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Evolution of France's credit profile depends on structural reforms

Publication Date: 17 May 2019 - By ReachX Team By ReachX Team
Actionable
Differentiated

Macro Environmental, Social & Governance Multi Asset EU ex-UK

The successful implementation of structural reforms by President Emmanuel Macron’s administration will be a key factor in shaping the future strength of France's sovereign credit profile and its economy, opines a leading rating agency. 

In a note for its clients, Moody's – which rates France as Aa2 positive – said the country’s credit strengths include high levels of economic and institutional strength, but its weaknesses stem from structural challenges linked to a high tax and regulatory burden, and an inability to reverse the rising public debt. 

Kathrin Muehlbronner, Senior Vice President at Moody’s and the report's author, said the French government has started to implement a broad and ambitious agenda of structural reforms, which should help correct the key underlying causes of the country's economic and fiscal challenges, provided they are fully implemented. 

"While the government's commitment to completing the reform agenda is still strong, it remains to be seen whether its fiscal strategy will succeed, following material concessions in the wake of the eruption of the yellow vest protests."

Moody's noted that the government no longer expects a material reduction in the public debt ratio over the coming years, given the concessions and somewhat weaker growth prospects than expected a year ago.

But the agency said France’s sovereign rating would likely be upgraded if there were to be full, or close to full, implementation of the reforms as planned and it concluded that those reforms were likely to yield material economic and fiscal benefits over the medium-term. 

Given that it will take time for the reforms to show results, the positive outlook will likely only be resolved in early 2020. However, the government's fiscal track record has been relatively weak, with the public debt ratio on a nearly uninterrupted rise for the past three decades, Moody’s noted.

The rating agency said that it would monitor “a range of metrics”, with a particular focus on improvements in job creation, given the government's early focus on reforming the labour market.

It also said French households have low levels of debt and the government's debt is highly affordable, despite being elevated. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX Team

 

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