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Fitch Affirms Belgium at 'AA'; Outlook Stable
May 16, 2014 / 4:03 AM / 4 years ago

Fitch Affirms Belgium at 'AA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 16 (Fitch) Fitch Ratings has affirmed Belgium's Long-term foreign and local currency IDRs at 'AA'. The Outlooks are Stable. The issue ratings on Belgium's unsecured foreign and local currency bonds have also been affirmed at 'AA'/'F1+'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS The affirmation reflects the following key rating drivers: Belgium's rating is underpinned by its diversified economy, high income per capita and solid institutions. The external sector is supported by a sizeable net foreign asset position. The Belgian economy is recovering. Following stagnation in 2012, real GDP grew by 0.2% in 2013, driven by private consumption and net trade. In 1Q14 the economy grew by 0.4%qoq (1.2%yoy), the fourth consecutive quarter of positive growth. Fitch expects growth of 1.2% and 1.6% in 2014 and 2015, respectively. The outlook for external demand has improved and households' strong balance sheets will support private consumption despite adverse labour market dynamics. Fitch estimates that public debt - Belgium's main rating weakness - will peak at close to 102% of GDP in 2014. This is the same year but a higher level relative to Fitch's previous rating review. The deterioration reflects the reclassification of some state-owned enterprises into the general government perimeter as requested by Eurostat, which added 1.7% of GDP to public debt figures. In Fitch's view, public debt dynamics remain within the tolerance of a 'AA' rating. For 2014 we project a deficit of 2.5% of GDP, above the authorities' target (2.1%). In our view, the possibility of a renewed political deadlock following the May elections is real and increases risks of fiscal slippage. However, experience with protracted periods of caretaker governments suggests that any slippage would be contained. In 2013 Belgium achieved a primary budget balance of 0.6% of GDP, the first surplus since 2008. Fitch's debt sensitivity analysis indicates that primary surpluses will have to be maintained and gradually increased in order to reduce public debt levels. The fiscal adjustment so far has mostly relied on revenue measures. However, public expenditure (relative to GDP) and the tax wedge on labour are among the highest in the OECD. Achieving primary surpluses while also improving competitiveness will be challenging and implies that part of the future fiscal adjustment will likely rely on expenditure. Adverse trends in the current account dynamics are a sign that Belgium is gradually losing competitiveness compared with its trading partners. Despite some improvement in 2013, the wage indexation mechanism will continue to prevent significant competitiveness gains versus countries which do not have such a mechanism, particularly when inflationary pressures pick up. Risks arising from the banking sector have receded. Contingent liabilities from the banking sector declined to 12% of GDP in 2013 from 15.7% in 2012. A substantial part relates to the funding guarantees provided to Dexia, which are not expected to significantly reduce in the foreseeable future. The sector has significantly shrunk from pre-crisis levels: assets stood at around 250% of GDP in 2013 from 410% of GDP in 2008. Banks have deleveraged by shedding or winding down non-strategic businesses mostly abroad. As a result, domestic credit conditions have remained accommodative. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could individually or collectively, result in a downgrade include: - Significant fiscal easing or growth underperformance, leading to the public debt ratio peaking higher and later. - Failure to address the deterioration in competitiveness which would prevent improvements in current account dynamics and hamper medium-term growth potential. - Sizeable recapitalisation needs of the financial sector by the Belgian sovereign, for example in the context of the ECB's forthcoming asset quality review. Fitch does not see any strong upward pressure in the near term. The main factors that could lead to positive rating action are: - A marked reduction in the public debt to GDP ratio over time. KEY ASSUMPTIONS The rating and Outlook are sensitive to a number of assumptions: Fitch assumes that fiscal discipline is maintained beyond the May 2014 elections, in line with the government's stability programme. We assume there will not be a constitutional crisis following the May 2014 elections. The costs of the Belgian ageing population to public finances will gradually begin to be felt. Fitch assumes that some reforms will be passed through legislation to address this problem. Failure to address the adverse impact of ageing on the public finances could lead to negative rating action over the long term. Fitch assumes that implementation of ESA 2010 accounting changes will result in limited upward revisions in GGGD. Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. An extended period of deflation, resulting in no growth in nominal GDP would hamper public debt dynamics. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Michele Napolitano Director +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eugene Chiam Associate Director +44 20 3530 1512 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 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, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status 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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