S&P affirms Belgium's unsolicited long-and short-term ratings

Tue Jan 29, 2013 12:25pm EST

Overview
     -- We are affirming our 'AA/A-1+' unsolicited long- and short-term 
sovereign credit ratings on the Kingdom of Belgium.
     -- The negative outlook reflects our view that we could lower the 
long-term rating on Belgium if its economic or budgetary performance deviate 
significantly from our projections. 

Rating Action
On Jan. 29, 2013, Standard & Poor's Ratings Services affirmed its 'AA/A-1+' 
unsolicited long- and short-term sovereign credit ratings on the Kingdom of 
Belgium (Belgium). The outlook is negative. Our transfer and convertibility 
(T&C) assessment for Belgium remains at 'AAA'. 
Rationale
The ratings on Belgium are supported by our view of its high levels of 
economic prosperity and its export-oriented economy, a strong track record of 
fiscal consolidation since the mid-1990s, a generally high national savings 
rate, and, consequently, a net external creditor position. The ratings on 
Belgium are constrained by our view of its high government debt ratio, 
high--albeit decreasing--contingent liabilities, and challenges related to 
fiscal and structural policy.

Following a prolonged period of political uncertainty, we believe that the 
comprehensive policy implementation by the coalition government since late 
2011--including state reform, budgetary consolidation measures, pension 
reform, labor market reform, and other potential economic growth-increasing 
measures--has contributed to loosening the political deadlock. In our view, 
the government has made progress despite difficulties arising from the 
multilayered governance framework. This includes the imbalances in the fiscal 
federalism framework, which, in our view, diminishes the predictability of 
policymaking when compared with other 'AA' rated sovereigns. We believe that 
we could see gradually reduced policy cohesion among the coalition parties in 
the run-up to the general elections scheduled for 2014. Nevertheless, we 
believe that the current coalition is likely to stay in place until then. 

We believe that the government's policy implementation has contributed to 
lowering the general government deficit to an estimated 3% of GDP in 2012 
(excluding the transfers related to financial institutions). However, despite 
the budgetary measures adopted so far, we see risks to the government's 2.2% 
of GDP fiscal target for 2013. While we believe that Belgium's subnational 
levels of government will produce the required budgetary consolidation effort 
in a timely manner, the underlying economic growth performance may be weaker 
than the government expects (0.7% in real terms in 2013), which suggests to us 
that additional measures may be required to meet the 2013 target. This, in 
turn, could delay the turnaround in the trajectory of net general government 
debt, which, in our view, is likely to peak this year at just below 95% of GDP 
before declining thereafter. The burden on the government of further 
recapitalizing Dexia S.A. (estimated to have been EUR2.9 billion in 2012), 
however, was more than offset by KBC's repayments of its loans to the state 
(EUR3.5 billion), with another EUR1.17 billion reimbursement due to the Flemish 
regional government from KBC in the first half of 2013.

Although on a declining trend, we consider that Belgium's outstanding 
financial sector contingent liabilities continue to present a risk to the 
government's budgetary position. While state guarantees to KBC, BNP Paribas 
Fortis (including Royal Park Investments), and--following the restructured 
multilateral agreement with France and Luxembourg--Dexia have gradually wound 
down, the outstanding guaranteed amount of Dexia's liabilities was still high 
at around EUR43 billion (around 11.4% of GDP) at the end of January 2013. 

Belgium's economic growth performance is uncertain, in our view, due to the 
difficult external environment, especially in its neighboring countries. This 
has had a negative effect on Belgian exports, which represented more than 80% 
of GDP in 2012, while imports were 83% of GDP at the same date. Moreover, 
weakening domestic demand, on the back of uncertain economic prospects, 
increased unemployment, and ongoing budgetary consolidation, presents downside 
risks to our current real GDP per capita growth projection of -0.1% in 2013 
and 0.5% in 2014. 

In order to boost the economy's growth potential, the government has started 
to implement measures to increase labor participation and improve the 
competitiveness of the economy, which in recent years has been posting current 
account deficits. Nevertheless, we estimate that Belgium was in an estimated 
net external creditor position of around 65% of current account receipts at 
year-end 2012 and we consider this to be a credit strength.

Outlook
The negative outlook reflects our view that we could lower the long-term 
rating on Belgium if its economic or budgetary performance deviate 
significantly from our projections or contingent liabilities push the net 
government debt ratio above 100% of GDP (versus our 2013 estimate of 94.5% in 
2013). 

Conversely, we could revise the outlook to stable during 2013 if the 
government continues to comply with its budgetary strategy, if risks related 
to the economic growth outlook and the materialization of contingent 
liabilities subside, and if the government implements measures to deal with 
impending structural economic and budgetary policy challenges.


Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.

     -- The Eurozone Debt Crisis: 2013 Could Be A Watershed Year, Jan. 9, 2013
     -- Sovereign Rating And Country T&C Assessment Histories, Jan. 4, 2013

Ratings List
Ratings Affirmed

Belgium (Kingdom of) (Unsolicited Ratings)
 Sovereign Credit Rating                AA/Negative/A-1+   
 Transfer & Convertibility Assessment   AAA                
 Certificate Of Deposit                 A-1+               

Fonds de l'Infrastructure Ferroviaire
 Senior Unsecured*                      AA                 
*Guaranteed by Belgium (Kingdom of).
N.B.-This does not include all ratings affected.
FILED UNDER: