London, 07 March 2014
Moody’s Investors Service has today changed the outlook on Belgium’s Aa3 government bond rating to stable from negative. Concurrently, Moody’s has affirmed Belgium’s Aa3/P-1 ratings.
The key drivers of today’s outlook change are as follows:
- Diminished risks that Belgium’s government balance sheet will be affected by a further crystallisation of contingent liabilities from the banking sector.
- Moody’s expectation that fiscal consolidation will continue and support a reversal in government debt at around 100% of GDP in 2014-15.
Moody’s affirmation of Belgium’s Aa3 rating balances the following two considerations:
- The robustness of its economy with limited external imbalances backed by strong institutions; and
- Still high government debt, which is expected to diminish only gradually over the medium term.
RATIONALE FOR OUTLOOK CHANGE
–FIRST DRIVER: RECEDING RISKS FROM THE BANKING SECTOR
The first driver of Moody’s decision to change the outlook on Belgium’s Aa3 rating to stable is the receding risk that contingent liabilities from the banking sector will crystallise onto the government balance sheet. The sector’s receding risks are reflected in the recent stabilisation of the rating agency’s outlook for the banking system.
Moody’s notes that the sector has been strengthened by a decline in legacy issues and in volatility related to the restructuring operations undertaken during the crisis and the authorities’ decisive support efforts. Moreover, asset quality should improve going forward as the Belgian economy is expected to recover, especially in light of the banks’ strong re-focus on the domestic market. In addition, whilst contingent-liability concerns related to Dexia Credit Local (Baa2 negative) remain a source of risk for the government balance sheet, the magnitude of these risks has decreased over the last two years.
The likely size of any potential support from the Belgian government to its banking sector has also diminished following the sector’s significant deleveraging — assets have shrunk to 2.6x GDP (as of Q3 2013) down from its 2007 level of 4.7x. Moody’s positively notes that bank deleveraging did not have a detrimental impact on the domestic economy, as these efforts were focused on external markets. In fact, the stock of loans granted by Belgian banks to the Belgian economy has remained on an upward trend since 2007.
–SECOND DRIVER: MOODY’S EXPECTATION THAT FISCAL CONSOLIDATION WILL SUPPORT A REVERSAL IN GOVERNMENT DEBT
The second driver underpinning the outlook change is Moody’s expectation that the government’s fiscal position will continue to improve given (1) Belgium’s solid track record in this regard; and (2) the pressure emanating from European authorities for the government to meet its fiscal commitments (e.g., reaching its Medium-Term Budgetary Objective (MTO) of 0.75% of GDP in 2016) under the reformed Stability and Growth Pact.
Belgium’s fiscal-consolidation performance prior to the crisis was strong, having brought its debt downwards to 84% of GDP in 2007 (1993: 138%), and having posted substantial and steady primary surpluses of 4.9% of GDP on average over 1998-2008. More recently, fiscal deficits were relatively contained: in 2013 the government brought its headline deficit under the 3% of GDP threshold at an estimated 2.7% of GDP, while its primary balance returned to surplus (0.5% of GDP) after four years of deficit.
Ongoing fiscal consolidation efforts are reflected in Moody’s expectation that the government’s debt trajectory will reverse after its stabilisation at around 100% of GDP in 2014-15. This is Moody’s central scenario and assumes the continuation of government efforts to consolidate public accounts, mostly via the rationalisation of expenditure, and a gradual improvement in the Belgian economy.
RATIONALE FOR AFFIRMATION
–FIRST DRIVER: A ROBUST ECONOMY BACKED BY STRONG INSTITUTIONS
The first driver of Moody’s decision to affirm Belgium’s Aa3/P-1 ratings is the robustness of its economy, with limited external imbalances backed by strong institutions. The Belgian economy exhibits limited external imbalances, as evidenced by the historically balanced current account position and its strongly positive net international investment position (47% of GDP in 2012). In addition, the private sector is healthy as reflected in a lowly indebted non-financial sector and its elevated savings level, which provides extensive domestic resources for sovereign financing. Moreover, Belgium’s strong institutions have led to policy continuity, even during periods of political turmoil (e.g., in 2007 and 2011), based on sound decision-making processes. This institutional capacity is further demonstrated by the government’s fiscal consolidation track record.
–SECOND DRIVER: ALBEIT DECREASING, GOVERNMENT DEBT IS EXPECTED TO REMAIN HIGH IN THE MEDIUM TERM
These considerations are partially offset by Moody’s concerns regarding Belgium’s still high government debt, which is likely to only gradually diminish over the medium term. Accordingly, it will remain higher than that of most rating peers and regional peers: the median government debt of Aaa/Aa-rated countries was 37% of GDP in 2013.
WHAT COULD MOVE THE RATING UP
Upward pressure might develop on the rating if the reduction in government debt would progress on a sustained basis.
WHAT COULD MOVE THE RATING DOWN
Downward pressure might develop on the rating if the government’s debt trend were to diverge significantly from Moody’s central scenario — i.e., a stabilisation at 100% of GDP in 2014-15 and its reversal over the medium term. In particular, the crystallisation of significant contingent liabilities from the banking sector on the government balance sheet or sustained deterioration in the government fiscal position would exert downward pressure on the rating.
GDP per capita (PPP basis, US$): 37,459 (2012 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.2% (2013 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.0% (2013 Actual)
Gen. Gov. Financial Balance/GDP: -2.7% (2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.2% (2013 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 03 March 2014, a rating committee was called to discuss the rating of the Government of Belgium. The main points raised during the discussion were: The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks, and in particular to those emanating from the banking sector. Other views raised included: The issuer’s economic fundamentals, including its economic strength, have not materially changed.
The principal methodology used in this rating was Sovereign Bond Ratings published in September, 2013. Please see the Credit Policy page on http://www.moodys.com for a copy of this methodology.