RAM Ratings assigns gA1(pi) global-scale rating to France

Published on 20 April 2015

RAM Ratings has assigned a gA1(pi) global-scale sovereign rating to France, with a stable outlook. On the ASEAN scale, France has been assigned a seaAAA(pi)/stable rating. These ratings take into account the country’s exceptional funding flexibility, high value-added economy with a strong institutional framework, and its sound banking system that shows improved financial stability. As the world’s fifth-largest economy, France is a modern, stable and diversified economy at the forefront of technological advancement, which anchors its long-term economic resilience. These strengths are moderated by the country’s weak government finances and deep-rooted structural challenges. Recovery in Europe’s second-largest economy is expected to remain soft in the near term, given a more challenging low-inflation environment and the political struggle within the region.

With the strong trade and financial links between EU-member countries, IMF expects France’s economy to expand by 1.2% in 2015, as its recovery hinges on that of the euro area. France is unlikely to benefit much from global recovery as loss of export competitiveness – one of the country’s main structural challenges – weighs on growth. “Supply-side measures such as reforms in the labour, goods and services market to reduce companies’ cost of labour, strengthen competition and reinvigorate investments are steps in the right direction,” says Esther Lai, RAM Ratings’ Head of Sovereign Ratings. “However, political resistance and implementation risks remain key challenges, as the progress of implementation is slow and the impact of these reforms is yet to be seen,” she adds.

Furthermore, the French government’s poor record of fiscal discipline has consistently resulted in it missing fiscal deficit targets. While fiscal consolidation measures had narrowed its deficit from -5.1% of GDP in 2011 to -4.0% in 2014, France has constantly overshot its budget deficit targets and has requested another 2 years from an already-extended 2015 deadline to bring its deficit below the -3.0% Maastricht limit. “The shift in fiscal policy – from tax increases to expenditure containment over a more moderate fiscal consolidation path – could restore fiscal space without running the risk of choking nascent recovery,” Lai notes. “France’s high unemployment rate of 10.2% in 2014 and a costly welfare system estimated at 32% of GDP, nevertheless, pose risks to fiscal slippage,” she adds.

At 95% of GDP, France’s debt is higher than that of most other advanced economies, surpassing the UK’s 92%, Germany’s 76%, and South Korea’s 35%. Nonetheless, the strength of the euro as the world’s second-most widely held reserve currency bolsters funding flexibility in France and cushions the nation from major external shocks.

While RAM has a stable outlook on France, the ratings may face downward pressure if government finances weaken substantially as a result of increased slippage and the materialisation of larger-than-expected contingent liabilities through spillovers from the EU. Conversely, the ratings could be adjusted upwards when the country’s growth returns to a firmer path and improved competitiveness is seen through the successful implementation of labour and product market reforms.

Media contact
Lynette Lee
(603) 7628 1182
lynette@ram.com.my