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.

Germany’s AAA rating is underpinned by its large and diverse economy, solid fiscal framework, proven consolidation track record, and net creditor position. The confirmation of the Stable trend reflects DBRS’s view that the challenges faced by Germany are manageable and comfortably offset by the country’s strengths. Economic activity continues at a robust pace helped by strong domestic demand, and fiscal accounts are projected to remain balanced, although there are some downside risks to the outlook. Nonetheless, DBRS considers these risks to be balanced by the country’s fundamentals.

The size, competitiveness and diversification of the German economy support the government’s capacity to meet its financial obligations. Germany is the world’s fourth largest economy and the largest in Europe. Stemming from its competitive manufacturing sector and skilled labour force, as well as its diverse income sources, the country’s high GDP per capita at EUR38,697 underscores the resiliency of the economy to potential shocks and enhances the government’s ability to raise new revenues if needed.

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. A fiscal surveillance arm, comprising the Stability Council, provides early warnings when the federal government or any of the German Länder 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 2020 from 71.2% in 2015, underpin Germany’s rating.

Germany’s strong creditor status supports the rating, signalling the country’s ability to absorb external shocks and providing a stream of positive income flows for the economy. The healthy balance sheet position of the country’s corporations and households have resulted in a strong net lending position for the whole economy and have helped to keep external debt at relatively moderate levels. Although the government debt is held in its majority by foreign investors, Germany’s safe haven status enhances the government’s capacity to obtain financing, particularly during turbulent times.

Despite these strengths, Germany faces a number of challenges. Given its high degree of trade openness, the economy is exposed to fluctuations in external demand. The global growth outlook is subject to significant uncertainty and has been recently cut by 0.1% to 3.4% in 2017 by the IMF. The UK’s vote opens a period of renewed political uncertainty in Europe that has the potential to increase financial volatility, dampen investor and consumer confidence, and raise concerns over the European project. An erosion of confidence relative to the cohesiveness and assertiveness of the European countries to address its challenges could severely hit activity in the Continent. German investment and exports could suffer due to Germany’s close trade and financial links with UK and the EU. Also, a deeper than expected slowdown in emerging markets growth poses downside risk to external demand. A sharper than expected deceleration in China could rapidly spill-over to global trade and consumer and business confidence, significantly impairing external demand.

Along with other European Union countries, Germany is facing significant migration inflows mostly coming from 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 with 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 have been 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. Public age-related spending is expected to increase by 3.3 to 6.9 percentage points of GDP between 2014 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. The federal government has already started to address long-term financing of the pension system, although more measures may be needed in the future.

RATING DRIVERS
The Stable trend could be changed to Negative in the event of a severe deterioration in growth prospects that places the public debt to GDP ratio on a persistent upward trajectory. A substantial loss of confidence in the European project that leads to a protracted period of financial market turbulence could weaken the economic and fiscal outlook, negatively impacting the creditworthiness of the issuer. Also, a sizable systemic shock to the financial system could spark a period of financial instability and dampen economic growth, putting downward pressure on the ratings.

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.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. 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.

Lead Analyst: Javier Rouillet, Assistant Vice President, Global Sovereign Ratings
Initial Rating Date: 16 June 2011
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Last Rating Date: 29 January 2016

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