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Rating agencies applaud Macron’s victory but warn of challenges ahead

While European markets seemed to be slipping on profit taking after centrist Emmanuel Macron won the French presidential elections, rating agencies have warned that the new presidency comes with challenges.

Fitch Ratings in a statement on Monday said the French election results have reduced the risk of a near-term political shock to France and wider Europe but warned of challenges and implementation risks ahead. The French election result supports Fitch's assumption that France will remain a member of EU and the euro zone, according to the ratings agency.

Fitch further explained that the presidential election also highlights the sense of disillusionment among many French voters, with 48 percent of the first-round electorate supporting anti-EU candidates, and a relatively low turnout compared to previous final-round elections (estimated at 74.6 percent, while 11.5 percent of ballots were blank or void).

Emmanuel Macron gestures after speaking at the Parc des Expositions in Paris, France, on April 23, 2017.
Christophe Morin | Bloomberg | Getty Images
Emmanuel Macron gestures after speaking at the Parc des Expositions in Paris, France, on April 23, 2017.

"A challenge for the incoming administration will be to address the concerns that have led to rising support for populist and Eurosceptic parties, such as high unemployment (around 10% in France versus 4% for 'AA' peers), while enacting potentially unpopular economic and fiscal reforms and maintaining a commitment to EU integration," according to Fitch.

Can Macron deliver?

Meanwhile, Standard & Poor's has been quite muted in its response saying that the outcome of the election will have no immediate impact on the country's ratings.

S&P's baseline expectation is that the next French government is likely to continue or even accelerate the current moderate pace of reform with a focus on unblocking the labor market and generating better growth outcomes.

However, Macron's ability to deliver these reforms is based on the outcome of the legislative elections in June and being able to find sufficient support in the new parliament, says S&P. The ratings firm currently rates France at 'AA' with a stable outlook.

Following Fitch and S&P, Moody's too had a similar set of analysis for France after Macron was elected as the next president. In a statement on Monday, Moody's said Macron's policy platform is, on balance, credit positive for France as it aims to enhance medium-term growth, while continuing the gradual process of debt consolidation.

"The ability of France's policymakers to design, and successfully implement, policies which enhance growth and support fiscal consolidation over time will drive the trajectory of France's rating and outlook over the medium-term," said Sarah Carlson, a Moody's Senior Vice President and co-author of the report. "The new president will face tests in all of these areas."

Supporters arrive ahead of Emmanuel Macron's Electoral Evening at The Louvre on May 7, 2017 in Paris, France. Voters are going to the polls to choose their next president after a tightly fought and somewhat unpredictable campaign.
Getty Images
Supporters arrive ahead of Emmanuel Macron's Electoral Evening at The Louvre on May 7, 2017 in Paris, France. Voters are going to the polls to choose their next president after a tightly fought and somewhat unpredictable campaign.

Debt 'unlikely to decline'

Moody's further warned that France's general government debt is nearly 100 percent of its gross domestic product and is unlikely to decline materially before the end of this decade.

"At the same time, France's growth potential is relatively weak, with trend growth unlikely to be above 1.5%, without significant growth-enhancing reforms," Moody's said in its report.

But Bank of America Merrill Lynch (BAML) seems to think otherwise. The U.S. investment bank has raised its forecast for French GDP growth, saying there were some positive signs from the election of Macron as president.

BAML raised its 2017 economic growth forecast by 20 basis points to 1.3 percent, and it increased its 2018 forecast by 10 basis points to 1.4 percent.

The U.S. bank said it was expecting Macron's party (En Marche) to get enough power in the lower house of parliament to carry out economic reforms.

"Our scenario....is conditional on En Marche either securing a majority on its own, or close enough to the threshold so that governing with moderates from the Socialist Party or Les Republicans would allow i) a prudent fiscal policy, with only a small measure of additional austerity; ii) the continuation of a drop in corporate/payroll tax supportive of investment, via improved margins, and employment," BAML wrote in a note.

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