OREANDA-NEWS. July 14, 2015. Fitch Ratings has affirmed Germany's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Germany's unsecured foreign and local currency bonds have also been affirmed at 'AAA'. Fitch has also affirmed the Short-term foreign currency IDR at 'F1+' and Country Ceiling at 'AAA'.

KEY RATING DRIVERS
Germany's 'AAA' rating primarily reflects its strong institutions and diversified, high value-added economy. The country's high structural current account surplus (6.5% of GDP on average over 2010-2014) has supported the country's net external creditor position. Government debt (75% of GDP in 2014) is higher than the 'AAA' median (45% of GDP) but is on a firm downward path thanks to strong budgetary discipline. The ageing population weighs on the longer-term potential growth.

Germany's 'AAA' IDRs also reflect the following key rating drivers:

The general government has registered small surpluses since 2012. Consistent with the authorities' commitment towards budgetary discipline and the eurozone fiscal rules, Fitch expects the government to remain in surplus, at 0.4% of GDP in 2017, down from 0.7% in 2014. Public finances benefit from a falling interest bill (at EUR51bn in 2014, or 1.7% of GDP, from EUR67bn in 2011, 2.5% of GDP) in a historically low interest rate environment. The average yield on issuance since the start of 2015 is 0.4%.

After a steep increase during the global economic crisis, the government debt ratio started to decline in 2013. Fitch expects debt/GDP will continue its downward trend to 65% in 2017, from 75% in 2014 and 81% in 2010. According to Fitch's long-term debt sustainability analysis, the 60% Maastricht threshold should be reached by 2020. The downward debt trajectory improves the sovereign's shock-absorbing capacity.

Fitch expects real GDP will grow above potential in 2015, although risks to this forecast are on the downside due to the risk of a Greek exit. The key driver of growth is domestic demand, which benefits from high job creation (the unemployment rate was 4.7% of the labour force in May 2015, the lowest level since at least 1991) and low inflation (0.3% in 2015). In the medium term, the agency expects GDP growth will decelerate, at 1.7% in 2017 and gradually converge towards its potential rate (1.3%).

Fitch expects the current account surplus will increase to 8.2% of GDP in 2015 from 7.5% in 2014, primarily due to the lower oil price, while the surplus with other eurozone trading partners will fall slightly. The agency expects the current account surplus will remain above 7% of GDP at the forecast horizon. Net external debt is set to decline as a result, to -14% of GDP in 2017 from -3.5% in 2014.

RATING SENSITIVITIES
The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However future developments that could individually or collectively result in a downgrade include:
-A reversal of the declining trend in the general government debt ratio. Debt approaching 90% of GDP would start to put pressure on the rating.
-Crystallisation of contingent liabilities, for example further state support to the banking sector or to other eurozone countries. As a member of the currency union, Germany is financially exposed to a re-intensification of the eurozone crisis.

KEY ASSUMPTIONS
In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 1.5% of GDP, trend real GDP growth averaging 1.3%, a gradual increase in marginal interest rate from 2016 and GDP deflator close to 2%. On the basis of these assumptions, debt/GDP would decline to 53% of GDP by 2024.

Future asset sales by the state-owned bad banks are likely, but their timing and size are unclear. Fitch does not assume any such debt-reducing transactions in its projections for government debt. According to Germany's Stability Programme (April 2015), government debt related to financial sector support fell by 0.9% of GDP in 2014, to 8.2% of GDP. The authorities expect it will decline by 0.8% of GDP in 2015. Debt related to the eurozone sovereign debt crisis (i.e. ESM, EFSF) rose by 0.1% of GDP in 2014, to 3.1% of GDP.

Although a possible Greek exit would represent a significant shock to the eurozone that could spark a bout of financial market volatility and dent confidence, Fitch does not believe it would precipitate a systemic crisis like that seen in 2012, or another country's rapid exit.