Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Free State of Bavaria (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 29 August 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The AAA/Stable rating reflects the Free State of Bavaria’s low debt burden, excellent access to capital markets, ample liquidity, strong budgetary performance and wealthy economy. In addition, the rating is underpinned by a well-established and highly integrated institutional framework, characterised by a very strong revenue equalisation system together with the federal solidarity principle and the primary shock-absorbing role the federal government has assumed in the context of the Covid-19 and energy crises. These supportive factors are balanced by challenges related to limited revenue flexibility, high pension liabilities weighing on long-term expenditure flexibility, and sizeable yet manageable contingent liabilities.

Bavaria's economy has performed well since the Covid-19 crisis, recovering faster than Germany as a whole with growth of 2.8% in 2021 (2.6% for Germany) and 2.1% in 2022 (1.8% for Germany). The unemployment rate also stood near all-time lows in July 2023 at 3.3%, remaining well below the country average. However, the worsening economic outlook in 2023 is expected to significantly slow growth in Bavaria. The June 2023 ifo Business Survey fell to its lowest level this year, reflecting weaker growth expectations with a significant number of companies noting a decline in business. Production plans continue to be revised lower as export demand is expected to weaken further.

However, Bavaria’s public finances are well positioned to face the temporary economic slowdown. Very low debt and strong budgetary performance result in significant liquidity buffers by both national and international standards. The state repaid all maturing debt without recourse to credit authorisations in recent years, underpinned by high own cash holdings. While pandemic-related borrowing has increased debt to 28% of operating revenue (EUR 19.9bn according to Destatis) at end-2021, up from 21% of operating revenue in 2019, debt started to decline in 2022 to around EUR 19bn, falling to 26% of operating revenue. Scope expects broad policy continuity following the state elections to be held on 8 October 2023.

The Stable Outlook reflects Scope’s assessment that the risks that Bavaria faces remain balanced. The ratings could be downgraded if: i) Germany’s sovereign rating were downgraded; ii) changes to the institutional framework were to result in a notably weaker individual credit profile; and/or iii) the individual credit profile deteriorated significantly and structurally.

The methodology applicable for the reviewed ratings and rating Outlooks (Sub-Sovereigns Rating Methodology, 11 October 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Eiko Sievert, Director

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