Standard & Poor’s Ratings Services said today it affirmed its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on the Federal Republic of Germany. The outlook is stable.
A detailed full analysis report on the Federal Republic of Germany was published earlier today on RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis at www.ratingsdirect.com.
“The ratings on Germany reflect its modern, highly diversified, and competitive economy, and a stable political environment with a track record of prudent macroeconomic policies and government expenditure discipline,” said Standard & Poor’s credit analyst Kai Stukenbrock.
The strong cyclical economic recovery currently underway has brought Germany’s medium-term growth prospects (2.3% on average for 2006-2010) back to par with the Eurozone. Unemployment is forecast to fall to its lowest level since reunification. Nevertheless, structural obstacles, particularly in the labor markets, risk constraining Germany’s medium to long-term growth prospects. Although some progress has been made in addressing some of these issues, progress on structural reform is expected to remains gradual and piecemeal, even under the grand coalition government, which commands solid majorities in both chambers of parliament.
Public finances have improved rapidly thanks to both sustained fiscal consolidation efforts and buoyant tax revenues, and the deficit is forecast to fall to 0.6% of GDP in 2007 from 3.2% just two years ago. The debt trajectory is now firmly on a declining path, projected to fall to just below 60% of GDP by 2010.
Germany continues to suffer, however, from fiscal flexibility that is below average for Europe. The report, titled “The 2007 Fiscal Flexibility Index: Continental Sovereigns Still Lagging Behind,” published on RatingsDirect, on May 31, 2007, analyzes fiscal flexibility index scores for 28 countries in the region, of which Germany ranks 26 (same ranking as in 2006). The index allows for cross-country comparisons of governments’ ability to adjust to adverse economic trends, and to react swiftly and effectively in the wake of economic shocks, by modifying tax and expenditure policies in a way that safeguards smooth debt-service payments. The index is constructed of two subindices. “On the revenue side, Germany ranked 20, while on the expenditure side, it ranked 27,” said Mr. Stukenbrock. “Consequently, Germany has limited fiscal flexibility due to constraints on both the revenue side and the expenditure side.”
“The stable outlook on Germany reflects the improvement in the condition of public finances, which had become the main threat to the sovereign’s extremely strong creditworthiness in recent years,” said Mr. Stukenbrock. “The government is expected to maintain expenditure discipline and the declining trend in general government debt.”
