Home Ratings and Research Currently valid ACRA Europe affirms unsolicited credit ratings of AAA to Germany, outlook Stable
ACRA Europe affirms unsolicited credit ratings of AAA to Germany, outlook Stable
Friday, 11 October 2019

The Federal Republic of Germany (hereinafter, Germany, or the country) has been assigned the following ratings:

  • Long-term foreign currency credit rating at AAA and local currency credit rating at AAA;
  • Short-term foreign currency credit rating at S1+ and local currency credit rating at S1+.

The outlook on the long-term foreign currency credit rating is Stable and local currency credit rating is Stable.

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.


Credit rating rationale

Positive rating assessment factors

  • Highly developed economy with strong competitiveness.
  • Tight fiscal policies supported by a stringent debt rule.
  • Strong decline in debt servicing costs.
  • Consistently strong current account surplus and net international investment position.
  • Stable and developed public institutions.

Negative rating assessment factors

  • Low public and private investment.
  • High sensitivity to external environment.
  • Moderate contingent liabilities.

Stable outlook

  • Strong domestic fundamentals should mitigate the impact of global slowdown.
  • Low risk of materialization of the contingent liabilities stemming mainly from the financial system.

Potential rating downgrade factors

  • Severe financial shock resulting in a costly bailout of the banking system.



Sovereign model results
 

Block Indicative credit rating for the block Modifier Score Modifier corrections to the indicative credit rating Final credit rating for the block
Macroeconomic position AAA Potential economic growth 0 +1 AAA
Sustainability of economic growth 0
Efficiency of structural, economic and monetary policies +1
Public finance AA- Contingent liabilities and risk of them materializing on the sovereign balance sheet 0 +2 AA+
Fiscal policy framework and fiscal flexibility +1
Market access and sources of funding +2
Debt sustainability +1
External position AAA Balance of payments vulnerabilities 0 +1 AAA
External debt sustainability +1
Stability of currency regime 0
Institutional framework AAA Willingness to pay 0 0 AAA
Default history 0
Political instability and recent political decisions 0
Involvement in geopolitical conflicts, exposure to geopolitical risks 0


Assigned credit rating

Indicative credit rating

AAA

Modifier corrections to the indicative credit rating

+2

Final credit rating

AAA

Assigned credit rating AAA


MACROECONOMIC SITUATION AND ECONOMIC POTENTIAL

The German economy is more dependent on exports and manufacturing than its peers.

Germany has the fourth largest economy in the world and the largest economy both in the EU and the Eurozone. With GDP per capita (in purchasing power standards) at 52.5 thousand international dollars (IMF, 2018), Germany enjoys very high living standards. Germany is a leading exporter of high value-added manufacturing products (in particular, vehicles and machinery) with very high competitiveness as illustrated by consistently high current account surpluses and low unemployment. Compared to other large economies, German economic growth is far more export driven and manufacturing based, and therefore, more susceptible to global economic fluctuations. This was demonstrated during the financial crisis in 2009 when the economy fell by 5.7% and is to some extent evident during the current global slowdown as well.


Figure 1. Exports and manufacturing dependence of major EU economies

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Source: Eurostat, 2018

Growth is lackluster mainly due to a slowdown in external demand.

The German economy experienced a mild contraction in Q2 2019. Seasonally adjusted GDP fell by 0.1% on a quarterly basis, reflecting a negative contribution from external demand. High-frequency indicators are signaling the significant probability of another contraction in the third quarter. For the whole year, growth is expected to slow from 1.5% to about 0.5%. Despite the slowdown, private sector consumption is likely to support the growth given a strong labor market. The unemployment rate declined to 3.1% in Q2 according to Eurostat’s methodology, which is the lowest level since the reunification. 

