DBRS Confirms Belgium at AA (high), Stable Trend

DBRS Ratings Limited has confirmed the ratings on the Kingdom of Belgium’s long-term foreign and local currency issuer ratings at AA (high), with Stable trends. DBRS has also confirmed the short-term foreign and local currency ratings at R-1 (high) with Stable trends.

The confirmation of the Stable trend reflects DBRS’s view that the risks for the rating are balanced. The trend could be revised to Positive if the on-going reforms to support growth and rein in the deficits result in a significant reduction in the debt-to-GDP ratios. On the other hand, the trend could be changed to Negative if there is a reversal to the on-going process of fiscal consolidation and measures being undertaken to improve competiveness, or a sharp downward revision to growth.

Belgium’s wealthy economy, its track record of fiscal consolidation and strong net asset position are key factors supporting the rating. Also reassuring are the measures being taken to support growth and improve Belgium’s competitiveness. The financial position of the private sector is one of the healthiest in Europe, due to high household savings and moderate net debt levels of firms.

With GDP per capita 20% higher than the European Union (EU) average, Belgium has demonstrated considerable resilience in the last few years. Following the stagnation in growth during 2012-2013, the economy saw a modest pick-up with GDP growth coming in at 1.3% in 2014 and rising further to 1.4% in 2015. This is largely attributed to on-going reforms on the labour front that have helped improve competitiveness and raise prospects for growth and employment. Moreover, healthy private sector balance sheets as reflected in a modestly indebted non-financial sector and a high levels of savings, coupled with the successful restructuring of the banking sector, are likely to continue to support the real economy.

Belgium has had a strong record of fiscal consolidation both prior and post the global financial crisis. Prior to the crisis, recurring primary surpluses enabled Belgium to bring down its debt ratio from 135% of GDP in 1993 to 86.9% of GDP in 2007. Likewise, after the crisis, a series of revenue enhancing measures resulted in the deficit being brought down from a high of 5.4% of GDP in 2009 to 2.9% in 2013, thus enabling Belgium to exit the EU’s Excessive Deficit Procedure (EDP) in 2014. Nonetheless, it is still subject to the preventive arm of the Stability Programme, which entails a structural adjustment target of at least 0.6% of GDP a year towards its medium term budgetary objective of a balanced budget in 2018. Key to note is that while the fiscal consolidation seen during 2009-2013 was achieved mainly through revenue enhancing measures, the new government’s fiscal consolidation strategy is expenditure-based, combined with shifting the tax burden away from labour.

A reassuring development over the last 18 months is that, in line with its pre-election promises, the government has taken various measures to support growth and improve Belgium’s competitiveness. These include: (1) redirecting taxes from labour to consumption, and (2) moderating wage growth thereby closing the gap in unit labour costs with Belgium and its neighbours. The government has also taken measures to reduce public expenditure and rein in the deficits. Measures undertaken and being contemplated include: (1) a freeze in the wage indexation mechanism, and (2) pension reforms, including raising the retirement age and a proposed ceiling on healthcare expenditure. Lastly, Belgium’s external sustainability is considered robust given its positive net international investment position has been stable at around 50-55% of GDP.

Despite these strengths, the Belgian economy is exposed to some risks. Among the key structural issues facing Belgium are its labour costs, which are among the highest in the EU and its trading partners. Apart from negatively impacting competitiveness, this has resulted in underutilization of labour and low employment rates. To put things in perspective, the combination of generous access to unemployment benefits, early retirement schemes and high labour taxes have resulted in Belgium having one of the lowest employment rates in Europe in the 15-64 age group, at 62%. Encouragingly, restoring competitiveness is one of the new government’s key priorities with the government effecting a one-time skip of wage indexation.

Belgium’s high public debt at 106.1% of GDP, which is significantly above the Maastricht criteria of 60% and the EU average of 87.2%, is another challenge. While debt sustainability risks have moderated they remain high. As per DBRS’ baseline scenario, further reduction in the debt ratio is hindered by low GDP and inflation, an ageing population, pension payments and the consequent pressure on deficits. Nonetheless, near term fiscal risks are mitigated due to low interest rates and long average maturity of debt of 7.96 years. In addition, the government has committed to balance its budget by 2018 and is undertaking measures to prune expenditure.

In addition to high debt levels and inefficiencies in the labour market, similar to most other EU countries, demographic trends pose a challenge to Belgium’s growth prospects and pension outlays. The number of elderly are projected to increase by 33% between 2009 and 2025. Belgium also faces the challenges of a small and open economy. Risks to the outlook include: (1) Its unfavourable export mix, (2) fragile recovery in the EU as nearly 75% of its trade is with other EU countries, and (3) low international competitiveness of Belgian goods.

Notes:
All figures are in Euros (EUR) 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, European Central Bank, Eurostat, European Commission, and 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.

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http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

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Lead Analyst: Javier Rouillet, Assistant Vice President
Initial Rating Date: 17 November 2011
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Last Rating Date: 13 September 2015

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