OREANDA-NEWS. April 04, 2016. Fitch Ratings has affirmed Germany's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA' with Stable Outlooks. The issue ratings on Germany's unsecured foreign and local currency bonds have been affirmed at 'AAA'. Fitch has also affirmed the Short-term foreign currency IDR at 'F1+' and Country Ceiling at 'AAA'.

KEY RATING DRIVERS
The 'AAA' ratings primarily reflect Germany's strong institutions and diversified, high value-added economy. A large structural current account surplus supports the country's net external creditor position. Government debt (71.6% of GDP in 2015) is higher than the 'AAA' median (43.3%) but is on a downward path. In Fitch's view, Germany has sufficient fiscal space to manage the migrant crisis without negative rating consequences.

The 'AAA' IDRs also reflect the following key rating drivers:

Germany's budget surplus increased to 0.5% of GDP in 2015 from 0.3% in 2014, supported by a further reduction in interest payments to 1.5% of GDP from 1.8%. Fitch expects a moderately expansionary fiscal stance in 2016 and 2017, in large part due to migrant-related expenditures, with a general government balance of 0% in both years. The importance of the government's "black zero" objective should constrain a larger fiscal loosening and we do not expect a return to significant deficit over the medium term. However, there is considerable uncertainty around the medium-term fiscal impact of the migrant crisis, including how the recent agreement with Turkey will affect net flows.

Germany is well-placed to accommodate the expected moderate fiscal loosening. Having increased by 15% of GDP after the financial crisis, general government debt fell steadily from 79.7% of GDP in 2012 to an estimated 71.6% in 2015, and Fitch forecasts a further reduction to 67.0% in 2017. According to Fitch's long-term debt sustainability analysis, the 60% Maastricht threshold would be reached in 2021. The downward debt trajectory improves the sovereign's shock-absorbing capacity.

Germany's external position is a key rating strength, with average current account surpluses close to 7% of GDP over 2011-2015, reflecting the country's competitiveness and high income from foreign assets, but also a fairly low investment rate. The current account surplus widened to an estimated 8.3% of GDP in 2015, from 7.2% in 2014, largely due to the low oil price and euro depreciation. In line with a weaker export outlook, Fitch expects a moderate reduction in the current account surplus but still remaining above 7% of GDP over the next two years. We forecast Germany's net external creditor position to strengthen further, to 25% of GDP in 2017 from close to 16% in 2015.

Fitch forecasts GDP growth at an above-trend 1.7% in 2016 and 1.8% in 2017, as strong domestic demand offsets external weakness. Fitch expects private consumption to maintain a similar pace to last year, growing 1.8% in both 2016 and 2017, underpinned by sound household fundamentals. Unemployment is at a post-reunification low of 4.3% and job vacancies near a record high. Growth in nominal earnings in 2016 looks set to match last year's 2.7%. Consumption is further supported by the low oil price, high inward migration, increases in the minimum personal income tax allowance, and higher pensions from this year. Weak global growth led to a fall in German export volumes in 4Q15, the first since 2012. Fitch forecasts continuing export softness, with net trade making negative contributions to GDP growth of 0.5pps in 2016 and 0.1pp in 2017.

HICP inflation fell to 0.1% in 2015 from 0.8% in 2014, whereas core inflation moderated only slightly to 1.0%. Fitch forecasts a steady rise in HICP inflation to 0.4% in 2016 and 1.7% in 2017. Average house prices increased by close to 6% over the last year but affordability measures are still more favourable than historical averages, supporting our view that the German property market is not yet overheating.

Longer-term, Fitch maintains its forecast that GDP growth will decelerate to a trend rate of 1.3%. The medium-term economic impact of the migrant inflow will be determined by the extent to which new arrivals are integrated into the labour market. The impact on GDP should be modestly positive, with downside risk to labour participation and unemployment rates.

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 ratings.
- 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
- Fitch's long-term debt sustainability analysis assumes trend real GDP growth of 1.3%, a primary surplus averaging 1.2% of GDP, a gradual increase in marginal interest rates from 2016 and a GDP deflator of 1.8%.
- 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 beyond 2017.