Fitch Ratings has placed the ‘AA+’ sovereign credit rating of France on rating watch negative, indicating that the country is at heightened risk for a downgrade.
Fitch’s next scheduled review of its rating on France isn’t until December 12, but the rating agency said that recent developments warrant a deviation from that schedule. In particular, it notes that the French government presented its draft 2015 budget on Oct. 1, which confirmed a material increase in its budget deficit targets. The government now projects the general government budget deficit at 4.4% in 2014, up from previous expectations of 3.8%, and it sees a 4.3% deficit in 2015, up from previous forecasts of 3.0%. It has also postponed its commitment to meet the headline EU fiscal deficit threshold of 3% of GDP from 2015 until 2017.
In its previous rating review, Fitch said that a weakening in public finances or greater uncertainty over the implementation of budget consolidation efforts could trigger negative rating action. Now, the agency’s latest forecasts show wider fiscal deficits into the medium term, with a deficit of 3.3% of GDP in 2017; and, it says that the French government’s own forecasts show material deviations from prior forecasts. “The wider deficits have negative consequences for public debt dynamics,” it says. “Even under the government’s own updated forecasts, the capacity of the public finances to absorb shocks has been significantly reduced.”
Fitch’s medium-term growth forecasts are weaker and budget deficits wider than official projections, it says. “The outlook for the French economy has deteriorated, impairing the prospects for fiscal consolidation and stabilising the public debt ratio,” it says, noting that the French economy underperformed both Fitch’s, and the government’s, expectations in the first half of 2014 “as it struggled to find any growth momentum, in common with a number of other eurozone countries.”
Fitch has also revised down its near-term GDP growth projections to just 0.4% in 2014 and 0.8% in 2015, down from 0.7% and 1.2% previously. Continued high unemployment at 10.5% is also weighing on economic and fiscal prospects, it notes.
“The on-going period of weak economic performance which started from 2012 increases the uncertainty over medium-term growth prospects,” Fitch says. “The French economy is expected to grow less than the eurozone average this year for the first time in four years. The quantitative impact of recent structural reforms is also uncertain, and in Fitch’s view does not appear sufficient to reverse the trends in long-term growth and competitiveness. Therefore, we believe there are downside risks to France’s long-term growth potential.”
Moreover, Fitch says that the latest deviations from budget targets and EU deficit commitments weaken the country’s fiscal credibility. “This is the second time the French government has postponed meeting the EU 3% headline deficit threshold since [the end of 2012],” it says, despite the introduction of a new fiscal framework in France and the reinforced EU policy framework.
Without a material improvement in the projected trajectory of public debt dynamics following the publication of the European Commission’s opinion on France’s 2015 budget, which is slated for November, Fitch says it faces a likely downgrade for its sovereign ratings by one notch.