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 its short-term foreign and local currency issuer ratings at R-1 (high). The trend on all ratings remains Stable.

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 Germany faces 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 broadly balanced.

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 EUR37,954 underscores the economy’s resiliency to potential shocks and enhances the government’s ability to raise new revenues if needed.

A strong and credible policy framework underpins the sovereign’s creditworthiness. Germany’s rules-based approach to fiscal policy, reflected in the incorporation of the debt brake rule in 2009, establishes clear limits to unduly expansionary fiscal policy. Compliance with the fiscal targets is supervised by the Stability Council. In line with this, fiscal accounts are sound and the debt ratio is declining steadily. The government’s progress on fiscal consolidation since the crisis and its credible plans to reduce its debt-to-gross domestic product (GDP) ratio below 60% by 2020 from 68.3% in 2016 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. 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. If not addressed in a timely manner, the demographic change would significantly increase age-related spending and dampen government revenues as a result of weaker growth. The federal government has already started to address long-term financing of the pension system, although more measures may be needed in the future. On the other hand, the current wave of net immigration, if successfully integrated into the labour market, could improve potential growth and public finances.

Along with other European Union (EU) countries, Germany is facing significant migration inflows mostly from the Middle East. Germany received 890,000 asylum seekers in 2015 and 280,000 in 2016. Despite the fact that the intake of asylum seekers was lower than previously expected and contracted significantly in 2016, successfully managing this massive inflow 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 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.

Although the government debt ratio is on a steady downward path, a materialization of contingent liabilities could put additional pressure on the government balance sheet. According to Eurostat, the stock of government guarantees stood at 16.4% of GDP in 2014, well above the EU average (9%). Moreover, as the largest contributor to any official rescue package, Germany is financially exposed to a re-emergence of the Eurozone crisis. Furthermore, although contingent liabilities from the banking system are limited by Bank Recovery and Resolution Directive (BRRD), a resurgence of banking sector problems could put additional pressure on the sovereign. DBRS believes, however, that the government remains well positioned, both institutionally and in terms of its fiscal position, to absorb the potential crystallisation of liabilities currently outside the government balance sheet.

RATING DRIVERS
DBRS could change the Stable trend to Negative in the event of a deterioration in growth and fiscal prospects severe enough to place the public debt-to-gross domestic product (GDP) ratio on a persistent upward trajectory. Moreover, a material crystallisation of contingent liabilities could exert 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 Deutsche Bundesbank, Ministry of Finance, German debt agency (Deutsche Finanzagentur), Federal Statistical Office, Stability Council, Eurostat, European Commission, IMF, OECD, UNDP, BulwienGesa AG and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited 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 historical default rates published by the European Securities and Markets Authority (“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
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and
Sovereign Ratings
Initial Rating Date: 16 June 2011
Last Rating Date: 29 July 2016

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