- We expect the State of Saxony to continue to benefit from strong tax revenues, discipline on the expenditure side of the budget, and a very supportive fiscal equalization mechanism in Germany, leading to small surpluses after capital accounts over our 2018-2020 forecast horizon.
- Saxony's burden from debt and, particularly, debt-like obligations has reduced markedly in 2017, thanks to the disposal of a state-guaranteed legacy portfolio from former Sachsen LB with much lower losses than we had so far anticipated would eventually materialize.
- We are affirming our 'AAA/A-1+' ratings on Saxony.
- The outlook remains stable.
On March 23, 2018, S&P Global Ratings affirmed its 'AAA' long-term and 'A-1+' short-term issuer credit ratings on the German State of Saxony. The outlook remains stable.
The stable outlook reflects our view that Saxony will continue to display a very strong budgetary performance with small surpluses after capital accounts and maintain its now very low level of indebtedness. The outlook factors in our assumption that tax revenues in Germany will remain healthy and the reorganization of the national fiscal equalization scheme from 2020 will support Saxony's fiscal performance.
Any negative rating action on Saxony would require a substantial deterioration in several of the factors that determine the state's stand-alone credit profile (SACP). With Saxony's SACP already at the same level as the rating itself, the additional uplift from the perceived extraordinary credit support of other German states and the federal government currently is inconsequential and acts as a buffer against a downgrade. We therefore consider rating downside in the near term to be highly unlikely.
We have reduced our assessment of Saxony's 2017 debt burden by about €1 billion, triggered by the disposal of the portfolio of special-purpose vehicle Sealink Funding on surprisingly positive terms. This collection of legacy assets from the former Sachsen LB is covered by a first-loss guarantee from the state. We had expected eventual full utilization and therefore included the full guarantee as a debt-like obligation in our assessment, but we can now disregard nearly the entire amount. This does not only lower the volume of the state's financial liabilities, but it also removes the forecasted liquidity impact from having to fund payouts under the guarantee. Our unchanged expectation of a very strong budgetary performance over the forecast horizon assumes continued strong German tax revenues, as well as ongoing expenditure discipline, and it incorporates our view that the reorganization of the German fiscal equalization mechanism in 2020 will support Saxony's fiscal performance. The state's only-average budgetary flexibility and relatively low level of contingent liabilities, primarily its exposure to state-owned development bank Saechsische Aufbaubank (SAB), are neutral to our ratings. We consider it likely that Saxony would benefit from extraordinary credit support from the federal government or other German states in a stressed situation. We would normally therefore apply a one-notch uplift from the SACP, but since our SACP on Saxony is already 'aaa', this currently has no effect on the rating.
Very strong economic and institutional backdrop forecast to continue
We characterize Saxony's economy as strong in an international comparison. However, despite arguably being one of the two economically strongest East German states and posting an unemployment rate below that of West German North Rhine-Westphalia (6.7% compared with 7.2% in February 2018), the economic strength of Saxony still falls short of the German average. A comparison between national and regional GDP per capita, estimated at $45,000 and $34,000 for 2017, respectively, quantifies the difference. Saxony's fiscal performance is largely determined by the extremely supportive German institutional framework, namely the fiscal equalization mechanism. This mechanism compensates for most of the pre-equalization shortfall in regionally-collected tax revenues per head compared to the national average (Saxony still falls short by about 40% of the national average). In 2017, Saxony obtained €4.1 billion in fiscal-resource dependent transfers from the system, split into €1.2 billion of direct inter-state equalization payments and €2.9 billion from the federal level (supplementary VAT portions and general supplementary federal grants). The state also benefited from special-needs supplementary federal grants earmarked for infrastructure development of about €1 billion. Although the latter will reduce by about €200 million per year until 2020, we expect the overall amount of transfers will not decrease over the next few years, but rather will grow in line with the national economy. This also holds true, in our view, beyond 2020, when a system reform will replace direct inter-state equalization payments with a more extensive redistribution of VAT revenues by the federal level. In particular, more than €800 million in forecast additional VAT allocations to Saxony in 2020 should more than compensate losses to the state from various other transfers no longer being made. Although relating to a different level of government, the German federal elections held in September 2017 had material repercussions for Saxony's financial management. Witnessing the conservative (CDU) party relegated to second place for the first time since German reunification--in the territory of Saxony--in favor of the right-wing AfD, the state's incumbent prime minister and finance minister both bowed to pressure from their own party and resigned. Saxony's incoming political leadership under new state prime minister, Michael Kretschmer (also CDU), implicitly acknowledged that their predecessor's very strong focus on fiscal discipline, budgetary consolidation, and net debt repayments at the expense of, for example, teachers' jobs and transfers to municipalities, might have played a role in the CDU's electoral demise. In response, the new state government announced a multi-year investment program "Our plan for Saxony", which assembles various operating and capital expenditure projects. Relative to the tax revenue growth observed in recent years, we assess the implied cost for the various measures under the plan to add up to only a modest amount. Accordingly, we do not anticipate any meaningful relaxation in the fiscal discipline that Saxony has applied so far, and we continue to assess the state's financial management as very strong and capable. In any case, the requirement in both the state and national constitutions to maintain balanced budgets (from 2020 according to the federal constitution) in "normal" times should put an effective limit on any future expenditure programs that the state's management may still be contemplating.
