France Outlook Revised to Negative by Fitch Amid Coronavirus

(Bloomberg) -- France is at higher risk of a credit downgrade by Fitch after the outlook on the country’s AA rating was revised to negative.

Fitch cited the substantial worsening in public finances and economic activity expected this year due to the pandemic.

“The combination of much reduced economic activity due to containment measures introduced from March and government policies to support the economy in the period of enforced reduced activity will sharply increase government borrowing and indebtedness.” Fitch said in a statement.

France’s general government deficit is expected to widen from 3.0% of gross domestic product in 2019 to 9.3% this year, Fitch said. The nation’s GDP contracted by 5.8% in the first quarter, based on a preliminary estimate, with real GDP expected to drop by 7.0% this year.

Along with countries across Europe, France is spending billions of euros to help its economy through the coronavirus and related lockdowns. That’s stretching the public finances and pushing up debt, which the French government expects to hit 115% of GDP by the end of the year.

Emergency fiscal measures will cost at least an extra 110 billion euros for France. The government expects more to come with another budget before summer. In addition to furlough programs, tax cancellations and loan guarantees for companies, France plans aid packages for specific sectors, including state-financed incentives to buy electric vehicles.

The government says reforms of the tax system and the labor market in recent years put the country on a stronger footing as the crisis began, and the huge increase in debt is necessary to retain the benefits.

“It’s better to preserve our human and economic capital than to preserve our public finances, which we will work out how to repair when the time comes,” Finance Minister Bruno Le Maire said when presenting the emergency budget in April.

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