Jan 23 - Fitch Ratings has revised the Outlooks on the Kingdom of Belgium's
ratings to Stable from Negative. At the same time the agency has affirmed the
Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA'. Fitch
has also affirmed Belgium's Country Ceiling at 'AAA' and Short-term foreign
currency IDR at 'F1+'.
The rating actions reflect the following key factors:
- The government succeeded in reducing the budget deficit by around 1% of GDP in
2012 as planned, to 2.9% (Fitch's estimate), despite a contraction in real GDP,
which Fitch estimates at 0.4%. Additional contingency measures adopted in March,
July and October helped keep the budget on track and highlighted the
government's commitment to meet its targets.
- Belgium's rating is underpinned by its diversified economy, high income per
capita and solid institutions. The robust external sector is supported by a net
foreign asset position.
- Fiscal financing conditions have eased significantly since Fitch's previous
review in January 2012. The risk premium on the Belgian sovereign has declined
and access to markets was not impaired at any time over 2012. Spill-over effects
from the banking sector and the eurozone crisis have been contained and tail
risks in the eurozone have eased.
- Fitch estimates that public debt - Belgium's main rating weakness - has peaked
in 2012/2013 at fractionally under 100% of GDP, earlier and only moderately
higher than in France and the UK (both rated 'AAA'/Negative). The agency
projects the public debt-to-GDP ratio to decline to 79% by 2021 under its
baseline scenario and debt dynamics are relatively robust to stylised shocks,
mainly owing to the relatively favourable budgetary starting point in 2012 (a
primary surplus of 0.7% of GDP).
- Another key weakness of Belgium's sovereign credit profile is the contingent
liability from the banking sector. In 2012, the state had to inject capital of
EUR2.9bn (0.8% of GDP) into Dexia for the second time since the start of the
crisis (EUR3bn was injected in 2008) and provide additional guarantees covering
Dexia's debt (these guarantees are projected to reach around EUR35bn in 2013).
Fitch does not expect additional capital injections into Dexia in 2013. However,
the group still has a large portfolio of residual assets including peripheral
eurozone government bonds, which are being run down and could lead to further
impairments and/or write-downs in the medium term. The other major Belgian
banking groups are in a better situation and benefit from good asset quality and
improving funding profiles. For example, in 2012 KBC Group repaid EUR3.5bn (plus
a 15% premium) of the hybrid capital received from the state.
- Labour costs in Belgium have outpaced those of its three main trading partners
(Germany, France and the Netherlands) causing losses in external
competitiveness. In Fitch's view, the wage indexation mechanism will continue to
create substantial increases in unit labour costs. The recent amendment to the
competition act and the changes to consumer price index basket do not address
the competitiveness gap. Moreover, inefficiencies in the domestic energy market
have resulted in higher inflation relative to the main trading partners.
The main factors that could lead to a negative rating action are:
- A sizeable increase in banking system support, for example caused by a further
deterioration in the credit quality of Dexia's residual assets, with a knock-on
effect on public debt dynamics.
- Material slippage against fiscal targets resulting in a rising public debt
- A prolonged political standstill following the 2014 elections.
- A loss of competitiveness that adversely affects growth and the current
account position over the medium term.
Fitch does not see any strong upward rating pressure in the near term. The main
factor that could lead to a positive rating action is:
- Over the medium term, a sustained decline in the public/debt GDP ratio.
Fitch assumes the Belgian authorities will maintain a tight fiscal stance
through the period leading up to the national and regional elections in
mid-2014. Therefore the agency does not assume a marked pre-election increase in
In its debt sensitivity analysis, Fitch assumes a trend real GDP growth rate of
1.5%, GDP deflator of 2% and a gradual decrease in the headline deficit towards
balance in 2018/19. Under these assumptions, public debt declines from its
current level to 79% of GDP in 2021.
Fitch's estimate for the general government deficit of 2.9% of GDP in 2012
assumes that the recent capital injection in Dexia (0.8% of GDP) is treated as a
financial transaction. However, Eurostat may classify the Dexia recapitalisation
as a capital transfer, which would bring the deficit to 3.6% of GDP. A final
decision will be made in April.
Belgium's growth outlook is sensitive to conditions in its main trading
partners. Fitch's forecast of mild growth of 0.2% in 2013 and resumption of an
export-driven recovery from mid-2013 is based on the assumption that the
recession in the eurozone proves to be shallow and short, followed by modest
Fitch assumes there will be progress in deepening fiscal and financial
integration at the eurozone level in line with commitments by eurozone policy
makers. It also assumes that the risk of fragmentation of the eurozone remains
Additional information is available on www.fitchratings.com. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
Applicable criteria, 'Sovereign Rating Methodology', dated 13 August 2012, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Sovereign Rating Methodology