By Michel Rose
PARIS (Reuters) - S&P raised its outlook on France's "AA" long-term sovereign credit rating to "stable" from "negative", citing labor and tax reforms introduced in the last two years, in a boost to President Francois Hollande's Socialist government.
In the first positive rating action for France since the loss of its triple-A in 2012, the U.S. rating agency said the reforms carried out since Hollande's pro-business U-turn in 2013 should boost job creation, competitiveness and public finances.
"The clearest evidence that the measures are gradually taking effect is the improvement in France's non-financial corporations operating margins," S&P said in a statement.
In July, the Socialist government forced through parliament reforms designed to make France's protective labor laws more flexible, in part by allowing firms to tailor pay and work terms to their needs more easily.
It was the second time in as many years the government invoked a rarely used constitutional decree to force reforms through parliament, after it passed the so-called Macron law in 2015 to deregulate a raft of sectors of the economy and loosen rules banning Sunday trading.
The move comes just six months before a presidential election, which opinion polls show the unpopular Socialist government is expected to lose.
The loss of France's top-notch credit rating in January 2012, only a few months before the last presidential elections, had given ammunitions to Hollande's ultimately successful campaign against former president Nicolas Sarkozy.
On Friday, Finance Minister Michel Sapin welcomed S&P's rating action.
"The reforms we introduced are paying off since all the rating agencies are now confident in France's prospects," he said in a statement.
S&P also praised the declining cost of employment in France, citing a 43 billion euro ($48 billion) payroll tax credit scheme Hollande launched to reverse years of lost competitiveness.
Under the scheme, known as the Tax Credit for Competitiveness and Jobs or CICE, firms can seek a tax credit of 6 percent of their wage bill on salaries worth up to 2-1/2 times the minimum wage, making employing French workers cheaper.
That has boosted company margins back to pre-financial crisis levels of 2008.
However, S&P said it expected growth to fall short of the government's 1.5 percent target for this year and next, penciling in just 1.3 percent and 1.2 percent respectively.
Although it judged the government's 3.3 percent public deficit target for this year achievable, S&P said the 2.7 percent target for 2017 would be harder to reach, expecting the shortfall to be closer to 3 percent, the EU-mandated limit.
(Additional reporting by Jessica Kuruthukulangara in Bengaluru; Editing by Larry King and Diane Craft)