Fitch: Belgian Government Formation May Limit Fiscal Uncertainty

Thu Jul 31, 2014 4:50am EDT

(The following statement was released by the rating agency) LONDON, July 31 (Fitch) The possible formation of a new federal government in Belgium relatively soon after federal elections reduces the risk of a loss of policy momentum and attendant increase in fiscal uncertainty arising from another prolonged political standstill, Fitch Ratings says. The leaders of the N-VA, CD&V, and Open VLD parties said last week they had agreed to form a new Flemish government, and would work together in a largely centre-right federal administration that could include the French-speaking MR party. However, it is not clear how long negotiations to finalise the formation of a government will take. If a coalition agreement took shape soon, little more than two months after elections were held in late May, it would be in contrast with recent Belgian experience (it took 541 days to form a federal government after elections in June 2010). Fiscal slippage has been contained even during protracted periods of caretaker government, maintaining fiscal credibility, and we do not anticipate significant fiscal deterioration in 2014-2015. But Belgium's lower political stability relative to most high-grade sovereigns, which reflects political decentralisation and linguistic divisions, is a ratings weakness that can have fiscal implications. Although caretaker governments are able to take measures to contain the budget deficit in the short term, they lack the mandate to pass major structural fiscal reform to improve budget sustainability over the longer term. The formation of a government would provide clarity on the authorities' desired fiscal path and its implications for public debt dynamics earlier than we expected. We project public debt to peak at close to 102% of GDP this year, considerably higher than ratings peers, with a combination of primary surpluses and GDP growth subsequently bringing it down. Belgium achieved a primary budget surplus of 0.6% of GDP in 2013 for the first time since 2008, but if debt is to fall surpluses will have to be maintained and increased. Fiscal adjustment has so far mostly relied on revenue measures. Adjustment will therefore probably focus on reducing high public expenditure. Overall fiscal outcomes from 2014 will also depend to a larger extent on regional and community governments, after various financial responsibilities were devolved to them under the Sixth State Reform. We affirmed Belgium's 'AA'/Stable sovereign rating on 16 May. The next scheduled review is on 14 November. Contact: Michele Napolitano Director Sovereigns +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London E14 5GN Douglas Renwick Senior Director Sovereigns +44 20 3530 1045 Mark Brown Senior Director Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Belgium 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 WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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