The savings rate of German households has increased rapidly to over 18% in the recent quarters amid global trade uncertainty. With consumer confidence remaining close to the highest levels since early the 2000s and a relatively low likelihood of a further sharp increase in savings rate, German households have plenty of room to increase their consumption and, in turn, support economic growth. On the fiscal side, there is mounting pressure on the government to come up with a stimulus package in order to support the economy. ACRA Europe believes that there is moderate probability of fiscal stimulus in 2019, either in the form of lower taxes or higher government investment. Taking all this into account, GDP growth is likely to return to above 1% in 2020.

However, the risks are tilted to the downside and are mainly related to ongoing international trade tensions. Leaving indirect impacts aside, German exports are also threatened by tariffs on exports to the United Kingdom and the United States. In 2018, the United Kingdom was Germany’s fifth largest export market with a 6.2% share. In the case of a no-deal Brexit, a significant portion of these exports will become subject to tariffs. The US is threatening the EU with tariffs on car imports. According to the US Census Bureau, Germany’s car exports are worth USD 18.2 bln, which accounts for almost 1% of German exports.


The share of household consumption on GDP is low.

Germany’s growth is also vulnerable due to the structure of its GDP. Among the five biggest EU economies, Germany had the lowest share of private consumption (52%) and domestic demand (94%) on GDP in 2018, while the net external balance accounted for more than 6% of GDP. This structure reflects the high level of savings with subdued consumption and investment in the economy.


Figure 2.
GDP structure of major EU economies

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Source: Eurostat, 2018


Public sector investment is subdued.

In the medium- and long-term, the German economy will face challenges resulting from underinvestment and an aging population. Since 2010, investments accounted for only for 20% of GDP. Investment activity is subdued in both public and private sectors. Public sector investment is constrained by tight fiscal policy and fiscal rules (mostly on state and local government levels, which are responsible for two-thirds of public investment). In the last five years, public investment has accounted for only 2.2% of GDP. Only four cash-strapped periphery countries have invested less. The unweighted EU average stood at 3.4%.

Private sector investments have increased somewhat in recent quarters, mainly in the residential construction sector and in manufacturing due to high capacity utilization. Nevertheless, they are still constrained by a tax system that is not very investment friendly (high corporate taxation, non-deductibility of equity financing, limited loss carry-forward), red tape in certain sectors, and a shortage in skilled labor and infrastructure. The investment gap is manifested in lower capital stock per person employed compared to most western EU countries. In 2018, net capital stock per worker stood at EUR 184,000, the lowest in Western Europe except for the United Kingdom. Subdued investment activity is slowing the rate of productivity growth and, thus, the potential long-term growth rate.


Figure 3. Investment and Capital Stock compared to the Western European peers

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Sources: IMF, AMECO, ACRA Europe


Germany has the worst demographic projections among western EU countries.

Negative demographic trends are another factor hampering long-term growth potential. Despite the recent immigration wave, Germany has the worst demographic projections among western EU Countries; the working-age population is expected to decline by almost 15% by 2060. In ACRA Europe’s view, demographic trends could improve due to the increasing fertility rate, which has grown from 1.36% in the previous decade close to 1.6% in recent years.


Competitiveness and innovative capacity are very high.

Strong competitiveness and innovative capacity will mitigate the effects of underinvestment and the aging population. Germany scores very high on the global scale in regulatory quality and efficiency. According to the World Economic Forum, Germany has the seventh most competitive economy. Its competitiveness is strongly supported by innovation capacity. In 2015-2017, Germany invested an average of 2.96% of GDP into research & development. This was the fourth highest figure in the EU. In addition, Germany scores among the top countries in the EU in PISA scores, R&D personnel per capita, and patents per capita. Taking all of this into account, long-term potential growth is projected to be between 1-1.5% by both the EU and OECD, which is close to the average growth rate for the past decade (1.3%).


Inflation is running below the 2% target.

