Country Risk Rating

A3
Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average. - Source: Coface

Business Climate Rating

A1
The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

 

  • Quality of infrastructure and public services
  • Skilled and productive workforce, dynamic demographics
  • Tourism power
  • Competitive international groups (aerospace, energy, environment, pharmaceuticals, luxury goods, food processing, retail)
  • Global agricultural powerhouse
  • High level of savings

 

Weaknesses

 

  • Insufficient number of exporting companies, loss of competitiveness, and market share
  • Weakening of the product range, insufficient innovation efforts
  • Low employment rate of young people and senior citizens
  • Room for improving the efficiency of public spending
  • High public debt
  • Growing private debt

 

Current Trends

Recovery to be driven by domestic demand

The French economy will record a strong catch-up in its activity in 2021, after having gone through an economic crisis of unprecedented proportions in 2020 due to the pandemic. In order to limit the spread, a lockdown was decreed in spring and again in November, although some non-essential activities, such as construction or manufacturing production, were able to continue in the autumn. While activity is expected, at best, to stagnate at the beginning of the year in a still difficult health context, the recovery is then expected to accelerate, in line with the gradual vaccination of the population. Household consumption, which fell in 2020 due to successive travel bans and uncertainty, will be the main driver of this rebound. Their purchasing power has been relatively preserved during the crisis thanks to the partial activity scheme (which also made it possible to limit the rise in unemployment), households have, on this occasion, built up precautionary savings, the use of which in 2021 will depend on their level of confidence, which will gradually improve with the health situation. Moreover, the evolution of the latter will also condition business investment, which will continue to benefit, at least at the beginning of the year, from the support measures implemented during the crisis, such as the deferral (or even cancellation for certain sectors) of tax and social security payments, the solidarity fund for microbusinesses and state-guaranteed bank loans (EUR 126 billion granted as at the end of November 2020). In addition to these measures, the government will support activity via a recovery plan, with the expenditure of around EUR 37 billion in 2021 (i.e. 1.6% of GDP, including EUR 10 billion of cuts in production taxes). The rebound in the economy will therefore be driven by domestic activity, insofar as the economic situation will remain adverse for the two main sources of growth on the external front. On the one hand, aeronautics, the leading export sector (9% of the flow of goods and services), will remain affected by the air transport crisis, after recording a fall in foreign sales in 2020 (-46% over 10 months). On the other hand, tourism (8% of total exports) will remain hampered for most of the year by traffic restrictions and fear, which had already led to a drop in the number of overnight stays between January and September 2020 (-48%, of which -70% for non-residents). Although the support measures should make it possible to limit the number of insolvencies, like in 2020 (-38% over the first 10 months), it will rise again to around 60,000, or +16% compared to 2019.

The reduction of the public deficit will wait and the recovery plan will take precedence

After having increased sharply in the face of the scale of the economic crisis, the public deficit will remain very high in 2021. Most support measures, such as short-time work (EUR 7 billion budgeted for 2021) and the solidarity fund (in sectors affected by restrictions), will be extended, at least in the first part of the year, in line with the health situation. While their cost is expected to be lower than in the previous year due to their progressive phasing out, the measures included in the recovery plan will come into force, meaning that public expenditure will remain significant (60% of GDP). As a result, public debt will remain very high, at almost 120% of GDP, has been one of the few in the Eurozone not to decline in the years before the pandemic, despite favorable economic conditions. Once the health and economic crisis is over, the sustainability of public finances will be one of the main challenges.

The current account deficit is expected to shrink slightly in 2021, after having increased sharply in 2020 due to the worsening of the deficit in the balance of goods (3.2% of GDP in the first three quarters) and the contraction of the surplus in the services sector (0.3% of GDP), due to tourism. Although still limited, tourism receipts will pick up again, especially in the second half of the year. With the exception of aeronautics, the other flagship export sectors (automobiles, cosmetics, leather goods, wines, and spirits) are expected to record better performances, which will however be offset by a clear rebound in imports, in line with domestic demand. The large current account deficit will continue to be financed by debt or share issues subscribed by non-residents.

New Prime Minister on the eve of the presidential campaign

In power since 2017, President Macron and his center-liberal party, La République En Marche (LaREM), may no longer have a majority in the National Assembly (271 seats out of 577) since the defection of 17 deputies in May 2020, but can still rely on the centrists Modem (57 deputies) and Agir (20). Following the setback suffered in the municipal elections of June 2020, President Macron appointed Jean Castex, the head of the post-lockdown opening-up strategy, to succeed Edouard Philippe as Prime Minister. Although these elections were marked by the breakthrough of the ecologist party EELV, the polls conducted at the end of 2020 suggest, with a view to the 2022 presidential election, a new duel between LaREM and Rassemblement National (far right), with 25% of the votes each in the first round. Nevertheless, although the historic parties of the left (Socialist Party) and right (Republicans) seem to be in difficulty, the choice of their candidate could reshuffle the cards of the presidential campaign, in which Jean-Luc Mélenchon, leader of La France Insoumise (far left, 11%), has already announced that he will participate.

Source:

Coface (02/2021)
France