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France breathes a sigh of relief. The feared downgrading of the rating by Moody’s and Fitch did not occur. The US agency confirmed its rating of Aa2. The outlook was also confirmed: it remains stable. The European agency, which lowered its rating a year ago, instead maintained the AA- rating, again with a stable outlook. The reassurances of the Ministry of Economy, led by Bruno Le Maire, have evidently convinced the company’s analysts, despite a worsening of the public finances which the agency had however predicted. “The decision – the minister said in a note – should encourage us to redouble our determination to restore our public finances and achieve the President’s objective of reducing the deficit to less than 3% in 2027”
Moody’s ratings
It is not certain that President Emmanuel Macron’s wishes will be fulfilled. The 2023 deficit was 5.5%, the Moody’s note recalls, a level “significantly higher than the official target of 4.9%, which makes it unlikely that the government will be able to reduce the deficit to 2%. 7% in 2027.” These developments, however, are “broadly in line with Moody’s previous assessment” according to which the deficit targets will not be achieved and debt will rise to 115% in 2027, and this explains the maintenance of the rating. Debt service is currently equal to 3.4% of public budget revenues, but “it could double in the next decade if the level of debt does not fall significantly”.
However, France has – Moody’s notes – a solid, diversified economy, with high private savings and quality institutions.
The stable outlook derives from an assessment of risks that are considered “balanced”. France – explains the agency – has implemented structural reforms, especially on the labor market, which will still produce results, and which the government could deepen. On the other hand, debt could exceed the 112% target by 2027 and debt service could increase.
The outlook and rating could improve if the government manages to implement measures that begin to reduce the debt, but it could worsen – notes Moody’s – if the agency “were to conclude that the deterioration in debt sustainability will be significantly higher in France than in countries that have the same rating.” An escalation of the war in Ukraine, the agency then warned, into a war directly involving NATO would create “downward pressure on the rating”.
Fitch’s rating
Fitch also believes that the 2027 target will not be maintained, but this is not a surprise for the European agency either. “France has managed to keep the deficit below 3% only four times in the last 20 years – explains the statement – and we expect it to be subjected to an excessive deficit procedure later in the year”. The 2023 deficit of 5.5% is the second in the euro area after Italy and, above all, it is double – explains Fitch – the median of the AA category. However, the agency believes that the Paris government will be able to hit the 5.1% target this year, even if it is “much higher than the expected target of 4.4% and the median expected for the AA countries of 2 ,2%”. Debt, at 110.6%, is the second highest in the group of similarly rated countries and exceeds the median of 50.1% “by a large margin.” In this way, debt service could rise to 4% of tax revenues in 2025, against a projected median of 3.2%.
The slowdown in the German economy will also have a bearing, which will slow down French GDP in 2024 by up to 0.8%, compared to a previous forecast of 1.1 percent. However, Fitch also notes the results of the reforms on the labor market, even if the unemployment rate could rise marginally. The banking system remains solid, the agency notes, and quality governance.