France vows to push on with reforms after Moody's downgrade

France's finance minister reaffirmed the country's commitment to economic reforms on Friday after ratings agency Moody's cut French bond ratings by a notch to Aa2, citing continued weakness in the country's medium-term growth outlook. The French government on Wednesday stuck to "cautious" growth and deficit targets two weeks before the release of its 2016 budget, saying it was right to ask EU partners for a delay in bringing down borrowing last year as an economic recovery was taking hold.
However, Moody's said it decided to downgrade France's government bond rating because it expects French economic growth to remain low over the medium term, likely weighing on "any material reversal" in France's debt burden. "The current economic recovery in France has already proven to be significantly slower - and Moody's believes that it will remain so - compared with the recoveries observed over the past few decades," Moody's said, placing a stable outlook on France's new rating.
President Francois Hollande has said that the country will not be able to cut its public deficit to within European Union targets as soon as planned because of weak growth and low inflation, casting doubt on the country's reform drive. France left its main targets untouched on Wednesday. The public deficit is set to fall from 3.8 percent of gross domestic product in 2015 to 3.3 percent next year, before falling below the European Union-mandated threshold of 3 percent in 2017.
The government also stuck to previous growth forecasts of 1 percent in 2015 and 1.5 percent next year, in line with the consensus of international organisations. Inflation will reach 0.1 percent this year, before picking up to 1.0 percent in 2016. In a statement responding to the downgrade on Friday, Finance Minister Michel Sapin said recent economic and budgetary data showed the government's capacity to revive the economy and vowed to press ahead with reforms.
"The government remains firmly committed to continuing and increasing its reform policies aimed at upholding potential growth and employment in the French economy," he said in a statement. Moody's said it saw France's potential annual growth rate at about 1.5 percent over the medium term. France would continue to be plagued with a high rate of structural unemployment, relatively weak corporate profit margins, and a loss of global export market share due to rigidities in its labour and product markets, the ratings agency said.