On the monetary side, inflation has not reached the 2% target rate since 2011 on an annual basis. The inflation rate has eased in 2019 after getting close to the target in 2017 and 2018, mainly due to the strong increase in food and energy prices. In the first nine months of 2019, it averaged at 1.4%. Similar to previous years, service prices are the main driver of inflation. Core inflation has been fairly stable in recent years, close to 1.3%. ACRA Europe expects inflation to remain below the 2% target in light of slow wage growth, negative demographics, and low inflation pressure in the Eurozone.


Figure 4.
Annual inflation and its components

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Sources: IMF, AMECO, ACRA Europe


ECB policies are expected to be in line with the German economic cycle.

In ACRA Europe’s view, the efficiency of Germany’s monetary policy is moderate. The European Central Bank (ECB) is consistently undershooting its inflation target and is not able to provide a significant boost to inflation despite its decrease. However, ACRA Europe believes that due to the significance of the German economy for the economic cycle in the Eurozone, the risk of the monetary policy being not appropriate for the German economy is low.


PUBLIC FINANCE  

Government debt is declining rapidly.

The German government continues its strong fiscal consolidation. In 2018, the debt to GDP ratio fell from 64.5% to 60.9%. This was just above the EU Maastricht criteria (60%), which is almost certain to be reached in 2019 for the first time since 2002. It is essential to note that in 2012, Germany's public debt was above 80% of GDP. This makes consolidation in Germany one of the strongest in the EU since the Eurozone debt crisis.


Figure 5. Change in general government debt to GDP ratio of Eurozone countries (2012-2018)
*Ireland has been excluded due to distortions in the measurement of GDP

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Source: Eurostat


The government strongly adheres to the balanced budget rule.

In addition to trying to set an example within the EU, the decrease of public debt was also helped by the constitutional law on balanced budgets, which stipulates the cap of the structural deficit at 0.35% for the federal government and 0% for individual states. This will take full effect for individual states in 2020. Germany has been recording budget surpluses since 2014 thanks to this rule. In 2018, the surplus reached 1.7% of GDP.


Debt servicing costs are declining at a strong pace.
In 2018, these costs accounted for 0.9% of GDP, while at the beginning of the decade this figure stood at 2.5%. The ECB easing policy along with a shortage of safe assets have been the major contributing factors. As of the release date of this report, the entire German yield curve has been negative. This implies further reduction of debt servicing costs in the future. In light of expected budget surpluses and declining debt service costs, ACRA Europe believes that the debt to GDP will decline close to 57% in 2020.

German debt has the second highest share in global reserves after the US Treasuries.

External government debt is high by global standards; in 2018, almost 50% of government bonds were held by non-residents. This is, however, the result of the safe haven status of German bonds, which are in high demand not only across the Eurozone, but globally as well. German bonds are largely held for reserve purposes due to the euro’s reserve currency status. According to the IMF Coordinated Portfolio Investment Survey, German bonds accounted for 12.5% of global sovereign bond reserves, the second highest after the US. External debt is almost exclusively denominated in euros. In 2018, only 4% of the total debt was denominated in currencies other than the euro.


Figure 6. Securities held as reserve assets by sovereign issuers (share of total)

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Source: IMF Coordinated Portfolio Investment Survey, 2018

Savings and regional banks’ liabilities are the main source of contingent liabilities.


Contingent liabilities are high by EU standards. According to the latest Eurostat data (2017), contingent liabilities and non-performing government assets accounted for 105% of GDP, the third highest in the EU. The majority of these liabilities (87% of GDP) is related to the liabilities of the public banks (savings banks and regional banks – Landesbanken). Additional 13% of GDP are related to government guarantees.

ACRA believes that the risk of large-scale materialization of the contingent liabilities is low. One factor mitigating this risk is the low indebtedness of the German private sector, implying low risk for losses related to non-performing loans. In Q2 2019, the NPL ratio stood at 1.2%, the fourth lowest in the EU. According to the Bank for International Settlements, the private sector debt to GDP ratio stood at 111.6% in Q1 2019, the lowest in western and northern Europe. The credit to GDP gap turned slightly positive in 2018. In Q1 2019, it stood at 2.1% of GDP. In light of low private indebtedness and the fact that the credit to GDP gap has been negative for 15 years, the risk stemming from excessive credit growth is low.


