DBRS Confirms the Kingdom of Belgium at AA (high), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the Kingdom of Belgium’s long-term foreign and local currency issuer ratings at AA (high) and the short-term foreign and local currency issuer ratings at R-1 (high). All ratings have a Stable trend.

The confirmation of the Stable trend reflects DBRS’s view that the challenges faced by Belgium are broadly balanced. The trend could be changed to Negative if weakened political commitment to fiscal consolidation, or a material downward revision to growth prospects, either due to adverse external shocks or weak domestic demand were to materialise. A further deterioration in the country’s competitiveness position and in trend growth prospects, as reflected in the failure to adopt credible measures aimed at boosting potential output, could also put downward pressure on the rating. The ratings could face upward pressure if sustained improvement in the primary fiscal balance were to lead to a material reduction in the debt stock over the medium term.

Belgium’s sound track record of fiscal consolidation, its wealthy and resilient economy and a sound net foreign asset position are key factors supporting the ratings. The Belgian government has made substantial progress on fiscal consolidation and the 2014 Budget aims to reduce the deficit further. Positive developments on the fiscal side have been accompanied by improving macroeconomic conditions. However, these supportive factors are balanced by significant challenges: the country’s large stock of public sector debt, high ageing costs, waning competitiveness and political fragmentation.

Belgium’s wealthy economy, with GDP per capita 20% higher than the EU average, has demonstrated considerable resilience. Healthy private sector balance sheets, as reflected in a modestly indebted non-financial sector and a high level of savings, and the successful restructuring of the banking sector, have supported the flow of credit to the economy. GDP is expected to expand by 1.3% in 2014 and 1.5% in 2015, on the back of gradual improvements in both domestic and external demand. Unemployment however is set to rise further to 8.5% in 2014 from 8.4% in 2013 as job creation is projected to lag the recovery in GDP. DBRS expects that households' strong balance sheets will support private consumption despite the adverse labour market dynamics. Even with some recent weakening in the balance of payments, Belgium continues to benefit from a strong external balance as reflected in a net foreign asset position of 47% of GDP in 2013.

Belgium has a strong track record of successful fiscal consolidations both prior to the crisis when it brought its debt to 84% of GDP in 2007, down from 138% in 1993, and also more recently, as reflected in contained fiscal deficits. In 2013 the general government deficit declined to 2.6% of GDP from 4.1% in 2012, while its primary balance returned to surplus, at 0.6% of GDP, following four years of deficit. DBRS expects the deficit to remain below the 3% threshold in 2014-2017. The possible formation of a new federal government relatively soon after the May elections should reduce the risks of a loss of policy impetus and fiscal slippage arising from another prolonged political standstill. Moreover, Belgium's experience of protracted care-taker governments suggests that any fiscal slippage would be limited.

Risks stemming from the banking sector are gradually diminishing. The ongoing restructuring in the sector has reduced financial vulnerabilities whilst preserving the ability of the banks to provide credit to the economy. Deleveraging has reduced the balance sheet of banks to 271% in 2013 from 410% of GDP in 2008. Capital injections have strengthened capital ratios but profitability is still low. Contingent liabilities from the banking sector remain high, yet they have declined to 12% of GDP in 2013 from 15.7% in 2012. These liabilities relate predominantly to outstanding guarantees provided to Dexia, which DBRS does not expect to significantly decline over the medium term. The supervisory and regulatory frameworks have been strengthened, with a new banking law which restrains trading activities and improves the recovery and resolution framework, including by increasing buffers for depositor protection.

Despite this progress, several challenges weigh on the ratings. Belgium’s government debt remains high at 101.2% of GDP in 2013. Debt figures have been revised upwards by 1.2% in 2013 as a result of reclassification of some state-owned enterprises and of some transactions into the general government balance sheet following Eurostat criteria. Over the medium term, DBRS expects government debt to peak in 2014 close to 102% of GDP and to gradually decline thereafter supported by a sustained increase in the primary balance, which is expected to reach a surplus of 3.4% of GDP by 2017 and GDP growth.

Demographic and productivity trends also pose a significant challenge to Belgium’s potential growth prospects. The government undertook important reforms in recent years to increase incentives to work, with the objective of raising the employment rate to 73% by 2020. At the same time, total factor productivity growth has slowed significantly over the past decade, undermining real wage growth prospects. Waning competitiveness is materialising in a deteriorating current account, as Belgian exports to the EU and emerging markets remain subdued as a result of the country’s export mix and unfavourable developments in unit labour costs relative to the country’s main trading partners. The ratings are further constrained by the prevalence of a marked political and economic regional divide that could undermine political stability and the country’s ability to make headway in reducing its high debt stock and implement structural reforms.

Notes:
All figures are in Euro unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the Belgian Debt Agency, Ministry of Finance, National Bank of Belgium, National Institute of Statistics, Federal Planning Bureau, IMF, OECD, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone, Senior Vice President.
Initial Rating Date: 11 November 2011
Rating Committee Chair: Roger Lister
Last Rating Date: 21 March 2014

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