NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) views the outcome of the French election as positive for France’s sovereign risk profile. The commanding win of independent candidate Emanuel Macron, with 66% of the vote, reinforces the strong likelihood that the thrust of policies in France with regards to European Union and eurozone membership will be sustained, thereby reducing existential eurozone risk. The upcoming parliamentary election in June remains a question mark given that Macron’s party, En Marche, may be unlikely to garner a majority of votes. Even so, France could be put on a path toward improving creditworthiness if Macron can institute long-overdue reforms, including the supply-side reform of the labor market, a key policy goal of the president-elect.
The outcome of the upcoming parliamentary election is difficult to predict, given the very low voter turnout in the second round of the presidential vote (estimated at under 75%). In the first round of the election two weeks ago, the 41% combined tally for populist, eurosceptic, and anti-immigrant candidate Marine Le Pen, and the left-wing nationalist candidate Jean Luc Mélenchon, further indicates electoral volatility. While Macron won by a wide margin, Le Pen nonetheless earned almost 34% of the votes in the second round of the French election on May 7. Should her party’s proportional results be repeated or expanded in the legislative vote, policymaking could become encumbered, albeit depending upon the performance of En Marche and the makeup of the resulting coalition.
Slow growth, in part because of structural rigidities in the labor market, and a large government debt of approximately 97% of GDP are France’s main sovereign credit quality constraints. France’s general government deficit to GDP last year stood at -3.4%, and its general government primary balance is projected to remain in deficit over the medium term, suggesting a continued modest rise in the trajectory of general government debt to GDP. Faster growth, contingent on structural reform, and fiscal rectitude are key to reversing that trend.
France is a core member of the eurozone and risks of a “frexit” would be destabilizing for France. The prospect of frexit would also rekindle concerns about the durability of the Eurozone project—a key credit strength of several member countries. Sharply reduced risk of a frexit is therefore positive to France’s credit quality and the overarching regional outlook.
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