Fitch Ratings affirmed Germany’s Sovereign rating and long term IDR’s and unsecured foreign and local currency bonds at ‘AAA’ with a stable outlook as expected. Germany ran a surplus last year and Germany’s fiscal position is expected to continue to improve.
Fitch Ratings affirmed Germany’s Sovereign rating and long term IDR’s and unsecured foreign and local currency bonds at ‘AAA’ with a stable outlook as expected. Germany ran a surplus last year and Germany’s fiscal position is expected to continue to improve.
Map of Germany
Fitch has also affirmed the Short-Term Foreign and Local Currency IDRs at ‘F1+’ and Country Ceiling at ‘AAA’.
Fitch’s Key Rating Drivers
- The ‘AAA’ ratings primarily reflect Germany’s strong institutions and diversified, high value-added economy.
- A large and sustained structural current account surplus supports the country’s net external creditor position.
- Government debt (71.2% of GDP in 2015) is higher than the ‘AAA’ median (42.4%) but is firmly on a downward path.
The ‘AAA’ IDRs also reflect the following key rating drivers:
- Fitch forecasts a reduction in the general government surplus from 0.7% of GDP in 2015 to 0.4% of GDP in 2016 and 0.2% in 2017, driven by additional social expenditure and to a lesser extent, modest loosening ahead of next year’s elections.
- Lower yields are expected to result in an interest saving of close to 0.18% of GDP in 2016.
- Together with buoyant tax revenues, this will partly offset higher spending related to the influx of refugees in 2H15 and to housing, social care and infrastructure more generally.
- The importance of the government’s “black zero” objective should constrain a larger fiscal loosening and we do not expect a return to significant deficit over the medium term.
In Fitch’s view, Germany can comfortably accommodate such a moderate fiscal easing. Having increased by 15% of GDP in the wake of the financial crisis, general government debt fell to 71.2% in 2015 from 79.6% of GDP in 2012. Over the same period, the structural fiscal balance improved from -0.4% of GDP to 0.8% of GDP, based on European Commission methodology.
Fitch forecasts a further decline in general government debt to 68.4% of GDP in 2016 and 66.1% in 2017. According to our long-term debt sustainability analysis, the 60% Maastricht threshold will be reached in 2020.
A widening of the current account surplus has further strengthened Germany’s overall external position, a key rating strength. On the back of euro depreciation and the low oil price the current account surplus increased by more than 1pp in 2015 to 8.5% of GDP, and the resilience of exports to the eurozone in 1H16 has helped offset weaker export demand elsewhere, including from the UK.
Primary income growth has also been strong this year, and the current account balance is forecast to increase to 8.7% of GDP in 2016, before moderating to 8.3% in 2018. Germany’s net external creditor position is expected to strengthen to 17% in 2016 from 12% of GDP in 2015, which compares favourably with the ‘AAA’ median of 10% of GDP.
Fitch maintains its 2016 GDP growth forecast of 1.7%, followed by 1.4% in 2017 and 2018, driven by private consumption and to a lesser extent investment growth. Domestic demand is supported by high employment, which has continued to increase at more than 1% in 2016, the near record levels of job vacancies, and last year’s inward migration of more than 1.1 million.
Since the Brexit vote, there has been a moderate weakening in confidence indicators, reflecting Germany’s exposure to the more uncertain external environment.
Longer term, Fitch forecasts that GDP growth will decelerate to a trend rate of around 1.3%, with unfavourable demographics a key headwind. The growth impact of the migrant inflows over the last year is likely to be mildly positive, although it will take time to absorb migrants into the labour force.
Negotiated pay settlements increased by just above 2% (year-on-year) in 1H16, and wage pressures are expected to increase only moderately. HICP is forecast to steadily rise on the back of higher oil prices to average 0.4% in 2016, 1.4% in 2017 and 2.1% in 2018, with core inflation remaining broadly flat at close to 1.0%.
The pace of house price growth quickened from 4.5% in 2015 to 5.5% in 1H16, but affordability indexes are still below historical averages, supporting our view that the German property market is not yet overheating.
Fitch’s rating outlook for most German banks and the sector is stable.
Capitalisation in the system is expected to further improve this year, in particular through earnings retention. Banks’ increased domestic focus has helped keep loan impairment charges low, supporting annual capital generation, which is currently 200bps above its historical average. The key challenges for the sector remain ultra-low interest rates weighing on profitability, regulatory pressures, intense competition, and in the case of Deutsche Bank, misconduct and litigation charges.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Germany a score equivalent to a rating of ‘AAA’ on the Long-term FC IDR scale. Fitch’s sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR.
Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The Outlook is Stable. Consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could, individually or collectively, result in a downgrade include: – A reversal of the declining trend in the general government debt ratio. Debt approaching 90% of GDP would start to put pressure on the ratings. – Crystallisation of contingent liabilities, for example further state support to the banking sector or to other eurozone countries. As a member of the currency union, Germany is financially exposed to a re-intensification of the eurozone crisis.
KEY ASSUMPTIONS
-Fitch’s long-term debt sustainability analysis assumes a primary surplus averaging 1.3% of GDP to 2025, average GDP growth of 1.4%, and a gradual increase in marginal interest rates from 2017.
– Future asset sales by the state-owned bad banks are likely, but their timing and size are unclear. Fitch does not assume any such debt-reducing transactions in its projections for government debt.
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Source: Fitch Ratings
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