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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Kingdom of Belgium’s long-term issuer and senior unsecured debt ratings at AA- in both local and foreign currency and maintained the Stable Outlook. The short-term issuer rating has been affirmed at S-1+ in both local and foreign currency with a Stable Outlook.

Summary and Outlook

The affirmation of Belgium’s AA- ratings reflects the country’s i) wealthy and diversified economy; ii) favourable debt profile and strong market access, with long maturities and low funding costs; and iii) its sound external position bolstered by a net international creditor position and a favourable external debt structure. The rating is constrained by i) high and increasing debt; ii) structural fiscal pressures related to an ageing population weighing on the budget balance and limiting prospects of material fiscal consolidation and iii) structural economic weaknesses such as declining productivity growth, lagging business dynamism and labour market bottlenecks.

The Stable Outlook reflects the well-balanced risks that Belgium will face over the next 12 to 18 months.

The ratings could be downgraded or Outlooks if, individually or collectively: i) Belgium’s growth outlook deteriorated over the medium-term; ii) the country’s fiscal performance deteriorated substantially, resulting in a persistent and significant increase in public debt; and/or iii) political instability were to weigh on governance and the government’s capacity to implement credit-enhancing reform supporting the economic and fiscal outlooks.

Conversely, the ratings could be upgraded or Outlooks revised to Positive if, individually or collectively: i) Belgium’s public debt were on a firm downward trajectory; and/or ii) structural reform accelerated and successfully strengthened the medium-term growth outlook.

Rating rationale

The first rating driver supporting Belgium’s AA- ratings is the country’s wealthy and diversified economy. High income per capita (USD 58,931 in 2021), as measured by GDP per capita at purchasing power parity, supports economic resilience and exceeds per-capita GDP in France (USD 40,729) and the United Kingdom (USD 49,675). Wealth is also reflected in the very large net financial assets of Belgian households (EUR 1.2trn, or 224% of GDP as of 2021), which would mitigate risk in the event of a financial system distress or a major correction in real estate markets. Belgium’s diversified industrial structure also partially shields its open economy from adverse external shocks. The country ranked 17th globally in the latest Economic Complexity Index and 22nd in the World Economic Forum’s 2019 Global Competitiveness Index although these rankings have deteriorated somewhat relative to previous years. High wealth and a diversified economy underpin Belgium’s macroeconomic stability, as demonstrated by the country’s comparatively resilient economic performance and the relatively lesser contraction in GDP in 2020 by 5.7% compared to peers (8.2% in France and 9.9% in the United Kingdom) as well as after the Great Financial Crisis.

Following a strong recovery, real GDP growth reached 6.2% in 2021. Belgium is set to register comparatively robust growth of 2.2% in 2022 despite significant headwinds due to the Russia-Ukraine war. Significant resilience factors support the Belgian economy, including high household net wealth and sound household debt structure, which combined with automatic wage indexation to inflation, should support household demand throughout the current energy crisis. Public investment should remain robust, in part due to the roll-out of Belgium’s Recovery and Resilience Plan (EUR 5.9bn over 2021-2026, or about 1.2% of 2019 GDP), providing additional support to aggregate demand. Growth should settle down to 0.6% in 2023 following weak business investment and adverse external demand. Inflationary pressures will hamper domestic demand, but wage indexation will mitigate the impact on household consumption. Thereafter, Scope expects growth to gradually converge to its long-term growth potential by 2027, which Scope estimates at 1.2%.

Belgium’s AA- ratings are bolstered by its strong market access and favourable debt profile. Its government debt is characterised by a long average maturity, which stood at 10.4 years as of August 2022¹. More than 90% of outstanding debt is long term, with a marginal share of inflation-linked securities (less than 0.2% of total) and no foreign-currency exposure after accounting for swap agreements. Around 20% of general government debt is held by the National Bank of Belgium, which supports stability in the investor base. Funding costs have risen in recent months on the back of i) the normalisation of monetary policy; ii) an expected inflation increase; and iii) the 10-year sovereign bond yield increasing to 2.4% on average in September 2022 (up from 0.0% over the same period last year). Financing conditions remain broadly accommodative in real terms. Belgium’s favourable debt profile provides a mitigant against the tightening global funding conditions and should allow for a progressive feedthrough of higher rates to the interest burden.

