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 its 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 risks to 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 the fragmented labour market.

Belgium’s productive, open, and wealthy economy is a key factor underpinning the ratings. GDP per capita is 29% 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 increasing labour participation by reducing labour and corporate taxes. Furthermore, household balance sheets are among the healthiest in Europe, due to high net financial wealth.

While the Belgian economy has been relatively resilient in the post-global financial crisis period, economic growth has remained moderate over the last few years. Policy-related factors as well as the March 2016 terrorist attacks contributed to a GDP slowdown in 2016 to 1.2% compared with 1.5% in 2015. Private consumption was less dynamic in response to the government’s wage moderation strategy, lower social benefits, and higher inflation. Growth is expected to pick up this year as the combination of a brighter European economic outlook, robust job creation and real wage gains, will sustain private consumption and investment. The National Bank of Belgium (NBB) projects average GDP growth of 1.6% in the 2017-18 period.

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 narrowing the gap in unit labour costs between Belgium and its neighbours. Both measures have helped to improve price competitiveness and boost job creation. In addition, Belgium’s competitiveness is projected to benefit from the revision of the 1996 law on collective wage negotiations along with the reform of the corporate tax. The latter was agreed in July under the so called “summer agreement” and is expected to be presented to the Parliament as budgetary neutral in the autumn. Finally, 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. A healthy household sector balance sheet translates into one of the highest Net International Investment Positions (NIIP) in Europe (49.6% of GDP in 2016) which, alongside a balanced current account, support the country’s resilience to external shocks.

Notwithstanding these strengths, the key challenges facing the Belgian economy are the high level of public debt and the fragmented labour market. Public debt at 106.0% of GDP is 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. In addition, judicious debt refinancing at low rates has enabled the country to lower its interest burden and increase the average debt maturity. However, additional effort may be needed to put the debt ratio on a downward path.

The outlook for debt sustainability remains challenging because of ongoing fiscal pressures. Although the budget deficit outturn at 2.6% of GDP in 2016 was better than expected (2.9%), additional fiscal effort may be required to render the multiannual tax shift and the corporate tax reform fiscally neutral in the coming years. Progress is likely to occur in 2017, with the headline deficit projected to significantly decline to around 1.9% of GDP. However, with local and regional/federal elections scheduled for 2018-19, fiscal consolidation in the form of lower primary expenditures may prove challenging in the next years.

Belgium’s fragmented labour market is characterised by low employment and participation rates. Although the unemployment rate is declining towards its pre-crisis level, there is structural inactivity among certain groups, including immigrants and low-skilled individuals which is amplified by lower mobility among regions. In addition, the combination of generous benefits, early retirement schemes and high labour taxes have resulted in Belgium having one of the lowest employment rates in Europe. Just 63.4% of the population in the 15-64 age group are employed, compared with 66.9% for the EU. Similarly, despite the recent improvement due to the pension reform, the employment rate of those in the group of 55-64 years (46.5%), still compares unfavourably with the average in the EU (55.8%). Without evidence of further measures, as the population ages, this is expected to result in higher pension and healthcare expenditure, which will weigh on public finances over time.

RATING DRIVERS
Although DBRS foresees limited upside potential in the near term, the ratings could be upgraded if fiscal consolidation results in a very significant reduction in the public debt-to-GDP ratio over time. On the other hand, negative downward pressure could materialise if a substantial budget improvement leading to a decline in the public debt ratio fails 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, Belgian Debt Agency, Ministry of Finance, IMF, OECD, ECB, Statistiska Centralbyran, Danmarks Statistik, European Commission, Eurostat, Centraal Bureau voor de Statistiek, Tilastokeskus, Office for National Statistics, EBA, UNDP, and 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 and US regulations only.

Lead Analyst: Carlo Capuano, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 11 November 2011
Last Rating Date: 24 February 2017

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