France Country Risk Report & Analysis | Euler Hermes in Singapore

Bumpy growth, followed by a Covid-19 induced recession in 2020

AA1

LOW RISK for entreprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD 2715bn (World ranking 7, World Bank 2019)
Population	67mn (World ranking 21, World Bank 2019)
Form of state	Semi-presidential republic
Head of state	Emmanuel Macron (President)
Next elections	2022, presidential and legislative

Dynamic demographics
Infrastructures (e.g., transport) and public services are of high quality
Many international corporate giants and a growing presence of technological start-ups (‘French tech’)
Diversified economy
Tourism revenues
Quality education system

Dual labour market: Insiders vs. outsiders, leading to structurally high unemployment rate
Low employment rate among youth and seniors
Growing inequalities in spite of costly redistribution
Rapid deindustrialisation and low competitiveness of manufacturing firms
Lack of large SMEs that can bear the sunk costs associated with innovation and exports
Rent-based economy (e.g., retail distribution, taxis)
Elevated level of public spending and questionable efficiency

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Growing with imbalances

After a lost decade (from 2008 to 2016), France rebounded with stronger growth in 2017 (+2.4%). However, despite this positive surprise, many bottlenecks remained unsolved and growth slowed down again in 2018 (+1.7%) and in 2019 (+1.3%).

France has cumulated four overarching imbalances during the last decade. Each domestic sector has its own imbalances, which are weighing on the whole economy: a supersized government (fiscal spending reached 55.6% of GDP in 2019), a highly indebted corporate sector (73.5% of GDP) and high-saving households (about 15% of their disposable income). The fourth imbalance is at the country level, with a sizeable trade balance deficit (EUR59bn in 2019).

What does this mean for corporates?

These weaknesses do not mean that France is unable to grow. Corporate investment continued to rise by 3.8% in 2018 and 4.2% in 2019 as French corporates started to undertake their digitalization. After the Covid-19 outbreak, digital industries have become strategic for growth and have received government financial support of EUR600mn in 2020.

Corporate margins reached their peak in 2019 (32.8% of value added), thanks to the labor cost relief from the tax credit for employment and competitiveness (CICE). However, profit margins are structurally low in France compared to peer countries (43% in Spain, 42% in Italy and 40% in Germany), reflecting a high corporate tax burden and elevated labor costs.

Business insolvencies, which have been on a decreasing trend since the last four years, are likely to make a U-turn in 2020. Amid the Covid-19 outbreak, significant output losses (-33% during lockdown) deteriorated the payment behaviour of companies and exacerbated their cash constraints. As of the third quarter of 2020, we expect business insolvencies to pick up dramatically, leading to a cumulative increase of +20-30% by end 2021.

Highly indebted corporates heading for a deep recession in 2020

The building up of strong imbalances and growth acceleration in 2017 fuelled the risk-taking of French companies. As companies resorted to debt issuance to finance their needs, corporate debt increased by +2.3pp in 2018 to 74% of GDP, before declining slightly to 73.5% in 2019. Yet, the Covid-19 shock is now fuelling the indebtedness of French companies once again. In April 2020, loans to non-financial corporations grew at a record rate of 9.3% year-on-year (compared to 6.4% on average in 2019). These loans were mainly intended for covering the treasury needs of cash-constrained companies.

The lockdown measures to contain the spread of the Covid-19 virus hit the French economy through an unprecedented loss of activity in virtually all sectors. After a massive decline (-18.2% q/q) in the second trimester, we expect the French GDP to rebound (+16%) as of the third quarter of 2020. However, overall, France is likely to experience the worst recession since World War Two, with GDP contracting by -18.2% in 2020. Economic growth is expected to rebound by +7.4% in 2021, thanks to continued fiscal support from the government and the recovery of domestic demand. We expect France to catch up with its pre-crisis GDP growth trajectory (+1.5% on average) only as of 2022. Inflation is expected to remain muted in 2020 (+0.4%) and to increase slightly in 2021 (1.4%) amid rising import prices and stronger internal demand.

The French government has implemented a wide number of emergency measures (7% of GDP) to limit the extent of the recession and support the recovery. These measures helped to absorb the immediate shock on households and companies, but will have a large fiscal cost. We expect the fiscal deficit to soar from -3% in 2019 to -11.8% in 2020, while public debt, which was already high in 2019 (98.8 % of GDP), is likely to reach 119% by end 2021.

Trade structure by destination/origin

(% of total)

Exports	Rank	Imports
Germany 15%	1	18% Germany
United States 8%	2	9% Belgium
Italy 7%	3	8% Italy
Spain 7%	4	8% China
United Kingdom 7%	5	7% Spain

Trade structure by product

(% of total)

Exports	Rank	Imports
Other transport equipment 12%	1	10% Road vehicles
Road vehicles 9%	2	6% Other transport equipment
Medicinal and pharmaceutical products 6%	3	6% Petroleum, petroleum products and related materials
Electrical machinery, apparatus and appliances, n.e.s. 6%	4	6% Electrical machinery, apparatus and appliances, n.e.s.
Other industrial machinery and parts 5%	5	5% Miscellaneous manufactured articles, n.e.s.

The payment behavior of domestic companies is good but does have some margin for improvement as the average DSO does not match the standards set forth in recent regulations stringently transposing EU payment standards into domestic law.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

French courts are fairly efficient in dealing with disputes in a timely manner.

The law in France provides for a complete set of restructuring proceedings when a company is facing financial difficulties, however, when liquidation proceedings are opended, the chances of collecting debts are very low.