Lastly, a sound external position supports the ratings. Belgium benefits from a strong net international investment position of 52.2% of GDP as of Q2 2022 versus a net international investment position of -6.8% for the United Kingdom and -26.7% for France. Risks related to a high gross external debt stock, at about 250% of GDP, are mitigated by a favourable debt composition, with two-thirds of external liabilities being long term. Belgium enjoyed a period of moderate and broadly stable current account surpluses averaging 0.3% of GDP over 2010-2019. The current account balance turned negative in 2021 (-0.4% of GDP) as a result of a strong rebound in domestic demand and rising global energy prices. Scope expects the balance to remain in deficit in the medium term given weak growth among Belgium’s European trading partners and high nominal energy imports. In the long run, Belgium’s external position faces a set of structural challenges related to weakening competitiveness, due to slowing productivity gains and rising labour costs. At the same time, the diversification of Belgium’s export industries (minerals, pharmaceuticals, chemicals, automotive) across cyclical and non-cyclical sectors will continue to support the country’s external accounts through adverse external conditions and prevent any sudden deterioration in the current account balance.

Despite these key credit strengths, Belgium’s ratings remain constrained by three main challenges: a growing public debt, an ageing population and labour market bottlenecks.

First, a high and growing public debt constrains Belgium’s ratings. Government support aimed at limiting the impact of the Covid-19 pandemic caused a stark deterioration in Belgium’s fiscal metrics and a jump in the headline government deficit from 2% of GDP in 2019 to 9% of GDP in 2020, pushing the debt-to-GDP ratio to 112.8% in the same year. While the debt-to-GDP ratio improved somewhat to 108.2% in 2021 on the back of a robust post-crisis recovery, it remained more than 10 pp above its pre-crisis level. The fallout from the Russia-Ukraine war has put further pressure on the fiscal balance. Rising inflation is adding to primary spending pressures in the form of higher personnel costs and social subsidies and the slowdown in economic activity is weighing on revenue growth. Federal government measures to alleviate the impact of the energy crisis on households and corporates amounted to around EUR 4bn (0.8% of GDP) in total allocated funds in the 12 months to September 2022². While this remains moderate compared to EU peers, a number of temporary measures became permanent, including lower VAT rates on electricity and fuel, thus durably impacting the fiscal balance. Additionally, rising interest rates should lead to a gradual increase in debt servicing costs from 2023 onwards, weighing on the fiscal outlook.

Scope’s baseline forecasts see a narrowing of the headline budget balance to 4.5% of GDP by 2023, before rising again in subsequent years, up to around 5.7% of GDP by 2027. At the same time, the debt-to-GDP ratio should rise from an estimated 106% in 2022 to around 119% by 2027, due to sustained high primary deficits and moderate nominal growth. Scope’s view is supported by the expectation that the high degree of political fragmentation will continue constrain policymaking in Belgium, limiting the current seven-party government coalition’s ability to increase the country’s growth potential and/or to reduce its structural budget deficit. Additional constraints to fiscal consolidation include difficulties in coordinating budget planning across levels of governments, as highlighted by the European Commission³. These issues are particularly salient given the low share of federal government spending in total final public expenditure (25% of GDP versus 19.2% for regions). The previous cooperation agreement, signed in 2013, was not fully implemented, thus limiting the credibility of multi-annual budget planning.

Second, Belgium’s fiscal balance is faced with structural challenges related to population ageing. According to the European Commission⁴, the old-age dependency ratio is set to rise from 32.5% in 2019 to 47.7% by 2045 and 53.3% by 2070. This will add significant pressure to public finances, in the form or rising ageing-related costs, in particular pension expenditures, which are already significantly higher than most euro area peers. Public spending on pensions is expected to increase to 15.2% of GDP by 2070, up 3 pp from 2019. A set of measures were introduced in recent years to address the low effective retirement age, including a gradual increase in the legal retirement age from 65 to 67 by 2030 and tightening conditions for early retirees to access pension benefits. The average labour market exit age remains low compared to peers, at 60.5 years in 2020. Labour force participation for people aged 50 to 64 have increased in recent years, from 59.5% in 2015 to 66.3% in Q2 2022, but they remain among the lowest in the EU and well below the euro area average (72.7%). The OECD recently recommended further policy action to address structural challenges hindering higher activity rates among senior workers, including lagging lifelong learning⁵. The IMF estimates the net present value of additional health care and pension spending over 2021-2050 for Belgium at 108.6% of GDP (versus 41% for France; 74.6% for the United Kingdom)⁶.

Last, the Belgian economy is faced with long-standing structural challenges that will weigh on future growth absent a forceful policy response. Labour productivity gains have slowed down materially since 2015 and multifactor productivity has weakened relative to neighbouring countries. Rising labour costs, exacerbated by the automatic wage indexation mechanism, has caused a widening competitiveness gap with key trading partners, which will worsen due to continuing inflationary pressures. This poses risks to Belgium’s trade-oriented economy (exports represented 80% of GDP on average over 2010-2019). Low labour force participation constrains Belgium’s long-term growth outlook as it suffers from a rigid labour market, high labour taxes and a complex unemployment benefit system. Labour force participation stood at 69.7% in 2021 (well below the euro area average of 73.7%) and vacancy rates have risen to record highs, at 5.1% as of Q2 2022, second only to the Netherlands among EU countries. These labour market challenges are likely to constrain Belgium’s long-term growth outlook and limit social mobility for workers.

