France has been able to avoid a second credit downgrade this year, providing President Emmanuel Macron some leeway as he tries to persuade investors that he can curb a debt burden that has swelled due to several crisis-related expenses. S&P Global Ratings has reaffirmed the country's AA credit rating, citing its prosperous economy and robust institutions that underpin its creditworthiness, although the outlook on the rating is still negative.
The rating agency cautioned that there are a few downside risks to France's economic outlook, mainly due to the country's already elevated general government debt. If the government debt as a percentage of GDP does not progressively reduce over 2023-2025 or exceeds 5% of revenue, the country's sovereign rating would be lowered within the next 18 months, according to S&P analysts. Last week, Scope Ratings put a negative outlook on its appraisal, and at the end of April, Fitch Ratings lowered France.
S&P's decision comes as a relief to President Macron since it indicates that his attempts since 2017 to develop a reputation for prudent management of public finances, combined with labor law and tax overhauls to boost economic growth. Nonetheless, his government has also opted for massive expenditures, responding to successive crises such as the Yellow Vests, the Covid pandemic, and the surge in energy prices. As the European Central Bank tries to stifle peak inflation, rising interest rates would further increase Macron's debt servicing expenses by over 50% to €70 billion ($75.3 billion) a year by 2027, according to the French government's estimate.
S&P revised its deficit forecast downward for 2023-2025 from 4.9% to 4.6% of GDP and now projects the deficit for 2026 to be 3.8%, thanks to the French government's revised budgetary consolidation strategy. "We predict that gross general government debt will remain above 110% of GDP with a lingering, albeit decreasing, primary budget deficit," S&P said.
Macron's capability to continue implementing unpopular but necessary overhauls that he claims are required to improve economic growth and debt ratios has been hindered by growing political headwinds noted by rating agencies. S&P, for instance, noted that a lack of an absolute majority in the French Parliament since mid-2022 could cause obstacles in policy implementation. While the pension reform that took effect earlier this year would support government finances, the mass protests and parliamentary battles over the change could make it harder for Macron to form parliamentary majorities to bring in future legislation.
French Finance Minister Bruno Le Maire termed S&P's verdict a "positive signal" for France, adding that the government would continue to undertake difficult but important reforms like the recent pension reform. Le Maire also indicated that a conference on public spending on June 19 would uncover "several billion euros" of supplementary savings. "France must remain unyielding in its strategy for debt and deficit reduction," Le Maire concluded.