The German private sector debt is low compared to peers.


Figure 7. Private sector debt (% of GDP)

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Source: BIS, 2018


The second factor mitigating this risk is the fact that when banks get into trouble, governments do not pay off banking sector liabilities. Instead, they provide banks with additional capital, which is only a fraction of their outstanding liabilities. During the recent financial crisis, which has been the most severe in decades, the German government spent only 2.5% of GDP on banking sector recapitalization.


The profitability of German banks is the second lowest in the EU after Greece.

The German banking sector is facing challenges related to lackluster profitability. In 2018, the cost to income ratio was the highest in the EU at 76.8% and return on equity was the second lowest at 2.42% after Greece. Profitability is constricted primarily by the prolonged low interest rate environment coupled with low private sector debt and a fragmented banking structure (Germany has over 1500 banks), which increases operating costs. Low profitability has also weighed on banking system ratios through slower capital accumulation from retained earnings. In Q1 2019, the CET 1 capital ratio stood at 15.8%, which is lower than the unweighted EU average of 17.1%. The leverage ratio stood at 14.1%, which is higher than the unweighted EU average of 12.3%. Nevertheless, these ratios have seen substantial improvement in recent years and ACRA Europe considers them adequate.


Aging costs will weigh on Germany’s public finances in the long-term.

German public finances will face challenges related to aging in the long-term. The European Commission estimates an increase in pensions, healthcare, and long-term care costs of around 4% of GDP by 2060. Nevertheless, given the constitutional debt rule, responsible fiscal policy, and sufficient time to address the future issue, ACRA Europe does not consider future aging-related costs as a factor constraining the country’s creditworthiness.


EXTERNAL RISKS

Germany has a consistently high current account surplus, reflecting high competitiveness, an undervalued real effective exchange rate within the Eurozone, and high saving rates coupled with underinvestment. Surplus is driven by the goods and primary income balances, which reflect income from foreign investments (the country’s net international investment position is strong and stood at +66% of GDP in Q2 2019), while the services and secondary income balances are negative. On the financial account side, the portfolio investment balance turned positive in 2015 and has stayed in surplus since then.


Germany’s current account surplus is above the EU macroeconomic imbalance procedure threshold.

Given the sharper decrease of exports compared to imports, Germany’s current account surplus is expected to decline in 2019 from 7.3% of GDP in 2018. The Bundesbank expects a decline to 7.0%. Despite the decline, the surplus should remain above the 6% threshold, which is seen as in imbalance according to the EU macroeconomic imbalance procedure. High current account surpluses may have destabilizing effects within the Eurozone. Moreover, as demonstrated during the financial and debt crises, a significant portion of the exported capital, which is mirroring the current account surpluses, might be invested in risky securities.


Germany
’s external debt is low compared to peers.

The external debt to GDP ratio has been declining moderately in recent years. This ratio fell from its Q2 2012 peak of 175% of GDP to 151% in Q2 2019. Although high by global standards, it is below average compared to its western European EU peers. The currency and sectoral structure of external debt is sound, only 16% is denominated in foreign currencies. The share of sectors more prone to liquidity risk (banking, private non-financial without intercompany loans) is approximately 45%.


Figure 8. External debt compared to peers (% of GDP)

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Sources: ECB, Eurostat, Q2 2019 or most recent


The Bundesbank does not hold much in reserves due to the euro’s reserve currency status.

Foreign currency reserve ratios are low. International reserves can cover less than two months of imports and approximately a quarter of the foreign currency debt. This is not, however, a source of concern as the euro has reserve currency status and therefore Eurozone countries tend to hold much lower foreign exchange reserves compared to most of the world. As noted in the public finance section, German securities are the most in-demand for reserve purposes among Eurozone countries.

