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Rating Action:

Moody's changes outlook on France's rating to stable from positive, affirms Aa2 rating

 The document has been translated in other languages

21 Feb 2020

London, 21 February 2020 -- Moody's Investors Service, ("Moody's") has today affirmed Government of France's Aa2 long-term issuer ratings and changed the outlook to stable from positive. The ratings on France's senior unsecured bond ratings have also been affirmed at Aa2.

The key driver for the outlook change to stable is the more moderate improvement of France's fiscal metrics compared to expectations when the outlook was changed to positive in May 2018. The French government has managed to implement some measures that contribute to more moderate spending growth than in the past, such as the caps on health care and local government operating spending growth. However, in Moody's view these are insufficient to engineer a sustainable and clear downward trend in the public debt ratio. As a consequence, France's fiscal metrics remain broadly aligned with a Aa2 rating, rather than a higher rating.

The affirmation of the Aa2 rating captures France's many credit strengths, including the solid progress achieved with implementing an ambitious economic reform programme. Moody's believes that these reforms will improve France's competitiveness, labour market performance and growth prospects over the medium term. France's credit strengths also include a large and diversified economy, strong institutions and a more favourable demographic profile than many peers.

In a related action, Moody's affirmed the Aa2 backed long-term issuer ratings of the Société de Prise de Participation de l'Etat (SPPE) and changed the outlook to stable from positive. The SPPE's P-1 backed short-term issuer and commercial paper ratings were also affirmed. Any debt issued by the SPPE is backed by unconditional and irrevocable guarantees from the French government for any issuance prevailing before 31 December 2023.

France's foreign and domestic currency bond and deposit ceilings were unaffected by today's outlook change and remain Aaa. The foreign-currency bond and deposit ceilings also remain unchanged at P-1.

RATINGS RATIONALE

When Moody's assigned a positive outlook to France's Aa2 rating in May 2018, the rating agency specified two complementary drivers that together could lead to an upgrade to Aa1. First, the implementation of structural economic reforms that would raise medium term growth. Second, the enactment of structural fiscal reforms that would reverse the debt trajectory, which has risen largely uninterrupted for a number of decades. Each was seen as necessary but not sufficient in isolation for a higher rating. Taken together, the achievement of the government's economic and fiscal objectives would signal an increase in institutional strength which would further support an increase in the rating.

Today's action reflects Moody's view that while much has been done to implement planned structural economic reforms and at least sustain medium-term growth, much less has been achieved on the fiscal front. Accordingly, while the rise in debt has paused, at least for now, a reversal in the trajectory is not expected. France's fiscal strength remains consistent with a Aa2 rating.

RATIONALE FOR CHANGE IN OUTLOOK TO STABLE FROM POSITIVE

The key reason for returning the outlook to stable reflects Moody's view that France's fiscal strength will not improve to the extent that the rating agency envisaged when assigning the positive outlook on the Aa2 rating in May 2018. Back then, the government targeted a reduction of the public debt ratio to below 90% of GDP by 2022, by gradually turning the recurrent budget deficits into a surplus by 2022.

Moody's recognizes that the government has managed to reduce the budget deficit since taking office, despite the significant acceleration of tax cuts in the context of the eruption of the "yellow vest" movement. Excluding one-off factors, the rating agency estimates that in 2019 the underlying general government budget deficit stood at the lowest level last year since the early 2000s. Measures to contain the growth of government spending have proven to be effective, such as the containment of health care spending, the agreement with local authorities to restrict their operating expenditures and the recent unemployment insurance reform. Moody's estimates that these measures have helped to reduce public expenditure by one percentage point of GDP between 2016 and 2019 and will continue to constrain public spending growth this year and probably also in the coming years.

However, France's level of government spending remains very high at above 55% of GDP (2019 estimate), and the rating agency does not believe that measures taken to date or in prospect will be sufficient to bring about a sustained reduction in the budget deficit to below levels of 2% of GDP in the coming years. Reaching the government's own fiscal targets -- a budget deficit of 1.5% of GDP by 2022 -- would require more forceful measures than containing the growth in spending to below the growth rate of nominal GDP. In Moody's view, this is unlikely to happen in the remainder of the government's term, given the continued high level of social discontent which was at the heart of the "yellow vest" protests. In this vein, Moody's notes that the government no longer aims to reduce the public-sector workforce as originally planned, nor have the recommendations by an expert group on how to make public spending more efficient been adopted. Meanwhile, spending pressures have emerged in the health care sector, necessitating additional spending on hospitals.

