%), and public debt to revenue (214%; 219%; 258%) thanks to its large and stable revenue base.
Scope anticipates public debt to rise moderately, from 111.6% of GDP in 2022 to 115.6% of GDP by 2027, or 18 percentage points above pre-Covid-19 level, against 19 points for Belgium and 16 points for the United Kingdom. Higher GDP deflator provides a cushion in the near-term, but sustained primary deficits, a rising interest burden, and modest GDP growth weigh on debt dynamics. Similarly, inflation-linked bonds (EUR 252bn as of end-September 2022), around two-thirds of which are indexed on the eurozone inflation, present an additional near-term challenge. In Scope’s view, the government’s ability to bring public debt back on a firm downward path has weakened since the Covid-19 and the energy price shocks, which is reflected in the modest decline in public debt projected by the government in 2026 (-0.1pps of GDP) and 2027 (-0.7pps to 110.9% of GDP), or one year ahead of the next presidential election. France has a debt trajectory that has fallen short of multiyear objectives, contributing to growing divergence with the euro area (87.8% of GDP in 2027) and the United Kingdom (99.9%), although a similar trend than that projected for Belgium (116.6%).
Second, France is exposed to a growing political fragmentation and polarisation. This year’s elections saw the President Emmanuel Macron losing his absolute majority in the National Assembly, with the left-green alliance (131) and far-right party (89) holding 38% of seats, more than the center-right party (61) but less than the ruling coalition (245 out of 577 seats). Scope foresees a substantially weaker reform momentum to deliver on reforms addressing France’s credit challenges, as reflected in the 2023 budgetary process, with the government relying multiple times on the Article 49.3 mechanism to pass laws without a parliamentary vote, as well as the unsuccessful motions of no confidence introduced by the far-right and the green-left coalition. This could force the government to postpone or water down its reform agenda, mostly centered around supply side measures and social reforms among which pensions. The risk of early legislative elections has increased as a result, which could support the reform momentum if the ruling coalition regains its absolute majority in the National Assembly.
Structural reforms supporting a sustained rise in productivity and competitiveness are unlikely in the current political environment, which could weigh on GDP growth potential (1.3% according to the IMF) and external performance. France recorded a modest current account surplus in 2021 of EUR 9bn (0.4% of GDP), primarily owing to a temporary rise in nominal transportation services exports. The IMF expects the current account balance to return to a deficit in 2022, of 1.3% of GDP, albeit more benign than those of Belgium (2.2%) and the United Kingdom (4.8%). The trade deficit reached record highs of EUR 47.6bn in Q3 2022 (around 7.2% of GDP), nearly doubling from the same period last year. It is expected to reach nearly EUR 150bn (5.8% of GDP) for 2022 in a context of soaring nominal energy and raw material imports and depreciating euro. Despite limited direct trade exposure to Russia, the Ukraine conflict is negatively impacting France’s external balance, notably due to supply chain difficulties impacting the aerospace and the automotive sectors, as well as a marked slowdown among euro area trading partners. In the long run, persistent challenges around competitiveness and productivity constitute material vulnerabilities to the external performance, maintaining pressure on the net international investment position (-27% of GDP as of Q2 2022) and gross external debt (261%).
Finally, persistent labour market bottlenecks hamper a further rise in employment. The headline unemployment rate has declined to multi-decade lows (7.3% in Q3 2022) in a context of resilient economic activity and following significant policy changes, including a revamp of the apprenticeship system and the 2021 reform of the unemployment benefit system. The government aims to deepen the latter by modulating the length of the benefits (between 24 to 26 months currently) depending on prevailing labour market conditions. This could support a further reduction in unemployment, in a context of significant labour shortages, with more than half corporates reporting recruitment difficulties. France has an unemployment rate that is higher than Belgium (5.8%) and the United Kingdom (3.6%). Youth unemployment is also high (17.8%) in comparison to senior workers (5.2%), reflecting shortcomings in the educational system, while the employment rate of workers aged 55-64 is significantly lower (56.8%) than in Germany (73.7%) and in the euro area (62.6%).
Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)
Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides a first indicative rating, which was approved by the rating committee, at ‘a’ for France. France receives a one notch uplift to this indicative rating via the reserve currency adjustment under the methodology. As such, the ‘a+’ indicative rating can be adjusted under the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.
