S&P welcomes French reforms, but outlook negative

Updated 24 November 2012
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S&P welcomes French reforms, but outlook negative

PARIS: Rating agency S&P took a watch-and-wait attitude to new French economic reforms yesterday, holding an already downgraded notation but with a negative outlook, while giving the benefit of the doubt to the government's determination to enact change.
The S&P decision holding its rating at "AA+" came four days after Moody's cut its top rating for the country by one notch to "Aa1" and warned that more could come.
The latest S&P statement used a slightly more optimistic tone about the outlook for reforms being pursued and enacted than had Moody's. 
S&P, which downgraded France from top notch in January, referring to recent French announcements on the economy, said although the government was "determined to carry out budgetary and structural reforms" France's long-term outlook was "negative."
It said: "After flat growth this year, we believe that the French economy will grow by 0.4 percent in real terms in 2013."
This is about half the target of the government which is hoping for growth of 0.8 percent. The European Commission is forecasting growth of 0.4 percent for France in 2013.
S&P expressed concern over "wavering consumption levels, rising unemployment, and decelerating wages."
But is also said in a significant passage, that it believed "that the French government remains committed to budgetary and structural reforms that would build on the measures it has proposed so far and improve the country's growth potential.
It noted that this month the government had announced a national pact for growth and competitiveness.
Reacting to the statement, French Finance Minister Pierre Moscovici, underscored the government's "resolve" to "follow up on ambitious reforms to help in economic recovery and job creation."
The third main rating agency, Fitch, still gives France a top-notch rating but has said it will take another look at how France is doing.
The head of Fitch, Marc Ladreit de Lacharriere welcomed recent French statements favoring structural reforms and standing by budget targets, but said in remarks to France 2 radio that many investors  questioned "the credibility" of action to balance the budget in 2017.
However in a slight boost for France, the second-biggest economy in Europe after Germany, its borrowing rate fell to 2.161 percent in morning trading after the announcement. It had stood at 2.181 percent at close on Thursday.
The International Monetary Fund, the European Commission, and leading voices in Germany have all warned France that it must catch up with deep structural reforms to its economy, as do analysts on financial markets where France borrows to fund its public deficit and debt.
The S&P statement said: "Our baseline expectation is that the government will press ahead with further important structural reforms, despite opposition from vested interests which benefit from long-entrenched entitlements. Substantial reforms would underpin the government's fiscal consolidation strategy, in our view, and improve economic growth prospects."
But it also said that reforms, announced in recent weeks, to spur the competitiveness of French industry, including a corporate tax credit for firms' payrolls, were "useful but insufficient to significantly unlock economic growth potential."
The statement said that "labor and service-sector reforms would be positive for competitiveness, economic growth, and, in turn, sovereign creditworthiness."
The agency also said that France's tax burden was high at "more than 46 percent of GDP over 2012-2015 ... while we project general government spending will stay above 56 percent of GDP (gross domestic product) over the same period, the highest in the euro zone."
It said there was a one-in-three chance the rating could be lowered next year if growth prospects deteriorated further or reforms failed to overhaul the labor market, or if France's general government deficit stayed close to current levels.
The issue of confidence in French economic policy, widely seen as having changed direction more towards reform in recent months, is vital if the country is to be able to continue borrowing at record low levels of about 2.0 percent. This is not much above the rate at which Germany borrows.
One key policy target is for France to reduce its public deficit to within EU limits.
France has not run a balanced budget since the 1970s.
Moody's said earlier this week that although recent announcements in France went in the right direction, a legacy of 20 years of difficulty by successive governments in reforming the economy hung over the outlook.
The economy has been stumbling along at almost zero growth for about a year but in the last quarter rallied to show a gain of 0.2 percent, the same level as in Germany where the economy had been resilient but has been hit by a slowdown in business activity.
French industrial confidence rose marginally in November from October, when it had hit a three-year low, the national statistics office said yesterday.
The composite industrial sentiment index rose by three points from last month when it stood at 85 points, moving further from its long-term average of 100 points.
Ratings are vital tools for vast sectors of the financial and investment industries since they assist investors in categorizing investments by class of risk.


Jordanian cabinet approves new IMF-guided tax law to boost finances

Updated 21 May 2018
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Jordanian cabinet approves new IMF-guided tax law to boost finances

AMMAN: Jordan’s cabinet on Monday approved major IMF-guided proposals that aim to double the income tax base, as a key part of reforms to boost the finances of a debt-burdened economy hit by regional conflict.
“When only 4 percent of Jordanians pay (personal) income tax, this may not be the right thing,” Finance Minister Omar Malhas said in remarks after the cabinet meeting, adding the goal was to push that to eight percent. The draft legislation was submitted to parliament.
The IMF’s three-year Extended Fund Facility program aims to generate more state revenue to gradually bring down public debt to 77 percent of GDP in 2021, from a record 95 percent.
A few months ago Jordan raised levies on hundreds of food and consumer items by unifying general sales tax (GST) to 16 percent — removing exemptions on many basic goods.
In January subsidies on bread were ended, doubling some prices in a country with rising unemployment and poverty among its eight million people.
The income tax move and the GST reforms will bring an estimated 840 million dinars ($1.2 billion) in extra annual tax revenue that will help reduce chronic budget shortfalls normally covered by foreign aid, officials say.
Corporate income tax on banks, financial institutions and insurance companies will be pushed to 40 percent from 30 percent. Taxes on Jordan’s phosphate and potash mining industry will be raised to 30 percent from 24.
The government argues the reforms will reduce social disparities by progressively taxing high earners while leaving low-paid public sector employees largely untouched.
“This is a fair tax law not an unfair one,” said Malhas, who shrugged off criticism the law is lenient on many businesses connected to politicians whose transactions are not subject to tax scrutiny.
Husam Abu Ali, the head of the Income and Sales Tax Department, said a proposed IMF-recommended Financial Crime Investigations Unit will stiffen penalties for tax evaders. Critics say it will not tackle pervasive corruption in state institutions.
Abu Ali said the government could be losing hundreds of millions of dollars through tax evasion, which is as high as 80 percent in some companies.
The amendments lower the income tax threshold and raise tax rates. Unions said the government was caving in to IMF demands and squeezing more from the same taxpayers.
“It is penalizing a group that has long paid what it owes the state,” the unions syndicate said in a statement.
“It imposes injustice on employees whose salaries have barely coped with price hikes rising madly in recent years.”