Scope confirms and publishes Belgium’s credit rating of AA, changes Outlook to Stable
Scope Ratings AG today confirms the Kingdom of Belgium’s long-term local-currency issuer rating at AA, following the release of its revised sovereign rating methodology, and converts its status from subscription to public. The agency also assigns a long-term foreign-currency issuer rating of AA, along with a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency is also rated at AA. All Outlooks are Stable.
The AA rating is underpinned by Belgium’s euro area membership with a large common market, a strong reserve currency, an independent European Central Bank effectively acting as a lender of last resort, and an economic governance, stability and macro prudential framework that supports credible macroeconomic policies and provides access to financial facilities from European institutions thus increasing the sovereigns‘ ability to withstand economic and financial shocks. Scope believes these are important elements that reflect better protection of the euro area from adverse shocks, underpinning sovereign creditworthiness of member states.
Belgium’s wealthy economy, with GDP per capita 20% higher than the EU average, has proven resilient. Healthy private-sector balance sheets, as reflected in a modestly indebted non-financial sector and a high level of savings, have supported economic activity. Scope expects real GDP growth in 2017 to increase by 1.6% and in 2018 by 1.5%, after growing by 1.2% in 2016, driven by both internal and external demand. Employment growth has helped reduce the relatively high Belgian unemployment rates, despite ongoing challenges with skills-mismatch of less skilled workers and immigrants. With a boost from investments, in recent years domestic demand has been the main engine of growth. Business investment is helped by supportive financing conditions and government measures to improve the relative labour cost position of Belgian companies.
The ratings benefit also from Belgium’s external sustainability, which is considered robust given its positive net international investment position (NIIP) of 47.1% of GDP in 2016. This reflects healthy private-sector balance sheets, which broadly offset the structural debtor position of the public sector.
The Belgian government has been implementing a number of structural reforms aimed at improving cost competitiveness. These have included a reduction of reduced employers' social security contributions and a freeze of 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 EU peers. Recent pension reform was an important step toward addressing the long-term cost of population ageing. These measure include an increase in age 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 over the medium term.
Despite these strengths, several challenges weigh on the ratings. Belgium has had difficulties consolidating public finances partly because of extended periods of political stalemate and recurrent fiscal slippage. The headline deficit widened in 2016 to -2.7% of GDP and is expected to narrow to -2.1% in 2017 and -2.2% in 018. There remains a wide gap with the country’s medium-term objective of a balanced budget in structural terms. Belgium is currently subject to the preventive arm of the Stability and Growth Pact due to its high debt levels and difficulties in successfully moving towards its reduction. The sustainability of Belgian debt is at the top of its peer group and while the government intends to reduce this, the track record has been mixed over the last several years.
Belgian government debt increased by 20 percentage points of GDP since 2008 and is estimated to have peaked in 2014 at almost 107% of GDP, before declining in 2017 as the budget balance is supported by lower interest payments and nominal GDP growth picks up. Public debt is expected to fall to 103% of GDP in 2018 and remains very sensitive to potential shocks in nominal growth and budget balances. The fiscal effort to reach medium-term budgetary objectives is substantial with an estimated structural deficit of 2.5% in 2016. Reaching a debt ratio of 60% of GDP by 2031 would require fiscal adjustments as high as 4.1 percentage points of GDP between 2018 and 2023. Nevertheless, near-term fiscal risks are mitigated by low interest rates and a relatively long average debt maturity of 8.6 years. Fixed-rate debt in December 2016 accounted for close to 90% of total debt.
Raising employment and labour participation rates will be key to improve sustainability of public finances with an ageing population. The labour market remains mixed, with large differences between regions and subgroups of the population. Overall unemployment remains below the EU and euro area average at 8.0% in 2016, but long-term unemployment rose sharply between 2012 and 2015 before stabilising at high levels. Regulation in Belgium affects many sectors of the economy: competition is restricted in network industries and professional services and barriers are high in public utilities, such as postal services, public transport, energy and water, and telecommunications. Despite recent job creation, structural shortcomings exist, with substantial untapped potential from low labour participation among certain groups. The labour market is divided between insiders and outsiders with high-skilled labour largely at full employment but low-skilled labour facing high unemployment.
Sovereign rating scorecard (CVS) and qualitative scorecard (QS)
Scope’s Core Variable Scorecard (CVS), which is based on relative rankings of key sovereign credit fundamentals, signals an indicative aa rating range for the Belgian sovereign. This indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to 3 notches depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis.
For Belgium the QS signals relative credit strengths for the following analytical categories: 1) market access and funding sources; 2) vulnerability to short-term shocks; 3) external debt sustainability; 4) resilience to short-term shocks and 5) perceived willingness to pay. Relative credit weaknesses are signalled for: 1) fiscal performance and 2) debt sustainability.
Combined relative credit strengths and weaknesses generate no adjustment and signal a sovereign rating at AA for Belgium.
A rating committee discussed and confirmed these results.
For further details, please see Appendix 2 in the rating report.
Outlook and rating-change drivers
The Stable trend reflects Scope‘s view that the challenges faced by Belgium are broadly balanced.
The ratings could be upgraded 1) if sustained improvement in the primary fiscal balance were to lead to a material reduction in the debt stock over the medium term; and 2) economic activity were to pick up more strongly than anticipated leading to a strong employment pick-up spreading to low-skilled workers.
The ratings could be downgraded 1) if the debt trajectory were to worsen as a result of fiscal slippage; 2) an unexpected sharp deterioration in growth prospects were to lead to higher debt ratio and 3) weaker political commitment for reforms and debt reduction.
For the detailed research report please click HERE.
The main points discussed during the rating committee were: (1) Belgium’s economic outlook, (2) fiscal performance, (3) debt sustainability and scenario analysis, (4) structural reform efforts, (5) fiscal consolidation developments, (6) political developments, (7) sovereign peers comparison.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.
This credit rating and/or rating outlook is issued by Scope Ratings AG.
Rating prepared by John F. Opie, Lead Analyst
Person responsible for approval of the rating Dr Stefan Bund, Chief Analytical Officer
The ratings /outlook was first assigned by Scope as subscription rating on January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.
The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the Kingdom of Belgium are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation1.
1Editor's note: The above paragraph was corrected on 17 July 2017 following the publication of the credit rating action on 30 June 2017. The original wording was: Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. It was replaced with the following: As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on The kingdom of Belgium are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation.
Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: National Bank of Belgium, BIS, Belgian Debt Agency, Ministry of Finance, IMF, OECD, ECB, European Commission, Eurostat, Haver Analytics.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.
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