December 23, 2016 / 9:08 PM / a year ago

Fitch Downgrades Belgium to 'AA-'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Belgium - Rating Action Report here LONDON, December 23 (Fitch) Fitch Ratings has downgraded Belgium's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'AA-' from 'AA', with Stable Outlooks. The issue ratings on Belgium's senior unsecured foreign and local currency bonds have also been downgraded to 'AA-' from 'AA', and the issue rating on the short term debt has been affirmed at 'F1+'. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign and Local Currency IDRs at 'F1+'. KEY RATING DRIVERS The downgrade of Belgium's Long-Term IDRs reflects the following key rating drivers and their relative weights: HIGH Belgium's gross general government debt/GDP, forecast to be 107% of GDP in 2016, is the highest among 'AA' category sovereigns. The government's fiscal deficit targets have faced successive upward revisions since October 2014 when the new government decided to soften near-term fiscal consolidation while it pursued structural reforms aimed at stimulating economic growth. This persistent fiscal slippage moves back the first year with substantial debt reduction to 2019, two years later than previously projected by Fitch in November 2014, when the agency placed Belgium's rating on Negative Outlook. Fitch has revised up its general government budget deficit forecast for 2016 to 3.0% of GDP, from 2.7% in its last review, and from 2.2% during its November 2014 review. The higher deficit, which represents a rise from the 2015 outturn of 2.5% of GDP, partly reflects a fall in fiscal revenues resulting from a tax reform reducing the burden of labour income taxes and social contributions on businesses and households. The 2016 fiscal deficit was further raised by 0.2% of GDP by extraordinary spending on refugees and on extra security measures following the recent terrorist attacks in France and Belgium. Repeated slippage against government targets is negatively affecting fiscal policy credibility, and reduces confidence in the ability to meet future fiscal targets. Fitch has also raised the 2017 deficit forecast to 2.2% of GDP, from 1.8% in the last review, and 1.3% in November 2014. This partly reflects lower projected returns in a number of revenue measures relative to the government's forecast. Beyond 2017, Fitch believes that the decentralised nature of the Belgian political system increases the challenge of achieving the consolidation targets for governments below the federal level, while differences between the parties in the coalition government going into the 2018 local election and 2019 federal election further raise risks around the ability to achieve fiscal targets. Belgium's 'AA-' IDRs also reflect the following key rating drivers: Belgium's ratings balance the government's high public debt burden and fiscal slippage in recent years against the economy's substantial net external creditor position, strong governance indicators, high income per capita and record of macroeconomic stability. The economy has a strong net external creditor position, forecast to be 50% of GDP in 2016, attributable to the high net financial wealth of Belgian households invested abroad. Belgium's current account has improved to a surplus of 0.4% of GDP in 2016, due to the fall in the price of oil imports and better export performance in recent years. The government has been implementing structural reforms targeted at improving Belgium's cost competitiveness. Most importantly, it has reduced employers' social security contributions and has frozen the automatic wage indexation mechanism in 2014-15. The measures are estimated to have reduced wage costs by 2-3% in 2016, partially reversing the erosion of Belgium's cost competitiveness relative to its immediate neighbours. The government also passed pension reforms at end-2015 to tighten age and career requirements for pensions, removing incentives for early retirement and reducing public pension payouts, halving the fiscal costs of ageing to 2.1% of GDP by 2060. These measures are expected to boost potential growth for the economy. Fitch forecasts real GDP growth to have slowed to 1.2% in 2016 (2015: 1.5%), due to the adverse impact of the 2015-16 terror attacks in France and Belgium on tourist numbers and retail activity in Belgium. Fitch forecasts real growth to improve slightly to 1.3% in 2017 and 1.5% in 2018, driven by private consumption and private investments, which are supported by accommodative monetary policy and the government's structural reforms which have boosted growth in employment (1.2%yoy in 3Q16) and disposable incomes, while reducing the unemployment rate (7.9% in October 2016). Upside risks to growth include the impact of faster labour market improvements on domestic demand, while uncertainties surrounding the Brexit process, political risks in upcoming eurozone elections and the impact of the Italian banking crisis weigh on the downside. Inflation rose to 1.7% yoy in November 2016 from an annual average of 0.6% in 2015, due to the government's measures to raise VAT on electricity, excise duties and administered prices, and also due to higher services inflation in the economy. Higher inflation relative to the eurozone (0.6% yoy in November 2016) and the reactivation of the automatic wage indexation mechanism in April 2016 threatens to partially erode some of the competitiveness gains of recent years. However, pending legislation seeks to reform the wage negotiation system to maintain Belgian wage growth in line with its neighbours. Sovereign refinancing risk is low, due to a long average debt maturity of 8.7 years, and a low average weighted bond yield of 2.6%. 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 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/GDP and sizeable contingent liabilities in the form of government guarantees on Dexia's debt. 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. - External finances: +1 notch, to reflect Belgium's large net external creditor position relative to the 'AA' rating category, which is not captured by the SRM. 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 lead to a positive rating action, individually or collectively, are: - A track record of government budget deficit reductions placing public debt/GDP on a sustained downward trajectory. - Strengthening growth prospects and competitiveness. Future developments that could individually or collectively, result in a negative rating action include: - Growing fiscal deficits, resulting in public debt/GDP rising. - Worsening of Belgium's medium-term growth prospects, e.g. due to a worsening in competitiveness. KEY ASSUMPTIONS In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 0.6% of GDP over the next 10 years, trend real GDP growth averaging 1.3%, an average effective interest rate of 2.3% and GDP deflator of 1.9%. Based on these assumptions, the debt/GDP ratio would be stable at 107% in 2016-2018 before falling slightly to 106.1% in 2019 and 98% by 2025. Fitch expects the global economy to perform in line with assumptions set in its Global Economic Outlook (November 2016), and in particular eurozone GDP growth of 1.6% for 2016, and 1.4% for 2017 and 2018. Contact: Primary Analyst Eugene Chiam Associate Director +44 20 35301512 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Maria Malas-Mroueh Director +44 20 3530 1081 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017088 Solicitation Status here 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. 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