Dagong Maintains the Sovereign Credit Ratings of Germany at AA+ with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
May 15, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Federal Republic of Germany (hereafter referred to as “Germany”) at AA+, each with a stable outlook. Germany’s repayment environment is widely stable while consumption and investment bring steady economic growth. The continuing fiscal surplus leads the government debt burden to continue declining, thus government solvency in local and foreign currency remains sound.
The key reasons for maintaining the sovereign credit ratings of Germany are below:
First, Germany’s repayment environment is stable for the most part. The Merkel Administration’s long-standing political capital guarantees political stability, yet the divided politics and growing populism will pose challenges to the German government’s ongoing implementation of its structural reforms — centering around fiscal reform, energy transformation, and Industry 4.0. In terms of the credit environment, the European Central Bank’s quantitative easing policy will continue providing credit support for the German economy, while continued economic growth and strict financial regulation assure the across-the-board soundness of the banking system. However, the long-term low-rate environment hampers traditional credit businesses, thus the banking system’s profitability is under constant pressure.
Second, domestic demand continues shoring up German growth. However, as affected by international trade protectionism and geopolitical factors, in the short term, Germany’s economy will register a stable but slower performance; meanwhile, in the medium and long term, the country faces growth constraints due to population aging, and several other factors. In the near term, private consumption will be supported by raising wages and income tax exemption, while investment is stabilized by strong domestic demand and the fact that the government enhances its support for infrastructure and digital technology. Nevertheless, Germany’s export demand is affected by trade protectionism and Brexit, amongst others. It is projected that in 2018 and 2019, German growth will decline slightly to 2.3% and 2.1%, respectively. In the medium and long term, energy transformation and Industry 4.0 afford Germany comparatively great economic competitiveness. Yet, German’s growth potential will be constrained by the labor shortage stemming from population aging, thus it is forecasted that the German economy will grow at around 1.4% over this period.
Third, repayment sources are secure. In the short term, steady economic growth stabilizes tax while the government utilises fiscal surplus to increase spending on infrastructure, digital technology, education and defense, as well as numerous other sectors. It is expected that in 2018 and 2019, the German general government’s primary surplus will slightly drop to 1.0% and 1.1%, while financing needs over the same period will decline on behalf of fiscal surplus and continually declining debt. That, coupled with relatively low financing costs, renders government repayment sources stable.
Fourth, government debt displays a falling tendency, hence stern solvency. Shored up by a continuing fiscal surplus, the German general government’s debt burden is forecasted to fall to 63.6% in 2018 and 62.3% in 2019, and is expected to drop below 60% in the medium term. That, combined with a rational maturity structure, enables government solvency to remain stable at a high level.
In the short term, government growth is steady, and government finance remains in a surplus, while the country’s government debt burden continues falling. These factors, combined with the high surplus in current account and a net creditor position, all lead to sound government solvency. Therefore, Dagong affirms a stable local and foreign currency sovereign credit rating outlook for Germany for the following one or two years.