Frankfurt am Main, February 10, 2023 — Moody’s Investors Service (“Moody’s”) has today affirmed the Government of Germany’s local and foreign currency long-term issuer ratings and the local currency senior unsecured rating at Aaa. The outlook remains stable.
The key drivers of today’s rating affirmation include Germany’s very high strength of institutions and governance, which underpin its capacity to effectively mitigate shocks and adapt to long-term changes. Moreover, the German economy’s ability to adjust to the energy shock illustrates the sovereign’s economic strength, although higher-for-longer energy prices will weigh on growth potential and exacerbate the effects of an ageing population. These governance and economic strengths together with expected gradual fiscal consolidation also underpin Moody’s assessment of Germany’s fiscal strength by supporting a decline in its debt burden from 2024.
The stable outlook reflects Moody’s view that the German government and economy will continue to effectively address the effects of the energy crisis and design a response that limits social and economic damage of future shocks. Similarly, while the policy response to population ageing has been limited to date, Moody’s expects that successive governments will take action to mitigate the associated credit effects.
Germany’s local and foreign currency country ceilings remain unchanged at Aaa. For euro-area countries, a six-notch gap between the local-currency ceiling and the local-currency rating (in Germany’s case, a zero-notch gap applies, which brings the ceiling to the maximum level of Aaa) as well as a zero-notch gap between the local-currency ceiling and foreign-currency ceiling is typical, reflecting benefits from the euro area’s strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It is also in line with Moody’s view of de minimis exit risk from the euro area.
In a related rating action Moody’s has today also affirmed FMS Wertmanagement’s (FMS-WM) Aaa local and foreign currency long-term issuer and senior unsecured issuance ratings. Concurrently, the (P)Aaa foreign currency senior unsecured shelf rating and the (P)Aaa local currency senior unsecured medium-term note programme rating have been affirmed as well. The following short-term ratings of FMS-WM have also been affirmed: the local and foreign currency Prime-1 issuer ratings; the local and foreign currency Prime-1 commercial paper ratings; the local currency Prime-1 deposit note/CD programme rating; and the local currency (P)Prime-1 other short-term rating. The outlook remains stable.
FMS-WM is a resolution agency or “bad bank” scheme for 100% state-owned Hypo Real Estate Group, which was created under the Financial Market Stabilisation legislation in Germany. FMS-WM is rated on par with the German sovereign because of an explicit guarantee and a loss compensation obligation from the Financial Market Stabilisation Fund (FMS or SoFFin) vis-à-vis FMS-WM, which is ultimately an obligation of the German sovereign.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL472801 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATINGS
FIRST DRIVER: STRONG INSTITUTIONS SUPPORT SHOCK ABSORPTION CAPACITY AND ABILITY TO ADAPT TO LONG-TERM CHANGES
The German government acted decisively to the energy crisis through a range of measures like the construction of new import infrastructure for liquified natural gas (LNG) and new legislation to accelerate the build-up of renewable energy sources, all of which demonstrate robust levels of institutional strength and an effective capacity to mitigate shocks.
This institutional capacity to manage shocks was demonstrated during the 2015 refugee crisis and the pandemic in 2020 and 2021. Germany has also shown itself capable of reversing debt trends on several occasions like during reunification, the low-growth environment in the early 2000s, and the global financial and euro area debt crises. For example, Germany’s debt-to-GDP ratio fell 23.1 percentage points between 2010 and 2019,[1] which was the strongest reduction recorded by a Aaa-rated sovereign.
Nevertheless, Germany faces sizeable challenges in the future. Absent further reform in areas like public pensions, health and social care, but also in the economy (the labour market, cuts in red tape and acceleration in planning and implementation processes), the total cost of ageing will rise to 27% of GDP by 2070, from around 23% in 2019, which is above the EU average.[2] These costs will widen fiscal deficits and increase general government debt to well above 80% of GDP, according to Moody’s projections.
