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Fitch Affirms Belgium at 'AA-'; Outlook Stable
June 23, 2017 / 8:09 PM / 3 months ago

Fitch Affirms Belgium at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 23 (Fitch) Fitch Ratings has affirmed Belgium's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AA-' with Stable Outlooks. The issue ratings on Belgium's senior unsecured foreign- and local-currency bonds are also affirmed at 'AA-'. The Country Ceiling is affirmed at 'AAA' and the Short-Term Foreign-Currency and Local Currency IDRs at 'F1+'. The issue ratings on Belgium's short-term debt are also affirmed at 'F1+'. KEY RATING DRIVERS Belgium's ratings balance the government's high public debt burden (general government debt was 106% of GDP in 2016, the highest in the 'AA' peer category and compared with a median of 40%) against the sovereign's substantial net external creditor position, strong governance indicators, high income per capita and macroeconomic stability. Following recent fiscal slippage with respect to published targets, the general government deficit outturn for 2016, at 2.6% of GDP, was in line with the 2016 Stability Programme and broadly unchanged from 2015. This generally favourable outturn was underpinned by expenditure restraint that offset a decline in revenue as a share of GDP (reflecting a decline in personal direct taxes due to 'tax shift' measures, not fully offset by indirect tax increases). Fitch expects the deficit to narrow further this year, to 1.9% of GDP, on lower interest payments (accounting for almost half of the decline), 1.6% in 2018 and 1.5% by 2019. The Belgian government's current Stability Programme envisages a consolidation in structural terms of around 2pp of GDP over the period 2017-2019, in line with its medium-term objective of achieving a structural balance by 2019. Under the authorities' plans, the consolidation effort is to be concentrated at the federal government (central government) level. This should help reduce execution risks given the decentralised nature of the Belgian political system. Our fiscal projections would be consistent with a modest decline in the general government debt-to-GDP ratio to 103.8% by 2019 from 106% currently. Sovereign refinancing risk is low, due to a long average debt maturity of 8.7 years (versus a 'AA' peer median of around 6.5 years), and a low average weighted bond yield of 2.4%. Recent economic data point to an upturn in economic activity. While real GDP growth slowed to 1.2% in 2016 (compared with 1.5% in 2015), activity has recently picked up, with real GDP rising 0.6% on a seasonally adjusted quarterly basis in 1Q17. We expect GDP growth to pick up to 1.6% for the full year, underpinned by stronger private consumption and investment. Growth should remain steady in 2018, before declining slightly to around 1.3% in 2019, in line with our assumptions on GDP growth over the medium term. Improved growth prospects have been accompanied by a pick-up in the labour market. Employment growth averaged 1.3% on an annual basis in 2016 and has risen further since, while unemployment fell to 7.2% in 4Q16 from 8.6% a year earlier. High inflation poses a risk to Belgium's competitiveness. Consumer price inflation averaged 1.8% in 2016, much higher than the rates seen in neighbouring countries on account of rising prices of certain services. Inflation has picked up further this year, averaging 2.7% in the first five months of 2017. There is a risk that higher inflation could lead to price and wage indexation, pushing up labour costs with negative consequences for companies' competitiveness. Mitigating this risk is a reform of the wage negotiation mechanism introduced by the government that aims to limit the divergence of labour costs in Belgium relative to its neighbours. Social partners have already taken this reform into account and have agreed to limits on increases in real wages of 1.1% over the next two years. House prices have been rising steadily since the global financial crisis, contributing to a rise in household indebtedness - lending to households is increasing at an annual rate of around 7.5%. Despite the increase, household debt, at 60% of GDP at end-2016, was in line with the euro area average. Belgium has a score of '2' on Fitch's Macro-Prudential Risk Indicator (MPI), reflecting a credit/GDP ratio significantly above trend and pointing to moderate vulnerability. At the same time, Belgian households' net wealth position is very strong (EUR1.1 trillion at end-2016, around 2.5x nominal GDP), mitigating risks to financial stability. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Belgium a score equivalent to a rating of 'AA-' on the Long-Term Foreign Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows: - Public finances: -1 notch, to reflect high gross general government debt/GDP and sizeable contingent liabilities. The SRM is estimated on the basis of a linear approach to debt/GDP and does not capture the higher risk at high levels of debt/GDP. - External finances: +1 notch, to reflect Belgium's large net external creditor position, which is not captured by the SRM. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year-centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Outlook is Stable, which means Fitch does not expect developments with a high likelihood of leading to a rating change. However, the main factors that could, individually or collectively, lead to a positive rating action, are: - A track record of fiscal restraint placing public debt/GDP on a sustained downward trajectory; - Strengthening medium-term economic growth prospects, particularly if related to an improvement in competitiveness. Future developments that could individually or collectively, result in a negative rating action include: -Larger fiscal deficits resulting in an increase in the public debt/GDP ratio; -Worsening of Belgium's medium-term growth prospects, for example due to a worsening in competitiveness. KEY ASSUMPTIONS In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 0.8% of GDP over the next 10 years, trend real GDP growth averaging 1.4%, an average effective interest rate of 2.1% and GDP deflator of 1.9%. Based on these assumptions, the debt/GDP ratio would decline to 90% by 2026. Fitch expects the global economy to perform in line with the assumptions set out in its Global Economic Outlook (June 2017), and in particular eurozone GDP growth of 2% this year, 1.8% in 2018 and 1.4% in 2019. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Maria Malas-Mroueh Director +44 20 3530 1801 Committee Chairperson Stephen Schwartz Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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