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). DBRS has also confirmed the short-term foreign and local currency issuer ratings at R-1 (high). All ratings have a Stable trend.

The confirmation of the Stable trends reflect DBRS’s view that the risks for the ratings are balanced. Economic growth, albeit low/moderate, combined with on-going progress made by the government in fiscal consolidation and a decline in contingent liabilities of the banking sector, counterbalance vulnerabilities stemming from the high level of public debt and a rigid labour market.

Belgium’s wealthy economy, its track record of fiscal consolidation and strong net external asset position are key factors underpinning the ratings. Also reassuring is the role of strong institutions in a politically divisive environment, where the government remains committed to improving Belgium’s competitiveness as well as to fiscal consolidation. The financial position of the private sector is one of the healthiest in Europe, due to high household financial wealth and moderate net debt levels of firms.

With GDP per capita 27% 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 real GDP growth coming in at 1.3% in 2014 and rising further to 1.4% in 2015. This is largely attributable to growth-enhancing reforms to reduce the high tax burden on labour that constrains competitiveness, economic activity and in turn job creation.

Belgium has a strong record of fiscal consolidation both before and after the global financial crisis. Prior to the crisis, recurring primary surpluses enabled Belgium to bring down its debt ratio from 138% of GDP in 1993 to a low of 87% of GDP in 2007. Likewise, after the crisis, a series of revenue enhancing measures resulted in the deficit being brought down from 5.4% of GDP in 2009 to 3.0% in 2013, thus enabling Belgium to exit the EU’s Excessive Deficit Procedure (EDP) in 2014. 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. 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, the so called “tax shift”, and (2) moderating wage growth, thereby narrowing the gap in unit labour costs between Belgium and its neighbours. Both of these measures have helped improve competitiveness and boost job creation. The government has also adopted a major reform of the pension system in 2015 with the aim of reducing the difference between the effective and the actual retirement ages and raising the latter.

Also, the ratings benefit from Belgium’s external sustainability, which is considered robust given its positive net international investment position (NIIP) of 61.9% of GDP in 2015. This reflects healthy private sector balance sheets, which broadly offset the structural debtor position of the public sector.

Despite these strengths, the Belgian economy is exposed to some risks. One of the key structural issues facing Belgium is its high public debt at 106.1% of GDP, which is significantly above the Maastricht criteria of 60% and the EU average of 86.8%. Some progress has been made in stabilizing the debt-to-GDP ratio. Fiscal consolidation measures have been taken at all levels of government to reduce the budget deficit. However, debt sustainability risks remain high as a result of still modest economic growth combined with additional spending on security which puts pressure on the primary balance. Nonetheless, near term fiscal risks are mitigated due to low interest rates and a relatively long average debt maturity of 8.7 years. At the same time, the government has committed to balance its budget by 2018, and is undertaking measures to prune expenditure.

Belgium’s economic activity is also constrained by its labour cost dynamic, which is among the highest in the EU and its trading partners. Since 2000 unit labour costs have risen fast as a result of low productivity growth and, in particular, fast wage growth. The latter can be attributed to certain features of the wage-setting system impacting on inflation and in turn on external competitiveness. This has resulted in the 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 61.8% compared with an EU average at 65.6%. While the recent trend reflects an improvement in the labour market, there is an entrenched high unemployment rate. This can be explained by inactivity among the young, the low-skilled, and immigrants from outside the EU.

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 share of people aged 60 or over, is projected to increase to around 30% of the total in 2030 from 24% in 2015. Belgium also faces additional challenges. These include: (1) further terrorist attacks, (2) slowdown in external demand following the UK’s vote in the EU referendum, and (3) the low international competitiveness of Belgian goods.

RATING DRIVERS
The trend could be revised to Positive if the on-going reforms to support growth and reining in of the fiscal deficit results in a significant reduction in the debt-to-GDP ratio. On the other hand, the trend could be changed to Negative if there is a reversal in the on-going process of fiscal consolidation and measures being undertaken to improve competiveness, or a sharp downward revision to growth expectations.

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 National Bank of Belgium, Finance Ministry, National Institute of Statistics, IMF, OECD, ECB, European Commission, Eurostat, Ageing Working group 2015 report, World Population Ageing 2015 report. Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Carlo Capuano, Assistant Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 17 November 2011
Last Rating Date: 4 March 2016

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