Consequently, under Moody's baseline assumptions the general government deficit will likely remain at between 2-2.3% of GDP in the coming years, rather than decline further. The public debt ratio will likely remain static at just below 100% of GDP, a level that is significantly higher than Aa1-rated sovereigns, and higher than Moody's expectations at the time of assigning the positive outlook.

RATIONALE FOR THE AFFIRMATION OF FRANCE'S Aa2 RATING

The affirmation of the Aa2 rating reflects several key credit strengths, including a very large and wealthy economic base with relatively favourable demographic trends and strong institutions. Despite its elevated level, France's public debt is highly affordable and is likely to remain so even when policy rates start to rise eventually. Government liquidity risk is commensurately low. The banking sector has comparatively robust metrics and France's susceptibility to political or external shocks is very low.

Moody's also takes a positive view of the progress the government has achieved in legislating its ambitious and wide-ranging reform programme. Implementation has been broadly according to schedule, with the simplification of the many pension schemes the only pending -- although still controversial -- reform. Since taking office in May 2017, the government has implemented important reforms to the labour market, vocational training and apprenticeship systems as well as the unemployment benefit system. The tax system and business regulations have been reformed with the objective of improving competitiveness and removing obstacles to growth.

While isolating the impact of reforms from cyclical developments is difficult and it will take several years to see the impact of the reforms, early signs are encouraging, particularly in the labour market. Employment growth has been solid at 1% on average since Q3 2017, when the first labour market measures were implemented, despite the slowdown in economic growth over the same period. The quality of job creation has also improved, with a significant shift from part-time to full-time positions and hiring on permanent contracts rising much faster than short-term and temporary contracts. The unemployment benefit reform should further accelerate this shift. In the same vein, unit labour costs have risen at significantly more moderate rates in France since 2017 than in the years prior and also compared to close competitors, indicating material gains in cost competitiveness for French exporters.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Moody's takes account of the impact of environmental (E), social (S), and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk. In the case of France, the materiality of ESG to the credit profile is as follows.

In line with other advanced economies, we assess the materiality of environmental risks for France's credit profile as low. While extreme climatic events have risen significantly over the past several years (floods in 2016 and 2018, droughts, hurricane Irma in 2017), France's exposure to such events remains relatively low globally and the sovereign has strong financial mitigants and insurance in place to compensate for damages incurred.

Social risks are material and are a key factor in our assessment that France's fiscal metrics will not improve to the extent necessary to reduce the budget deficit to below current levels. The "yellow vest" movement has exposed deep social discontent in the country, with perceived inequalities in the delivery of public services across the country, making spending cuts politically difficult. The government has reacted by accelerating planned tax cuts and focussing on raising the purchasing power of low to middle-income households, and while tensions have consequently eased the tax cuts have derailed the government's original fiscal plans. Ultimately, a decline in social risks will be contingent on the government's reform agenda bearing fruit, and particularly the multiple reforms of the labour market resulting in further and sustained improvements.

Governance risks are an integral part of our assessment of institutional strength, which in the case of France is broadly in line with peers.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the recent return to a stable outlook, upward pressures on the rating are limited at this stage. The outlook could be returned to positive and the rating ultimately upgraded if France's fiscal and debt metrics were to improve materially, on the back of more significant structural measures on the spending side.

The rating would come under downward pressure if the reforms implemented since 2017 were to be reversed over the coming years with materially negative medium-term implications for growth, or if the recent fiscal trends were to reverse with a consequent further increase in the already elevated public debt ratio.

GDP per capita (PPP basis, US$): 45,893 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.7% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.9% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -2.5% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.6% (2018 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: aa3

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 18 February 2020, a rating committee was called to discuss the rating of the France, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, has not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kathrin Muehlbronner
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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