Since the ECB has provided a conditional guarantee for Eurozone sovereign debt via its outright monetary transaction program, the main risk for the stability of the Eurozone is political. In ACRA Europe’s view, political risks for the Eurozone are moderate. Politicians and central bankers in Eurozone countries have invested immense political capital in preserving the euro. But in some countries, most importantly Italy, public and political support for the euro is declining, and therefore the risk of the Eurozone breaking up in the future cannot be completely ruled out.


INSTITUTIONAL FACTORS

Germany’s rank according to the Human Capital Index is the second highest on the global scale.

Governance indicators in Germany are very high by global standards and are close to the average of its western European EU peers. This indicates the high quality of government institutions and a very supportive environment for the allocation of resources in the economy, and therefore for future potential growth. The average score for the governance indicators has been fairly stable over time. However, in recent years the political stability and absence of violence indicator has declined notably as a result of an increased number of terrorist attacks. Moreover, in ACRA Europe’s Human Capital Index, which is composed of life expectancy, years of schooling, and adult mortality, Germany scored second on the global scale.


Figure 9. World Governance Indicators compared to the Western Europe average (global average = 0)

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Source: World Bank


Appendix 1. Comparative analysis of Germany and the sample group


Comparison of macroeconomic and institutional indicators for 2018

Germany France Spain Italy Netherlands Austria
Macroeconomics GDP per capita (1000 EUR, PPS) 37.6 32.0 28.1 29.6 39.9 39.3
Real GDP growth (%) 1.5 1.7 2.4 0.8 2.6 2.4
CPI (% y-o-y) 1.9 2.1 1.7 1.2 1.6 2.1
Openness of economy (% of GDP) 88.7 63.4 67.5 60.5 157.6 107.8
Unemployment * 3.1 8.5 14.1 9.9 3.3 4.6
Public finance Consolidated government debt (% of GDP) 60.9 98.4 97.1 132.2 52.4 73.8
External consolidated government debt (% of GDP) 29.4 46.6 44.3 38.6 20.9 49.1
Consolidated government budget balance (% of GDP) 1.7 -2.5 -2.5 -2.1 1.5 0.1
Private non-financial sector debt (% of GDP) * 111.0 200.7 151.8 110.5 268.9 137.9
External position Current account (% of GDP) 7.3 -0.6 0.9 2.6 10.9 2.3
Real effective exchange rate (base: 2010) 99.70 97.65 98.64 99.11 100.12 104.84
External debt position (% of GDP) 145 216 168 121 484 148
Short-term external debt to total external debt (%) 37.5 41.5 39.5 42.7 23.7 26.4
Export diversification index *** 0.31 0.33 0.34 0.35 0.31 0.34
Institutional framework ** Political stability and absence of violence 0.60 0.11 0.25 0.31 0.87 0.92
Government effectiveness 1.62 1.48 1.00 0.41 1.85 1.45
Rule of law 1.63 1.44 0.97 0.25 1.82 1.88

* Eurostat methodology, Q2 2019

** Assessment of effectiveness ranges from -2.5 (weak) to 2.5 (strong).

*** Indicates the extent of differences between the country’s trade structure and the average world indicator and ranges from 0 (weak differences)
to 1 (strong differences).

Sources: Eurostat, ECB, BIS


Appendix 2. List of material data sources

International Monetary Fund
World Bank
Eurostat
The Bank for International Settlements
European Commission
Organisation for Economic Co-operation and Development
European Central Bank
Deutsche Bundesbank
Federal Statistical Office of Germany