For France, the following relative credit strengths are identified: i) macro-economic stability and sustainability; ii) debt profile and market access; iii) resilience to short-term shocks; iv) banking sector performance; and v) environmental risks. No credit weaknesses relative to peers were identified.
The QS generates two positive notch adjustment and indicates AA long-term ratings for France.
A rating committee has discussed and confirmed these results.
Factoring of Environment, Social and Governance (ESG)
Scope explicitly factors in ESG issues in its rating process via the Sovereign Rating Methodology’s standalone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (CVS) and in the methodology’s qualitative overlay (QS).
With respect to environmental risks, France overperforms peers given its relatively lower carbon intensity, as measured by CO2 emissions per unit of GDP. A nuclear-dominated energy mix largely contributes to the French economy’s lower carbon intensity and mitigates to some extent higher global energy prices. However, the fleet of nuclear reactors – 56 nuclear reactors generating on average 70% of the electricity supply – faces operational issues. Extending the lifespan of the existing fleet and replacing ageing reactors remains crucial for France’s comparatively low carbon-intensity and climate objectives. Nuclear is expected to be at the core of the government’s green transition strategy, alongside renewables, to reach carbon neutrality by 2050. This strategy recently benefitted from the European Parliament’s vote in favor of nuclear inclusion in the EU Green Taxonomy, which demonstrates France’s capacity to anchor European policy, as the largest producer of nuclear electricity in the European Union. The government is on course to fully nationalise public utility EDF by purchasing the remaining 16% of the company’s capital it did not yet own. Still, the long-term horizon of nuclear investment plan (EUR 50bn) could make the country vulnerable to technological breakthroughs and larger investment in renewables among euro area peers, although the government plans to streamline legal procedures to invest in renewable energy. Finally, France has lower natural disasters risks and higher biocapacity compared to peers, which support our ‘strong’ qualitative assessment together with proactive environmental policies, especially around green budgeting.
With respect to social risks, the CVS score is constrained by an ageing society that constitutes a key challenge given France's large welfare state and already elevated social expenditures. The steady increase of the old-age-dependency ratio over the long term remains a key credit challenge, as the outcome of the pension reform remains uncertain. Still, demographic trends compare favorably to most European peers. The IMF estimates the net present value of additional health care and pension spending over 2021-50 at 41% of GDP for France, well below peers including the United Kingdom (75%) and Belgium (109%)6. Labour force participation is lower than most of peers, reflecting persistent bottlenecks in the labour market, including a complex pension system and insufficient re-skilling measures, though Scope expects the reform of the unemployment benefit system to support flexibility. Finally, France has lower income inequality than most of peers thanks to its large welfare state underpinned by ambitious redistributive policies, which support our ‘neutral’ qualitative assessment.
Under governance-related factors in the CVS, France has scores that are in line with peers such as Belgium and the United Kingdom, as assessed by the World Bank’s Worldwide Governance Indicators. France has strong and effective institutions, and this year’s presidential election supports policy predictability and continuity. The next elections are due in 2023 (senatorial; half of the seats to be renewed through indirect universal suffrage) and 2026 (municipalities), against 2024 for Belgium and the United Kingdom (general election). Even so, the risk of political instability has increased. The government overcame multiple no-confidence votes in H2 2022 prompted by opposition lawmakers, including in the form of opportunistic alliance between the far right and the green-left coalition. Growing fragmentation and polarisation lowers policy effectiveness and makes early legislative elections more likely. This drives our ‘neutral’ qualitative assessment.
The main points discussed by the rating committee were: i) economic developments; ii) fiscal policies and prospects; iii) monetary policy stance of the European Central Bank; iv) financial stability risks; and v) peer comparison.
Rating driver references
1. European Commission - Autumn 2022 Economic Forecast for France
2. IMF - France: Staff Concluding Statement of the 2022 Article IV Mission
3. High Council for Financial Stability - 2022 Annual Report
4. French Finance Ministry - Budget Bill 2023
5. High Council of Public Finances – Opinion on the Revised Draft Budget Bill 2022
6. IMF – Fiscal Monitor, October 2022
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Sovereign CVS model version 2.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales.
Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation YES
With Access to Internal Documents NO
With Access to Management NO
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity; and public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks is/are UK-endorsed.
Lead analyst: Thomas Gillet, Associate Director
Person responsible for approval of the Credit Ratings: Dr. Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 3 May 2019.
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