Lower debt assessment following Sealink guarantee not being fully used
Preliminary budget execution data for 2017 confirm very strong fiscal results for Saxony in the past year and a significant outperformance of budgetary planning. We calculate an operating surplus of about 14% (versus 9% budgeted) and a balance after capital accounts of almost 4% (versus a budgeted deficit of 2%). Adjusting the (by now somewhat outdated) 2017/2018 bi-annual budget figures and the medium-term financial projections for various recent developments (for instance, updated tax revenue estimates, actual expenditure levels on personnel, and the spending program "Our plan for Saxony"), we forecast a continuation of the very solid budgetary performance over the forecast horizon of 2018-2020. In particular, we expect stable operating balances of about 12.5%-13.0% and positive balances after capital accounts of about 1% for those years. The long-awaited formation of a new "grand coalition" government at the German federal level has removed the uncertainty regarding the potential impact of future tax reform plans on Saxony that we mentioned in our last research update on the state (published on Oct. 6, 2017). All pre-election promises of major tax cuts, with the exception of a minor increase in the allowance for children, have been shelved. Budgetary flexibility in Saxony is, in our view, only average by international standards and the weakest factor in our rating assessment. With the vast majority of revenues being shared taxes and transfers (as is the case for all German states) and no major easily sellable assets available, we expect any adjustments would likely fall on the expenditure side--in Saxony, primarily affecting operating spending. The most noticeable update to our ratings assessment affects our calculation of Saxony's debt burden, which we reduce considerably by over €1 billion. So far, we had included Saxony's remaining first-loss guarantee obligation of €1.2 billion for the assets of Sealink Funding DAC, a vehicle that holds legacy assets from former Sachsen LB, as a debt-like obligation in our calculation of total financial liabilities. This reflected our expectation that the entire guarantee would be triggered at the latest in 2019 under a clean-up call. However, the administrator of Sealink Funding managed to sell practically the entire portfolio on very favorable terms in fourth-quarter 2017. Limited losses on the portfolio resulted in payouts under the guarantee of €308 million upon the sale, but will allow Saxony to eventually cancel in excess of €800 million in unused guarantees. Together with regular debt repayment, the resolution of the Sealink portfolio reduces our assessment of outstanding direct debt to €4.7 billion. Relative to operating revenues, this very low value ranks Saxony together with Bavaria as the two least-indebted German states. Of gross pension liabilities, €14.5 billion does not change our debt assessment because the state has already set aside €6.6 billion in assets, is gradually moving from investing in state-issued debt instruments to third-party assets, and is making annual cash contributions of about €600 million to its pension reserves. We continue to view Saxony's liquidity as exceptional. Modest volatility in debt service coverage, which we so far had included in our forecast for 2018 and 2019, is reduced by payouts under the Sealink guarantee no longer being necessary. With reduced funding needs, we expect Saxony to basically borrow only for the shifting of internal pension provisions to external reserve assets. In general, the state has excellent access to external liquidity. This comprises bank credit lines, the proven ability to issue bonds or Schuldschein-loan certificates in the capital markets, even in times of general market stress, and access to liquidity from other levels of government. Saxony's contingent liabilities predominately stem from its guarantees for its promotional bank and development agency, Saechsische Aufbaubank. We regard the effective risk from these guarantees as low, given the bank's strong risk profile and sound capitalization. Yearly losses from other guarantees are minimal. We are not aware of any financially significant litigation risk for Saxony.
