Fitch Affirms Germany at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, January 08 (Fitch) Fitch Ratings has affirmed Germany's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Germany's unsecured foreign and local currency bonds have been affirmed at 'AAA'. Fitch has also affirmed the Short-term foreign currency IDR at 'F1+' and Country Ceiling at 'AAA'. KEY RATING DRIVERS Germany's 'AAA' rating primarily reflects its strong institutions and diversified, high value-added economy. The country's high structural current account surplus (7% of GDP on average over 2011-2015) has supported the country's net external creditor position. Government debt (71.8% of GDP in 2015) is higher than the 'AAA' median (44% of GDP) but is on a downward path. In Fitch's view, Germany has sufficient fiscal space to manage the recent intensification of the migrant crisis without negative rating consequences. Germany's 'AAA' IDRs also reflect the following key rating drivers: The general government has registered small surpluses since 2012. Fitch expects a surplus of 0.6% of GDP in 2015, falling to 0% in 2016 due in large part to additional expenditure related to the migrant crisis. While budgetary outturns are now more uncertain as a result, Fitch does not expect a return to significant deficit over the medium term. Public finances benefit from a falling interest bill (at EUR51bn in 2014, or 1.7% of GDP, from EUR67bn in 2011, 2.5% of GDP) in a historically low interest rate environment. After a steep increase during the global financial crisis, the government debt ratio started to decline in 2013. Fitch expects debt/GDP will continue its downward trend to 66.5% in 2017, from 81% in 2010. According to Fitch's long-term debt sustainability analysis, the 60% Maastricht threshold should be reached by around 2020. The downward debt trajectory improves the sovereign's shock-absorbing capacity. Fitch expects GDP growth to reach 1.9% in 2016 and 2017. Robust consumption growth in 2016 will be supported by a low unemployment rate and growing real incomes. The fiscal stance will also be expansionary. Longer term, the agency expects GDP growth will decelerate towards its potential rate (1.3%). The extent to which new arrivals are integrated into the labour market will determine the long-term economic impact of the migrant inflow. The medium-term impact on GDP should be modestly positive, with downside risk to labour participation and unemployment. External finances are a rating strength for Germany. Fitch estimates the current account surplus increased to 8.3% of GDP in 2015 from 7.5% in 2014, primarily due to the lower oil price. The agency expects the current account surplus will remain above 7% of GDP at the forecast horizon. Net external debt (-3.5% in 2014) is set to decline further into negative (ie net creditor) territory as a result. 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 rating. -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 In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 1.5% of GDP, trend real GDP growth averaging 1.3%, a gradual increase in marginal interest rate from 2016 and GDP deflator close to 2%. On the basis of these assumptions, debt/GDP would decline to 54% of GDP by 2024. 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 beyond 2017. According to Germany's Stability Programme (April 2015), government debt related to financial sector support fell by 0.9% of GDP in 2014, to 8.2% of GDP. Debt related to the eurozone sovereign debt crisis (bilateral loans, EFSF, ESM paid-in capital) rose by 0.1% of GDP in 2014, to 3.1% of GDP. Contact: Primary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Arnaud Louis Director +33 1 44 29 91 42 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected]. 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