The current government has started to take action, including reforms to the immigration law to attract highly-skilled immigrants from outside the EU, the start of an equity-based pension fund pillar with the aim to stabilize contribution rates from the late 2030s, and new legislation to speed up bureaucratic processes, especially in light of the energy transition.
SECOND DRIVER: VERY HIGH ECONOMIC STRENGTH DESPITE PRESSURES
Germany’s economic strength is supported by the economy’s large size and the high per-capita income levels. Germany performs well compared to Aaa and Aa1-rated countries in terms of productivity and is among the most competitive economies globally. In addition, Germany shows one of the lowest scores in terms of FDI restrictiveness according to the OECD[3], and generally fares well in international comparisons of spending on research and development (R&D).
Government financial support, greater-than-expected flexibility in large parts of the industrial sector in diversifying energy sources and mild temperatures helped to soften the slowdown in 2022, with real GDP growing 1.8% after 2.6% in 2021.[4] Nevertheless, high price levels and tighter financial conditions will weigh on private consumption and investment in 2023. Moody’s forecasts Germany’s economy will stagnate this year and recover slowly by 1.2% in 2024.
At the same time, near-term competitiveness pressures have increased, particularly for energy-intensive companies, but the reduction in gas and electricity prices since early December 2022 and the high filling levels of gas storage facilities limit the risk of energy rationing in 2023. Nevertheless, in Moody’s view the lingering effects of the energy crisis reflected in higher energy prices than prior to Russia’s invasion of Ukraine and demographic pressures weigh on Germany’s growth potential and could weaken Germany’s economic strength over the longer term.
Unfavourable demographics are reflected in a tight labour market. Shortages of skilled labour are most pronounced in areas that require ICT skills, but also in healthcare, mechatronics and automation technology. Ageing will lower Germany’s potential growth further from a projected 0.8-0.9% in 2023-2026[5], to only 0.7% over the late 2020s and early 2030s according to the European Commission’s Ageing Report[6], which is lower than for most Aaa- and Aa1-rated peers. Other competitiveness challenges relate to relatively slow progress with respect to physical and digital infrastructure and slow pace in increasing digitalization in the public sector and industry.
THIRD DRIVER: EXPECTATION OF A RETURN TO GRADUAL FISCAL CONSOLIDATION AND DECLINING DEBT BURDEN FROM 2024
In line with Germany’s track record following previous crises, Moody’s expects a return to gradual fiscal consolidation from 2024, but also notes that recent developments will lead to structurally higher spending in areas like defence and energy transformation.
A strong starting fiscal position meant Germany was able to announce sizeable support measures during the pandemic and in response to the energy crisis without materially weakening its public finances.
After large deficits in 2020-21 due to the pandemic-induced recession and related fiscal measures, Germany’s fiscal deficit eased to 2.6% of GDP in 2022 largely due to an increase in revenue. While coronavirus-related spending is gradually being phased out, government support related to the energy crisis is adding to fiscal spending, which together with a stagnating economy will increase the fiscal deficit to 3% of GDP in 2023. However, the size of the actual deficit is largely dependent on energy support measures, which hinge on the development of gas and electricity prices.
Moody’s estimates that general government debt decreased to 66.8% of GDP in 2022 from 68.6% in 2021. After another uptick in 2023 to around 68%, strong nominal GDP growth will gradually reduce Germany’s debt ratio to around 66% of GDP by 2026, which is above its 2019 low, and the median of around 45% for Aaa-Aa1 rated peers.
Government debt remains highly affordable, despite the increase in funding costs. Given its safe haven status, Germany is able to fund itself at comparatively favourable conditions. However, Moody’s expects a gradual weakening in debt-affordability indicators over the coming two to three years, albeit from exceptionally strong levels. Moody’s forecasts interest payments will increase to around 2.9% of revenues and 1.4% of GDP by 2025, which is more rapid than for many other Aaa-Aa1-rated peers given Germany’s shorter average term to maturity of around seven years for federal government debt.
RATIONALE FOR THE STABLE OUTLOOK
Germany’s very high economic resiliency and fiscal capacity provide a strong foundation to manage shocks, address long-term challenges and mitigate downside risks to Germany’s strong credit profile.