The Belgian government has introduced a number of policies in recent months to address these issues, though it remains too early to assess their impact on growth. In February 2022, the coalition government agreed on a labour market reform, with a goal of lifting the employment rate to 80% by 2030, notably through increased flexibility regarding work times and training for workers. Additionally, the government initiated talks to introduce a reform aimed at streamlining the labour tax system in a tax-neutral manner in July 2022, though uncertainty remains as to the governing coalition’s ability to reach an agreement ahead of the 2023 budget. In July 2022, the coalition government reached a limited agreement on a legislative package, including the introduction of a minimum of 20 years of work to obtain pension payments as well as bonuses for late retirees. While this represents a positive step forward, the reform only partially addresses the system’s long-term financial sustainability challenges. While Scope notes positively the near-term momentum, policymaking is set to remain constrained by political polarisation and fragmentation across national and regional legislative bodies, resulting in limited ability for implementing ambitious structural reforms.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative credit rating of ‘a+’ for Belgium. The ‘a+’ indicative rating is further supported by the Sovereign Rating Methodology’s reserve currency adjustment, which provides a one-notch uplift to the CVS indicative rating. The ‘aa-’ indicative ratings can thereafter be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on relative qualitative credit strengths or weaknesses against a peer group.

For Belgium, the following relative credit strengths have been identified: i) debt profile and market access; and ii) external debt structure. Belgium’s relative credit weaknesses are: i) growth potential of the economy; ii) debt sustainability; and iii) governance factors.

The combined relative credit weaknesses and strengths identified in the QS generate no adjustment to the ratings and indicate a sovereign credit rating of AA- for Belgium.

A rating committee has discussed and confirmed these results.

Factoring of environment, social and governance (ESG)

Scope explicitly factors in ESG issues in its rating process via the Sovereign Rating Methodology’s standalone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (CVS) and in the methodology’s qualitative overlay (QS).

Environment-related credit risks for Belgium are balanced. The economy is more carbon intensive than that of France or the United Kingdom, with limited emissions reductions in recent years. Belgium faces some risks linked to storms and flooding but its vulnerability to natural disasters remains low within an international context. The European Commission has assessed Belgium’s national energy and climate programmes as ‘unambitious’ regarding the national energy contribution from renewables and ‘low’ with regard to energy efficiency enhancements⁷. Still, additional reforms proposed under the country’s climate plans are in line with requirements of the Effort Sharing Regulation. The current economic recovery plan specifically includes a climate and sustainability pillar and foresees large investments in the energy efficiency of buildings and in low-carbon energy systems, which support the green transition. However, the high degree of political fragmentation weighs on the government’s ability to formulate a coherent, long-term transition strategy, as was recently reflected in the uncertainty surrounding the phasing-out of nuclear power.

Social factors are similarly captured under Scope’s CVS through the increasing old-age dependency ratios and low labour force participation rates. These quantitative factors weigh on the ratings. The CVS score, however, also reflects supportive contributions from Belgium’s low income inequality. The qualitative assessment of social factors is reflected in the ‘social risks’ evaluation category of the QS, under which Belgium is assessed as ‘neutral’ compared with its sovereign peers, as it balances strong social safety nets with skills mismatches and regional inequalities.

Under governance-related factors in the CVS, Belgium’s performance is strong and in line with that of sovereign peers, such as France and the United Kingdom, as assessed by the World Bank’s Worldwide Governance Indicators. Belgium has had a record of policy inertia in recent years given the difficulties it faces in forming a robust government coalition, leaving structural weaknesses partially unaddressed. This reflects long-term trends in political polarisation, which are exacerbated by a complex political and institutional structure, with high degrees of autonomy for federated entities and a limited formal hierarchy between government tiers.

Rating Committee
The main points discussed by the rating committee were: i) fiscal developments and outlook; ii) economic performance and resilience; iii) institutional and political risks; iv) banking sector performance; and v) peer benchmarking.

Rating driver references
1. Kingdom of Belgium Debt Agency, September 2022 Investor Presentation
2. Bruegel (2022), National policies to shield consumers from rising energy prices
3. European Commission (2022), Belgium 2022 Country Report
4. European Commission (2021), The 2021 Ageing Report
5. OECD (2022), Economic Surveys: Belgium
6. International Monetary Fund (2022), Fiscal Monitor
7. European Commission (2020), Assessment of final national energy and climate plan of Belgium

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Sovereign CVS model version 2.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation        NO
With Access to internal documents                                     NO
With Access to management                                               NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Thibault Vasse, Associate Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus
The Credit Ratings/Outlooks were first released by Scope Ratings on 30 June 2017. The Credit Ratings/Outlooks were last updated on 28 May 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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