• 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.

Rating Action

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.

Downside scenario
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 

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 

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 

Key Statistics


Table 1

Saxony (State of) Selected Indicators
Fiscal year end Dec. 31
Mil. € 2015 2016 2017e 2018bc 2019bc 2020bc
Operating revenues 16,369 16,881 17,462 17,840 17,934 18,455
Operating expenditures 13,919 14,613 14,976 15,597 15,673 16,041
Operating balance 2,450 2,268 2,485 2,243 2,262 2,414
Operating balance (% of operating revenues) 15.0 13.4 14.2 12.6 12.6 13.1
Capital revenues 1,066 759 810 991 903 814
Capital expenditures 3,479 2,782 2,594 3,045 2,973 2,999
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
Debt repaid 1,674 1,475 376 1,193 615 790
Gross borrowings 1,205 18 - 580 360 720
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


Table 2

State of Saxony Ratings Score Snapshot
Key Rating Factors
Institutional framework Extremely predictable and supportive
Economy Strong
Financial management Very strong
Budgetary flexibility Average
Budgetary performance Very strong
Liquidity Exceptional
Debt burden Very low
Contingent liabilities 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 

Related Criteria

Related Research

  • 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 List

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 
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