Consistent with the evolving response to the energy supply shock observed so far, Moody’s believes that the German government and economy will continue to address effectively the implications of this shock and, in the face of future shocks, design a response that limits social and economic damage while maintaining sustainable government finances.
While a response to population ageing and the economic and fiscal challenges it presents has been limited to date, Moody’s expects successive governments will take action that will mitigate the credit impact of demographic change.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Germany’s positive (CIS-1) ESG Credit Impact Score reflects low exposure to environmental and social risks as well as very strong governance. Moreover, Germany’s capacity to respond to costly environmental hazards or social demands is very high based on the country’s high-income levels, very large fiscal capacity and very high quality of governance.
The E issuer profile score is neutral to low (E-2), reflecting low exposure to environmental risks across all categories. Moody’s sees large industrial sectors such as automobile susceptible to carbon transition risks, though headway has been made in pursuit and adoption of green technology.
Germany’s S issuer profile score is neutral to low (S-2) reflecting low exposure to social risks across most categories and with particularly strong scorings in health & safety and access to basic service. In line with many advanced economies, Germany faces long-term economic and fiscal pressures from unfavorable demographic trends as highlighted by a decreasing working-age population and a relatively high dependency ratio. However, further labor immigration, an ongoing increase of the pension entry-age and Moody’s expectation that the government will implement further measures to improve the long-term sustainability of the pension system in the coming years will soften the negative impact of demographic trends on Germany’s credit profile. The gradual increase of the statutory pension entry age to 67 years from 65, which started in 2012, will be completed in 2029.
Germany’s G issuer profile score is positive (G-1). This is underpinned by the government’s high credibility, transparency and consensus on key fiscal policy goals and macroeconomic policies. It has demonstrated its high shock-absorption capacity and its ability to reverse debt trends in the past: in the context of German reunification, the low-growth environment of the early 2000s, during the global financial crisis and euro area debt crisis. It also reflects the professional and well-staffed public administration and the country’s very strong scores in global surveys assessing rule of law, voice and accountability, and the control of corruption. Coupled with its comparatively strong public finances and sound fiscal framework this supports a high degree of resilience.
GDP per capita (PPP basis, US$): 58,757 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 2.6% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.7% (2021)
Gen. Gov. Financial Balance/GDP: -3.7% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 7.4% (2021) (also known as External Balance)
External debt/GDP: 162.1% (2021)
Economic resiliency: aa2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 07 February 2023, a rating committee was called to discuss the rating of the Germany, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD MOVE THE RATINGS UP
An upgrade of Germany’s ratings is not possible as its Aaa ratings are at the highest level on Moody’s rating scale.
WHAT COULD MOVE THE RATINGS DOWN
Germany’s Aaa ratings would come under downward pressure if Moody’s were to observe a material and prolonged deterioration in its economic strength. Such an erosion could result from failure to address rising demographic challenges, as well as from competitive pressures on Germany’s manufacturing sector.
Additionally, the rating could come under pressure in the event of a sharp increase in the government debt burden that Moody’s deemed to be unlikely to be reversed, coupled with significantly deteriorated funding conditions.
Although not Moody’s baseline assumption, an escalation in the Russia-Ukraine military conflict into a war involving NATO members would also exert downward rating pressure.
The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL472801 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody’s disclosures on the following items:
EU Endorsement Status
UK Endorsement Status
Rating Solicitation
Issuer Participation
Participation: Access to Management
Participation: Access to Internal Documents
Lead Analyst
Releasing Office
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
REFERENCES/CITATIONS
[1] Eurostat 02-Feb-2023
[2] European Commission 02-Feb-2023
[3] OECD FDI Restrictiveness Index 02-Feb-2023
[4] DESTATIS 02-Feb-2023
[5] Stabilitaetsrat 02-Feb-2023
[6] European Commission 02-Feb-2023
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Steffen Dyck
Senior Vice President
Sovereign Risk Group
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Dietmar Hornung
Associate Managing Director
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