|Saxony (State of) Selected Indicators|
|Fiscal year end Dec. 31|
|Operating balance (% of operating revenues)||15.0||13.4||14.2||12.6||12.6||13.1|
|Balance after capital accounts||36||245||701||189||191||228|
|Balance after capital accounts (% of total revenues)||0.2||1.4||3.8||1.0||1.0||1.2|
|Balance after borrowings||(433)||(1,212)||326||(424)||(64)||158|
|Modifiable revenues (% of operating revenues)||5.8||5.7||6.1||5.3||5.2||5.1|
|Capital expenditures (% of total expenditures)||20.0||16.0||14.8||16.3||15.9||15.8|
|Direct debt (outstanding at year-end)||7,149||6,171||4,669||4,315||4,060||3,990|
|Direct debt (% of operating revenues)||43.7||36.6||26.7||24.2||22.6||21.6|
|Tax-supported debt (outstanding at year-end)||7,483||6,266||4,765||4,411||4,156||4,086|
|Tax-supported debt (% of consolidated operating revenues)||45.7||37.1||27.3||24.7||23.2||22.1|
|Interest (% of operating revenues)||1.3||1.1||1.0||1.0||1.1||1.2|
|Local GDP per capita (single units)||27,899||28,474||29,735||30,806||31,871||32,910|
|National GDP per capita (single units)||37,485||38,260||39,974||41,426||42,871||44,278|
|The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. Base case reflects S&P Global Ratings' expectations of the most likely scenario. Downside case represents some but not all aspects of S&P Global Ratings' scenarios that could be consistent with a downgrade. Upside case represents some but not all aspects of S&P Global Ratings' scenarios that could be consistent with an upgrade.|
Ratings Score Snapshot
|State of Saxony Ratings Score Snapshot|
|Key Rating Factors|
|Institutional framework||Extremely predictable and supportive|
|Financial management||Very strong|
|Budgetary performance||Very strong|
|Debt burden||Very low|
|*S&P Global Ratings bases its ratings on local and regional governments on the eight main rating factors listed in the table above. Section A of S&P Global Ratings' "Methodology For Rating Non-U.S. Local And Regional Governments," published on June 30, 2014, summarizes how the eight factors are combined to derive the rating.|
Key Sovereign Statistics
Sovereign Risk Indicators, Dec. 14, 2017. Interactive version available at http://www.spratings.com/sri
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings , April 7, 2017
- Criteria - Governments - International Public Finance: Methodology For Rating Non-U.S. Local And Regional Governments, June 30, 2014
- Criteria - Governments - International Public Finance: Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 15, 2009
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
- Research Update: Germany-Based Saechsische Aufbaubank Ratings Affirmed At 'AAA/A-1+'; Outlook Stable - July 13, 2017
- Research Update: Germany 'AAA/A-1+' Ratings Affirmed; Outlook Stable - October 27, 2017
- Research Update: German State of Saxony Ratings Affirmed At 'AAA/A-1+'; Outlook Stable - Oct 06, 2017
- Considerable Tax Inflows Will Curtail German, Swiss, And Austrian Local And Regional Government Borrowing In 2018 - February 22, 2018
- Institutional Framework Assessments For Non-U.S. Local And Regional Governments - September 21, 2017
- Default, Transition, and Recovery: 2016 Annual Non-U.S. Local And Regional Government Default Study And Rating Transitions - May 08, 2017
- Public Finance System Overview: German States - December 16, 2016
- Banking Industry Country Risk Assessment: Germany - October 11, 2017
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee agreed that debt burden had improved. All other key rating factors were unchanged. Key rating factors are reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').
Ratings Affirmed Saxony (State of) Issuer Credit Rating AAA/Stable/A-1+
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
|Primary Credit Analyst:||michael stroschein, Frankfurt + + 496933999251;|
|Secondary Contact:||Thomas F Fischinger, Frankfurt (49) 69-33-999-243;|
|Additional Contact:||International Public Finance Ratings Europe;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.