Rating Action Commentary
ֳ Revises Belgium's Outlook to Negative; Affirms at 'AA-'
Fri 03 Apr, 2020 - 4:01 PM ET
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Belgium
Belgium - Rating Action Report
ֳ - Frankfurt am Main - 03 Apr 2020: ֳ has revised the Outlook on Belgium's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'AA-'.
Key Rating Drivers
The revision of the Outlook reflects the following key rating drivers and their relative weights:
High
The revision of the Outlook reflects the substantial worsening in the public finances expected this year due to the COVID-19 pandemic and its impact on economic activity. The combination of much reduced economic activity and necessary measures to address the spread of the pandemic will bring about a sharp rise in public sector borrowing this year. The extent of this increase, and the pace at which it will unwind, is very uncertain, and crucially depends on the time it will take for economic activity to return to pre-pandemic levels. Belgium is likely to emerge from the crisis with a significantly higher level of public debt, compounding an existing credit weakness relative to regional and rating peers, and may face challenges in consolidating public finances over the medium-term.
Discretionary measures to combat the disease and support the economy during restrictions on normal business will amount to EUR8 billion-EUR10 billion (around 2% of 2019 GDP), according to IMF estimates. Temporary unemployment benefits have been increased and extended (from 65% of wages to 70%, up to a ceiling of EUR2755 per month), and an income support scheme for self-employed workers (EUR1292 for single people) will be made accessible for businesses that had to remain closed for at least seven days in March or April. Both individuals and businesses will benefit from tax and social security deferrals this year, while subsidies for businesses that have to close completely will be introduced. Health spending will also increase.
We expect the general government deficit to widen to 5.5% of GDP, which would be in line with the figure recorded in 2009 during the global financial crisis. We then project the sharp increases in public spending to partly unwind in 2021. Combined with a rebound in economic activity this would translate to a deficit of 4.2% of GDP for 2021.We estimate that the deficit rose to 1.7% of GDP in 2019, from 0.7% in 2018. We had already expected a higher deficit this year and 2021 on the basis of unchanged policy, which would have resulted in broadly unchanged government indebtedness over 2019-2021.
We estimate general government debt was 99.3% last year, more than double the current 'AA' median estimate. Our public finance projections are consistent with the debt ratio rising sharply to 108% this year, which would be the highest ratio since 2000, and then edge down to 107.5% in 2021.
There is a considerable degree of uncertainty about fiscal policy settings for 2021 and beyond. The current government's term expires in October this year. Negotiations after the May 2019 federal elections did not produce an agreement on a government coalition, and there is the risk that renewed political and economic policy uncertainty takes hold in the autumn.
Medium
The dislocation brought about by the restrictive measures taken to contain the spread of COVID-19 will bring about a sharp reduction in economic activity across the world this year, although the extent and the duration of the dislocation and its impact on economies are very uncertain. We expect real GDP in Belgium to decline by 3.2%, through a sharp fall in demand, as both firms' and households' spending is put on hold. In our central scenario, we expect the disruptions from the coronavirus outbreak to unwind over the rest of this year. This implies that we expect a recovery in growth at the end of last year and over next year, so that real GDP growth bounces to 2.8% for the whole of 2021. The Belgian economy expanded by 1.4% in real terms in 2019, at a faster pace than we had expected at the time of the last review (+1.1%).
There is a material downside risk to these forecasts. If the extent and duration of the restrictions on activity is greater and longer than expected, then we see a much larger decline in output in 2020 and a weaker than expected recovery in 2021.
Belgium's 'AA-' IDRs also reflect the following key rating drivers:
Belgium's ratings balance high public sector indebtedness against high income per capita compared with the 'AA' median and macroeconomic stability. Governance indicators are slightly below the peer median, but still robust. The high level of public debt is mitigated by low borrowing requirements, low interest rates and high average debt maturity.
The most recent federal elections in May 2019 had increased political fragmentation among parties and between regions, making it challenging to form a federal government. The spread of the COVID-19 pandemic to Belgium hastened the process of government formation, which had not been resolved. Sophie Wilmès of the francophone liberal Mouvement Réformateur (MR), who had led a minority caretaker government since October, will head a new government sworn in for an initial three months, with a renewable term up to six months, with the specific mandate to face the COVID-19 pandemic. The government has a narrow base, with only the Dutch-speaking liberal and Christian-democrat parties participating in addition to MR, but it enjoys a majority of support in parliament. Moreover, the government has been granted special powers for the duration of its term, which allows it to introduce by decree measures on questions of public health, public order, economy and social support.
We expect the labour market will deteriorate markedly this year, although the extent to which the restrictive measures and their impact on activity will translate into job losses is uncertain. We currently expect unemployment to rise this year and average 7.0%, before edging down to 6.5% next year. As for the GDP growth forecasts, there is a material downside risk to these projections. Labour market dynamics improved in 2019. Employment growth averaged 1.5% in 2019, and the unemployment rate fell back over the year to 5.2% in 4Q19, down from 5.8% a year earlier.
Credit dynamics in the private sector continued to develop at a strong pace in 2019, with overall lending to the private sector rising by around 5%. This is consistent with Belgium retaining a score of '2' on ֳ's Macro-Prudential Risk Indicator, denoting moderate vulnerability. However, credit to the real economy could come to a standstill on the back of the restrictive measures taken against the spread of COVID-19.
As part of the response of the Belgian authorities' response to the crisis, the National Bank of Belgium (NBB) has reversed the increase in the counter-cyclical capital buffer from 0% to 0.5% announced in 3Q19, and introduced a guarantee scheme amounting in total to EUR50 billion (around 11% of 2019 GDP) to cover all new loans and credit lines of up to 12 months provided until the end of September. At the same time, Belgian banks have agreed to grant a postponement of loan repayments to otherwise viable borrowers who face repayment difficulties until the same date.
ESG - Governance: Belgium has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Belgium has a high WBGI ranking at 83.7, reflecting its long track record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Belgium a score equivalent to a rating of 'AA-' on the Long-Term Foreign-Currency (LT FC) IDR scale.
ֳ's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
ֳ'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. ֳ'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
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Persistently large fiscal deficits resulting in a sustained increase of public sector indebtedness
- Worsening of Belgium's medium-term growth prospects and competitiveness.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Increased confidence in a sustained decline in public sector indebtedness
- Strengthening medium-term growth prospects, particularly if related to improvements in competitiveness and structural reform implementation.
Best/Worst Case Rating Scenario
International scale credit ratings of Public Finance issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings click here.
Key Assumptions
We assume that the global economy develops in line with the Global Economic Outlook published on 2 April. Eurozone GDP is forecast to decline by 4.2% in 2020, before recovering by 2.9% in 2021.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Belgium has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ֳ's SRM and are highly relevant to the rating and a key rating driver with a high weight.
Belgium has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Belgium has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as strong social stability and voice and accountability are reflected in the World Bank Governance Indicators that have the highest weight in the SRM. They are relevant to the rating and a rating driver.
Belgium has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Belgium, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
Applicable Criteria
Applicable Models
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v1.7.1 (1)
- Debt Dynamics Model, v1.2.0 (1)
- Macro-Prudential Indicator Model, v1.4.0 (1)
- Sovereign Rating Model, v3.11.0 (1)
Additional Disclosures
Endorsement Status
| Belgium | EU Issued |
Additional Disclosures for Unsolicited Credit Ratings
Belgium (Unsolicited)
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