DBRS Confirms 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 risks for the ratings remain 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 if 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 European Union (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 1.0% in 2014, GDP is expected to expand moderately by 1.1% in 2015 and 1.4% in 2016, on the back of gradual improvements in both domestic and external demand. Growth is expected to be supported by the initial effects of measures introduced to restore cost competiveness, relatively low energy prices and improving external demand. Belgium’s current account returned to a surplus of 1.4% of GDP in 2014, from a deficit of 0.3% in 2013 and is expected to continue to record surpluses of 1.5% in 2015-2016. Moreover, Belgium continues to benefit from a strong external balance as reflected in a net international investment position of 49.7% of GDP in 2014.
Belgium has a sound track record of fiscal consolidations both prior to the crisis, and also more recently as reflected in contained fiscal deficits. However, fiscal consolidation slowed down in 2014 with the general government deficit increasing to 3.2% of GDP in 2014, 0.3% above its 2013 level as a result of the deceleration of economic activity and the statistical revisions under Eurostat’s ESA 2010 accounting system. Nevertheless, DBRS expects the deficit to gradually improve to 2.7% of GDP in 2015 and to 2.4% in 2016, thanks to lower interest charges and 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 two years later than previously expected by 2018.

Risks stemming from the banking sector have declined. The ongoing restructuring in the sector has reduced financial vulnerabilities while preserving the ability of the banks to provide credit to the economy. Deleveraging has reduced the balance sheet of banks to 251% in Q3 2014 from 410% of GDP in 2008. Capital injections have strengthened capital ratios, with the major Belgian banks passing the European Central Bank’s (ECB) Comprehensive Assessment. Contingent liabilities from the banking sector remain high, yet they have declined to 8% of GDP in September 2015 from 15.3% in 2012. These liabilities relate predominantly to outstanding guarantees provided to Dexia SA (Dexia), which DBRS does not expect to significantly decline over the medium term.

Despite these strengths, the Belgium economy is exposed to some risks. Given the openness and small size of the economy, the country is vulnerable to external shocks, especially to slowdowns in global trade levels that could affect the country’s export sector. While Belgian exports to China only amount to 1.7% of the total, a more severe economic deceleration in China could negatively affect Belgium’s main trading partners and dampen the export sector growth prospects materially. Also, uncertainty stemming from the geopolitical conflict in Ukraine and from the negotiations between Greece and its euro-area partners could dampen growth in Belgium’s main export markets and negatively affect the country’s growth prospects.

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% reaching 106.6% of GDP in 2014. In DBRS’s 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 and the reimbursement of a loan by KBC Banking Group; however, weaker-than-expected growth and persistently low inflation pose downside risks.

Weak external competitiveness and demographic trends also pose a significant challenge to Belgium’s potential growth prospects. Corrective wage policies have started to reverse in part a loss in cost competitiveness relative to its main trading partners, but the economy has continued to experience weak productivity growth. Recent pension reforms should help to contain growth in ageing related expenses over the long term, with ageing costs projected to rise according to the Belgian Federal Planning Bureau by 2.1% of GDP by 2060. The governing coalition has committed to a wide range of economic reforms which include a reduction in labour costs, raising the minimum retirement age, measures to shift the tax burden from income to consumption and social security-system reform, 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.

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Lead Analyst: Giacomo Barisone, Senior Vice President.
Initial Rating Date: 11 November 2011
Rating Committee Chair: Roger Lister
Last Rating Date: 13 March 2015

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