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

DBRS Ratings Limited (DBRS) has 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 ratings could face upward pressure if sustained improvement in the fiscal accounts were to lead to a material reduction in the debt stock over the medium term. On the other hand, the trend could be changed to Negative if the current fiscal consolidation plan is not effectively implemented in 2015 and 2016, or there is a material downward revision to growth prospects. Further deterioration in the country’s competitiveness position could also put downward pressure on the rating.

Belgium’s wealthy economy, strong net foreign asset position, and sound track record of fiscal consolidation are key factors supporting the ratings. Belgium’s 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.

After growing at an estimated 1.0% in 2014, GDP is expected to expand moderately by 1.1% in 2015 and 1.3% in 2016, on the back of gradual improvements in both external and domestic demand. Over the medium term, growth is expected to be supported by the initial effects of measures introduced to restore cost competiveness, further easing of credit conditions, relatively low energy prices and accelerating external demand. DBRS expects Belgium’ current account surplus in 2014-2016 to likely increase from the 0.15% of GDP recorded in 2013, the first since the financial crisis. Moreover, 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 down from 138% of GDP in 1993 to 84% in 2007, and also more recently, as reflected in contained fiscal deficits during the global financial crisis. However, in 2014 the general government deficit increased to 3.2% of GDP from 2.9% in 2013, due to the deceleration of economic activity and by statistical revisions under Eurostat’s ESA 2010 accounting system. DBRS expects the deficit to decrease to 2.6% of GDP in 2015 thanks to the consolidation measures at all levels of government. Overall, the measures amount to 1.4% of GDP, with the emphasis on the expenditure side. The spending cuts are expected to be frontloaded, with the target of a balanced budget in structural terms to be reached by 2016.

Risks stemming from the banking sector have declined. 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 252% in 2014Q2 from 410% of GDP in 2008. Capital injections have strengthened capital ratios with the major Belgian banks passing the ECB’s Comprehensive Assessment. Contingent liabilities from the banking sector remain high, yet they have declined to 9.4% of GDP in 2014 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.

Despite these strengths, the Belgian economy is exposed to some risks. Given the openness and small size of the economy, uncertainty stemming from the geopolitical developments related to Ukraine and from the negotiations between Greece and its euro area partners, could dampen growth in the Belgian’s main export markets and impact negatively on the country’s growth prospects. While the direct impact of a further escalation of the conflict in Ukraine may only have a temporary direct effect, with less than 1% of Belgian exports going to Russia, the economy is vulnerable to a deceleration of global trade that could dampen export sector performance.

Another challenge stems from Belgium's high and rising government debt stock. Following the reclassification in the general government balance sheet of some public enterprises debt, government debt was revised up by over 4.5 percentage points reaching 106.5% of GDP in 2014. In our baseline scenario, debt-to-GDP is projected to peak at 107% this year and then gradually decline thereafter, supported by a sustained increase in the primary balance. However, weaker than expected growth, persistently low inflation or an escalation of tensions between the EU and Russia pose downside risks to our baseline scenario.

Demographic and productivity trends also pose a significant challenge to Belgium’s potential growth prospects. Total factor productivity growth has slowed significantly over the past decade, undermining real wage growth prospects. Waning competitiveness has materialised in a weakening current account since 2008, 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 new governing coalition has committed to a wide range of economic reforms to restore Belgium's economic competitiveness. These include a reduction in labour costs, raising the minimum retirement age, a reform of the tax and social security system which should gradually restore the economy’s competitiveness.

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: Alan Reid
Last Rating Date: 19 September 2014

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960