Appendix 3. Key indicators

Balance of payments, EUR bln

  2015 2016 2017 2018
Balance of trade 248.4 252.6 253.1 221.7
Exports 1166.6 1178.6 1256.3 1292.7
Imports 918.2 926.0 1003.2 1071.0
Balance of services -19.2 -21.8 -21.9 -20.7
Exports 253.0 263.8 281.8 290.6
Imports 272.2 285.6 303.7 311.3
Balance of income 30.8 34.7 30.7 44.0
Income receivable 275.0 278.9 279.3 286.3
Income payable 244.3 244.2 248.6 242.2
Current account 259.9 265.5 261.9 245.0
Current account, % of GDP  8.5 8.4 8.0 7.3
International reserves at the end of the period 159.5 175.8 166.8 173.1

Sources: ECB, Eurostat

 

 External position (assets and liabilities), EUR bln

  2013 2014 2015 2016 2017 2018
External debt 4238 4495 4571 4765 4753 4839
long-term * 2233 2412 2351 2307 2230 2151
short-term (up to 1 year) * 1331 1400 1491 1686 1729 1816
External liabilities            
Sovereign issuer, including 1696 1822 1810 1849 1785 1816
monetary authorities 402 396 482 593 669 766
consolidated government 1294 1426 1328 1257 1117 1050
Banks 1380 1464 1404 1518 1518 1473
Other sectors 1162 1208 1358 1398 1449 1550
including intra-corporate loans 674 683 729 771 794 872
External assets, excluding shares 4347 4683 4836 5100 5183 5341
Sovereign issuer, including 893 848 961 1136 1273 1329
international reserves 144 159 160 176 167 173
other external assets 749 689 802 960 1106 1155
Banks 1698 1868 1819 1820 1703 1772
Other sectors * 1389 1563 1599 1673 1707 1746
Net debt -109 -188 -265 -336 -430 -502
Sovereign issuer 803 975 848 714 512 487
Banks -318 -404 -415 -303 -185 -299
Other sectors * -899 -1038 -970 -1046 -1051 -1067
International investment position (net),% of GDP 34.5 40.6 46.4 51.0 54.7 61.2
External debt, % of GDP 151 154 151 152 146 145

* Excluding direct investment

Sources: ECB, Eurostat

 

Budget indicators, % of GDP

Consolidated government 2015 2016 2017 2018
Income 44.5 44.8 45.0 45.6
Expenses 43.7 43.9 43.9 43.9
including debt servicing expenses 1.4 1.2 1.0 0.9
Primary budget balance 2.2 2.1 2.1 2.7
Overall budget balance 0.8 0.9 1.0 1.7
Consolidated government debt 71.6 68.5 64.5 60.9
% of income 160.9 153.0 143.5 133.7
Central government        
Income 12.9 12.7 12.7 12.9
Expenses 12.4 12.3 12.5 12.3
including debt servicing expenses 0.8 0.6 0.5 0.5
Primary budget balance 1.3 1.0 0.7 1.0
Overall budget balance 0.5 0.4 0.2 0.5
Central government debt 45.0 43.4 41.2 39.1
% of income 350.3 340.9 324.2 303.9
Note: nominal GDP, CHF mln 3030 3134 3245 3344

Source: Eurostat


Rating history

The rating was first released for distribution on October 12, 2018, with the last review on April 12, 2019.


Regulatory disclosure

The sovereign credit ratings have been assigned to Germany under the Methodology to assess Sovereign entities. An explanation of the importance of each rating category and a default definition is included in the ACRA Europe website. Information on the rate of historical failure is available at www.cerep.esma.europa.eu. The default rate means a percentage of ratings that were changed to default from the overall number of ratings, for each rating category and given period. The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. Since July 30, 2012, ACRA Europe has been a registered credit rating agency according to Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies.

The sovereign credit ratings and their outlook are expected to be revised within 6 months following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was issued as unsolicited. The rated entity did not participate in the credit rating assignment. ACRA Europe did not have access to the rated entity’s internal documents or management. ACRA Europe, in the context of routine care, verified all sources entering the rating process and considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The rated entity was notified on October 9, 2019, and after the notification there were no changes or amendments in the rating.

ACRA Europe provided no additional services to the German government. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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