DBRS Confirms 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). DBRS 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 reflects DBRS’s view that the risks for the ratings are balanced. Moderate economic growth, gradual fiscal consolidation, and declining contingent liabilities counterbalance challenges stemming from the high level of public debt and a fragmented labour market.

Belgium’s productive, open, and wealthy economy is a key factor underpinning the ratings. GDP per capita is 28% higher than the European Union (EU) average and total exports account for more than 80% of GDP. The government is implementing a strategy to further improve Belgium’s competitiveness by reducing labour costs and encouraging job creation. Furthermore, household balance sheets are among the healthiest in Europe, due to high household financial wealth.

While the Belgian economy has been relatively resilient in the post-global financial crisis period, economic growth slowed last year due to policy-related factors as well as the March terrorist attacks. Private consumption was less dynamic in response to the government’s wage moderation strategy, lower social benefits, as well as higher inflation. At the same time, lower tourism receipts following the terrorist attacks likely constrained economic activity. Growth will likely pick up this year as the adverse economic effects of the terrorist attacks recede and private consumption and investment strengthen. The European Commission expects GDP growth of 1.4% in 2017 and 1.6% in 2018.

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, which should improve competitiveness, 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 price competitiveness and boost job creation. The government has also adopted a major reform of its pension system, which increases the retirement age and aims to reduce the difference between the effective and the official retirement ages.

The ratings also benefit from Belgium’s strong external position. In the second quarter of 2016, the net international investment position (NIIP) amounted to 53% of GDP. The current account has a small surplus which is expected to remain positive in the coming year. The Belgian economy’s external finances reflect healthy private sector balance sheets.

Notwithstanding these strengths, the key challenges facing the Belgian economy are the high level of public debt and the fragmented labour market. Public debt increased to 106.8% of GDP in 2016, significantly above the EU average of 85.1%. Some progress has been made in stabilising the debt-to-GDP ratio following the financial and sovereign debt crises, and fiscal consolidation measures have been taken at all levels of government to reduce the budget deficit. Judicious debt refinancing at low rates has enabled the country to lower its interest burden and increase the average maturity.

However, the outlook for debt sustainability remains challenging due to ongoing fiscal pressures. While the tax shift clearly supported job creation, the overall reform was not revenue neutral. This, along with higher expenditures related to security and refugees, contributed to a widening of the fiscal deficit to 2.9% of GDP, missing the target of 2.5% set in the Stability Programme. In the Draft Budgetary Plan for 2017, the government remained committed to balancing its structural position by 2018. This target seems very ambitious. The tax shift plans include further tax cuts over the next three years that could generate lower revenues if not adequately offset. At the same time, the implementation of expenditure cuts could be challenging as the local and federal/regional elections approach in 2018 and 2019. Against this background, DBRS views 2017 as a critical year to adjust fiscal accounts and set a credible fiscal consolidation path.

Belgium’s fragmented labour market is characterised by unfavourable labor cost dynamics, low employment rates and high structural unemployment. Since 2000, unit labour costs in Belgium have quickly risen, as wage increases outpaced productivity growth. The latter can be attributed to certain features of the wage-setting system. In addition, the combination of generous unemployment benefits, early retirement schemes, and high labour taxes have resulted in Belgium having one of the lowest employment rates in Europe. Just 62.2% of the labour force in the 15-64 age group are employed, compared with 67.1% for the EU.

RATING DRIVERS
The ratings could be upgraded if fiscal consolidation results in a significant reduction in the public debt-to-GDP ratio. On the other hand, the trend could be changed to Negative from Stable if a significant budget improvement were not to occur. Moreover, a reversal in measures to improve competitiveness or a sharp deterioration in growth prospects could put downward pressure on the ratings.

Notes:

All figures are in Euros 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, BIS, Belgian Debt Agency, Ministry of Finance, IMF, OECD, ECB, European Commission, Eurostat, CBS, Tilastokeskus, Office for National Statistics, Danmarks Statistik, EBA, 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 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: 11 November 2011
Last Rating Date: 2 September 2016

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