DBRS Confirms Federal Republic of Germany at AAA, Stable Trend

DBRS Ratings Limited has today confirmed the Federal Republic of Germany’s long-term foreign and local currency issuer ratings at AAA and the short-term foreign and local currency issuer ratings at R-1 (high). All ratings have a Stable trend.

The confirmation of the Stable trend reflects DBRS’s view that the challenges faced by Germany are comfortably offset by the country’s strengths. The trend could be changed to Negative in the event of a severe deterioration in growth prospects that place the public debt to GDP ratio on a persistent upward trajectory. If the Euro Area sovereign debt crisis were to re-emerge, resulting in a large impact on Germany’s stock of public sector debt through the country’s participation in the various Eurozone rescue mechanisms, this could also put downward pressure on the ratings.

Germany benefits from a large, competitive, and diversified economy. The country’s high GDP per capita, at EUR36,364, and its competitive manufacturing sector are key factors supporting the rating. In addition, a dynamic and diversified export market supports Germany’s large trade surplus and has contributed to its significant net international investment position. Healthy private sector balance sheets, as reflected in a modestly indebted household and non-financial corporate sector, enhances the sector’s ability to absorb negative shocks.

The country’s strong fiscal framework supports budget discipline and further enhances its creditworthiness. A “debt brake” rule established in the Constitution stipulates that the cyclically-adjusted deficit for the federal government will be restricted to 0.35% of GDP from 2016 onwards, while the country’s 16 states (the Länder) will be obliged to balance their budgets over the business cycle from 2020 onwards. Various additional fiscal rules and guidelines enacted at the EU and Eurozone level, which were formally transposed into national legislation in 2013, strengthen the fiscal framework. In addition, a fiscal surveillance arm, comprising the Stability Council, provides early warnings when the federal government or any of the German states are at risk of missing their fiscal targets.

Moreover, the government’s progress on fiscal consolidation since the crisis, together with its credible plans to reduce its debt to GDP ratio below 60% by 2023, underpin Germany’s rating. Healthy budgetary outturns along with reduced interest costs, the winding-down of “bad banks” and its associated liabilities, and an expansion in GDP have been key factors supporting debt reduction in recent years. The government debt to GDP ratio, which peaked at 80.5% in 2010, is expected to decline to 71.3% at the end of 2015. DBRS expects continued growth, primary surpluses and low interest rates to buttress the downward trajectory for the debt to GDP ratio over the medium term.

The healthy balance sheet position of the country’s corporations and households, which have resulted in a strong net lending position for the whole economy and have helped to keep external debt at relatively moderate levels, also supports the ratings. Looking ahead, DBRS expects that households' strong balance sheets will support private consumption, whilst corporations’ increasing savings could also bolster investment over the medium-term. The robust performance of the labour market, with unemployment expected to have declined to 4.6% in 2015 and employment to have gained by 0.8% in 2015, and higher real disposable income should support domestic demand. DBRS expects real GDP growth to average 1.75% in 2016-2017.

Despite these strengths, Germany faces a number of challenges. Given the close economic and financial linkages with its Eurozone partners, a re-emergence of the crisis and a protracted recession in Europe could affect the German growth outlook. With respect to the potential effect of Greece or any other member country defaulting on its debt, the impact on Germany would be moderate and manageable in DBRS’s view, although growth prospects and confidence could be severely affected by a systemic crisis.

Given it high degree of trade openness, the German economy is exposed to fluctuations in external demand. A deeper than expected slowdown in emerging markets growth poses downside risk to foreign demand. A sharper than expected deceleration in China could rapidly spill-over to global trade and consumer and business confidence, significantly impairing foreign demand. In addition, an escalation of geopolitical tensions over Ukraine and Russia could also have a negative impact on the German economy. DBRS believes that in order for Germany’s growth performance to be materially impacted, an extreme scenario would need to unfold with a deep recession in Russia and severe disruptions in energy supply. DBRS sees such a scenario as currently unlikely.

Along with other European Union countries, Germany is facing significant migration inflows mostly coming from war-torn nations in the Middle East. Successfully managing the inflows of asylum seekers will be challenging for the government. The fiscal, macroeconomic, and political consequences for the country are subject to significant uncertainty. Substantially higher than expected public spending associated to the management of the influx of refugees to the country could pressure the fiscal accounts. However, the associated costs have been contained so far and are expected to be covered by the previously accumulated fiscal savings.

Over the medium and longer term, the projected decline in the working-age population poses significant challenges to Germany’s growth potential and to the sustainability of its public finances. According to the European Commission, public age-related expenditure are projected to rise by 5.1% of GDP (from 23.1% to 28.2%) between 2013 and 2060. However, the current wave of net immigration if successfully integrated into the labour market could improve potential growth and the public finances outlook. Moreover, the federal government already started to address the fiscal costs associated with the ageing population.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Deutsch Bundesbank, Ministry of Finance, German debt agency (Deutsche Finanzagentur), Federal Statistical Office, Stability Council, European Commission, IMF, OECD, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Javier Rouillet, Assistant Vice President
Initial Rating Date: 16 October 2011
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Last Rating Date: 7 August 2015

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