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German regions will benefit from solid revenue growth and declining debt

Staff writer ▼ | December 4, 2015
German regions (Laender) will continue to register solid revenue growth in 2016, which will spur a decline in debt levels, driving a positive outlook, says Moody's Public Sector Europe.
Germany   Expenditure growth will likely remain below revenue growth
"Expenditure growth will likely remain below revenue growth in 2016, a continuation of a trend since 2010. We expect that regional governments' tax revenues will rise by 3% amid a favourable macroeconomic environment," says Harald Sperlein, a Vice President and Senior Analyst at Moody's.

The rating agency forecasts a higher aggregate financial surplus in 2016 for the sector, of 1% of revenues, as most Laender have started to introduce savings measures.

Lower interest costs will also help to relieve budgetary pressure, says Moody's. It notes that the 16 Laender have been locking in very low interest rates to refinance maturing debt, of around 20bp above that of the sovereign, which signals the regions' status as a safe haven.

Moreover, aggregate sector debt is on a downward path. Moody's expects the level to drop to around 150% of operating revenues in the coming years, from over 210% in 2010 as Laender prepare for the "debt brake" rules. These are enshrined in the German constitution and require regional governments to report structurally balanced budgets - after adjustments for cyclical effects - from 2020.

The reduction in outstanding debt implies a lower refinancing need, of EUR70 to 75 billion in 2016 compared with EUR75 to 80 billion in 2015.

In addition, the equalisation system, which redistributes and transfers revenues from financially stronger Laender to weaker peers, are unlikely to have negative credit implications for the sector. Laender and the federal government will likely agree next year on new equalisation system to take effect in 2020.