Scope completed a monitoring review on the French Republic
Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.
Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.
Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.
Scope completed the monitoring review for the French Republic (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AA/Negative Outlook; short-term local- and foreign-currency issuer ratings: S-1+/Stable Outlook) on 6 November 2023.
This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this borrower along with the associated ratings history can be found on www.scoperatings.com.
Key rating factors
France’s long-term ratings of AA are underpinned by multiple credit strengths, including i) the country’s large and diversified economy driven by high value-added activities; ii) its core euro area membership reflected in its role as an EU founding member and leading guarantor of the European institutional framework; iii) its favourable debt profile and excellent capital market access; and iv) its sound and resilient banking sector.
At the same time, France’s ratings are challenged by i) weakening public finances, including a high public debt-to-GDP ratio, sustained primary fiscal deficits and an uneven track record of fiscal consolidation; ii) growing political fragmentation and polarisation, potentially limiting the government’s ability to address structural pressures through reforms; and iii) persistent labour market bottlenecks compromising a further decline in unemployment notwithstanding already implemented reforms of the apprenticeship programmes, unemployment benefit scheme and pension system.
The public finance programming bill for 2023-27 projects a gradual reduction of the fiscal deficit, from 4.9% of GDP in 2023 to 4.4% in 2024 and 2.7% in 2027, and a decline of public debt, from 109.7% of GDP in 2023 to 108.1% in 2027. This trajectory is supported by the withdrawal of emergency support for business and households, and above-potential GDP growth assumed between 2025 and 2027. The reduction in the fiscal deficit and public debt is also supported by a stronger commitment to budgetary consolidation through annual comprehensive spending reviews, regulatory measures, a bolstered plan for fighting tax fraud, and the establishment of a high council of public finances for local governments.
The government’s more ambitious deleveraging is factored in Scope’s revised projections, with debt-to-GDP ratio expected at 112.2% in 2028, or 1.9pps below the agency’s previous estimate. However, this trajectory is more conservative than that currently projected by the government and the IMF, due to i) a lack of clarity regarding expected efficiency gains in public spending; ii) rigid expenditure, particularly on the welfare state; and iii) an interest burden projected to rise to 2.6% of GDP in 2027 by the government, from 1.7% of GDP in 2023. The fiscal outlook is also clouded by growing investment needs, in particular related to the green transition, and by an already high tax burden, among the highest of OECD countries.
Furthermore, the long-standing fragmentation and political polarisation complicate policy setting, potentially exacerbating challenges related to budgetary consolidation and medium-term growth prospects. This raises the risks that the government’s economic, social, and climate reform agenda will be postponed or watered down, especially when approaching electoral milestones. Scope projects GDP growth of 1.3% on average from 2023 to 2028, which is in line with France’s potential rate of growth but below the government’s projection of 1.7% on average between 2025 and 2027.
The Negative Outlook reflects Scope’s opinion that risks to the ratings remain skewed to the downside.
The ratings could be downgraded if, individually or collectively: i) public debt-to-GDP resumed on an upside trajectory, such as due to the failure to deliver sustained budgetary consolidation; and/or ii) the growth outlook deteriorated significantly due, for example, to weaker reform momentum and/or an external shock.
Conversely, the Outlooks could be revised to Stable if, individually or collectively: i) sustained budgetary consolidation helped place public debt-to-GDP on a structurally declining trajectory; and/or ii) the growth outlook improved significantly due, as an example, to sustained reform momentum.
For the updated rating review annex accompanying this review, click here.
The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Ratings, 27 September 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Thomas Gillet, Director
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