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Fitch Affirms Belgium at 'AA-'; Outlook Stable
December 1, 2017 / 9:24 PM / 16 days ago

Fitch Affirms Belgium at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 01 (Fitch) Fitch Ratings has affirmed Belgium's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Belgium's ratings balance high public sector indebtedness (general government debt this year is forecast to be 104.6% of GDP, more than double both the 'AA' and 'A' medians) against strong governance indicators, high income per capita and macroeconomic stability, and a substantial net external creditor position. Public finance outturns so far this year point to a substantial decline in the government deficit. Tax receipts have been strong, particularly for corporate taxes, reflecting a pick-up in economic activity and employment. In the nine months to September, taxes collected at the federal level were 13.6% higher than in the same period a year earlier. Fitch has therefore revised down its estimate for the general government deficit to 1.4% of GDP this year, from 1.9% at the last review in June. The draft budget for 2018 envisages a net rise in government revenues of 0.3% of GDP. Around a third of these extra revenues will derive from new taxes, including a tax on liquid financial assets. The government has reformed corporate taxation, lowering the rate from 33% to 29% from January 2018 (and to 25% from 2020) while broadening the tax base. The revenue loss is intended to be offset mainly by substantially limiting the scope for notional interest deduction. We expect the government deficit to edge down further in 2018, to 1.2% of GDP, and remain at this level in 2019. Elections in 2018 (local) and 2019 (federal) raise a degree of uncertainty about future policy measures. Our public finance projections are consistent with the government debt to GDP ratio falling to 104.6% this year from 105.7% at end-2016 (the sale of a quarter of the state's stake in BNP Paribas accounts for around 0.45pp of the decline). The debt ratio is forecast to fall to 101.1% by 2019, which would still leave it slightly more than double the projected peer median of 48%. Strong import growth is expected to underpin a current account deficit averaging 0.9% of GDP over the next three years. Belgium is a net external creditor, but the net creditor position has eroded in absolute terms and relative to peers, a trend that is forecast to continue. Net external debt (NXD) was -123% of GDP in 2010 (compared with the 'AA' peer median at the time of -8.3%); the debt ratio has risen since then and this year is forecast to be -34.4% of GDP, compared with a peer median of -29.4%. On current projections, the NXD ratio would be in line with the peer median by end-2018. The net international investment position was around 51% of GDP in 2Q17. Economic activity has accelerated in recent months. Employment growth has picked up to 1.6% in 2Q17 on an annual basis from 1.0% in 1Q16. Labour market improvements have been accompanied by robust business and especially consumer confidence. We expect real GDP growth for 2017 to be 1.7%. Domestic demand will remain the main driver of growth this year while net exports will detract slightly as imports growth outstrips exports. We forecast the same pattern of growth in 2018 and 2019, with growth of 1.7% next year, and 1.5% in 2019 (the median growth rate for the 'AA' category is expected to be 1.9% on average in 2017-19). Steady growth dynamics will translate to further falls in unemployment, to an average of 6.6% in 2018 and 6.4% in 2019. Consumer price inflation has slowed, to 1.8% in October. We expect inflation to average 1.6% next year and 1.8% in 2019. The main risk from high inflation is the impact of consumer prices, through wage indexation, on labour costs and firms' competitiveness. Social partners in Belgium have agreed that wage settlements over 2017-2018 would rise by around 1pp above the indexation uplifts, which are based on core inflation dynamics. Rising house prices have pushed up the household debt to income ratio to around 104%, higher than the euro area average, and overall lending growth to households has picked up from 2.0% yoy at end-2014 and to around 5.0% over the past year. 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 is very strong, with net financial wealth of around EUR1 trillion (around 246% of GDP) at 2Q17, the highest in the eurozone. The National Bank of Belgium intends to introduce measures to address pockets of vulnerability in the housing market. 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 (LT FC) IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Public finances: -1 notch, to reflect high gross general government debt 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. 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 LT FC 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 positive rating action, are: -A track record of fiscal restraint placing public debt/GDP on a sustained downward trajectory; -Strengthening medium-term growth prospects, particularly if related to improvements in competitiveness. Future developments that could, individually or collectively, result in negative rating action include: -Larger fiscal deficits resulting in an increase in public sector indebtedness -Worsening of Belgium's medium-term growth prospects and competitiveness KEY ASSUMPTIONS In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 0.7% of GDP over the next ten years, real GDP growth averaging 1.4%, an average effective interest rate of 2.1%, and whole-economy inflation of 1.9%. Based on these assumptions, the government debt/GDP ratio would decline to 89% by 2026. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'AA-'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'AA-' Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'AA-' Issue ratings on short-term senior unsecured local-currency bonds affirmed at 'F1+' Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gergely Kiss Director +44 20 3530 1425 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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