DBRS Morningstar: French Sub-Sovereign Governments’ COVID-19 Impact Mitigated by State and Strong Financials but Challenges Lie Ahead

DBRS Morningstar released a commentary looking at the impact of the Coronavirus Disease (COVID-19) on French sub-sovereign governments’ (SSGs) finances and their ability, with the support of the central government, to withstand this shock.

The COVID-19 pandemic is putting financial pressure on local and regional governments across Europe. In France, SSGs are being relatively less affected on the expenditure side, as healthcare expenditure is almost exclusively a central government responsibility. On the other hand, on the revenue side, the impact of COVID-19 is significant for French SSGs in 2020 and will continue to affect them in the coming years.

The French central government (France, rated AAA, Negative by DBRS Morningstar) has reacted swiftly through revenue loss compensation mechanisms included in the third central government's budget bill for 2020 and an ad-hoc agreement with the transport authority Ile-de-France Mobilités. These mechanisms will provide some temporary relief to French SSGs. Nevertheless, given that some of this support is granted through cash advances –especially for French departments regarding their property transfer fees– it will have to be repaid. In addition, while these mechanisms compensate for the loss of revenues in 2020, SSGs’ tax receipts may remain lower than pre-crisis levels for longer.

DBRS Morningstar however considers that French SSGs entered 2020 on a solid financial footing. “The budgetary consolidation efforts engaged by French sub-sovereign governments in the last years offer them a strong resilience capacity in the current pandemic context” says Mehdi Fadli, Vice President at DBRS Morningstar. Thanks to the increase in their operating results over the 2015-19 period, French SSGs were able to increase their capital expenditure by almost 25%, while improving their debt ratios. The local public sector overall also enjoys a good access to liquidity, at low rates, thanks to the diversity of available long-term funding sources.

Nevertheless, “some specific budgetary challenges lie ahead, especially for French departments and entities with transport responsibilities which are more exposed to the economic and behavioral impacts of this pandemic”, says Nicolas Fintzel, Vice President at DBRS Morningstar. Some SSGs already see a surge in their operating expenses, in particular French departments, which are responsible for social expenditure, with the payment of the minimum income allowance (“RSA”). The funding of transport responsibilities will also remain challenging, especially on the passenger side depending on demand evolution.

Notes:
The commentary titled: “French Sub-Sovereign Governments’ COVID-19 Impact Mitigated by State and Strong Financials but Challenges Lie Ahead” is available at www.dbrsmorningstar.com.

For more information on the impact from coronavirus,, visit www.dbrsmorningstar.com or contact us at [email protected].

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