Scope affirms the Kingdom of Belgium's ratings at AA-; revises the Outlook to Negative from Stable
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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 has revised the Outlook to Negative from Stable. 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 revision of the Outlook on Belgium’s AA- rating to Negative from Stable reflects:
Scope’s expectation of persistently wide fiscal deficits, driven by elevated structural budgetary pressures, including rising interest and ageing-related spending. This will place Belgium’s public debt-to-GDP ratio on a firm upward trajectory and result in a deterioration of Belgium’s fiscal fundamentals vis-a-vis its European and rating peers.
- The persistence of governance challenges, including institutional rigidities and high political fragmentation and polarisation at the federal and regional levels, curb the government’s capacity to address structural economic and fiscal pressures. Worsening electoral prospects of major coalition partners ahead of the scheduled general elections in Spring 2024 could result in a renewed period of political instability.
The Outlook revision reflects Scope’s updated assessments of Belgium under the ‘public finance risk’ and ‘ESG risk’ categories of its sovereign rating methodology.
The Negative Outlook represents Scope’s view that risks to the ratings are tilted to the downside over the next 12 to 18 months.
The ratings could be downgraded if, individually or collectively: i) Belgium fails to effectively implement a credible fiscal consolidation plan and stabilise its public debt trajectory; ii) Belgium’s growth outlook deteriorated over the medium-term; and/or iii) political instability were to worsen, further weighing on governance and the government’s capacity to implement credit-enhancing reforms supporting the economic and fiscal outlooks.
Conversely, the Outlooks could be revised to Stable if, individually or collectively: i) Belgium consolidates its public finances and stabilises its public debt-to-GDP trajectory; and/or ii) structural reforms accelerate, strengthening the medium-term growth outlook.
The revision of the outlook to Negative from Stable on Belgium’s AA- rating reflects the country’s weak fiscal outlook, with Scope expecting wide budget deficits and a firmly increasing public debt-to-GDP trajectory over coming years. This presents a considerable challenge to Belgium’s rating, underpinned by rising interest rates, the costs associated with an ageing population and elevated public investment needs, which will result in a deterioration of the country’s fiscal fundamentals vis-a-vis rating peers in coming years.
The federal government’s latest Stability Programme foresees that joint consolidation efforts from the federal government and federated entities will reduce the fiscal deficit below 3% of GDP by 2026 from 3.9% in 2022, and 5.6% in 20211. The narrowing of the budget deficit in 2022 has been driven by the continued post-pandemic rebound in economic activity and the favourable short-term impact of accelerated price dynamics on government revenue, despite the roll-out of support measures aimed at cushioning the impact of the energy shock on the private sector.
However, any consolidation strategy will be substantially hindered by multiple compounding factors. The persistence of high inflation is causing significant short-term primary spending pressures, in the form of discretionary support to the private sector (for a net cost of EUR 3bn, or 0.5% of GDP in 2023) as well as tangible medium-term pressures due to higher inflation-linked personnel costs and social subsidies. The National Bank of Belgium estimates that the unexpected inflation surge will structurally increase the primary deficit by about 0.5% of GDP by 20252. This will exacerbate the structural rise of social spending in Belgium, which is projected to increase by 2pps of GDP over 2022-28 according to the Federal Planning Bureau3, and thus constitutes a major fiscal challenge.
In addition, global funding conditions and the resulting increase in government borrowing costs, which caused the yield on benchmark 10-year government bonds to rise from -0.1% in August 2021 to about 3.2% in August 2023 further weighs on the budgetary outlook. While the feedthrough of higher market rates to overall interest payments should be gradual, thanks to Belgium’s favourable public debt structure, the Belgian Debt Agency expects interest payments on federal debt to more than double from EUR 6.9bn (1.2% of GDP) to EUR 14.8bn (2.2% of GDP) over 2022-28.
As a result, Scope expects budget deficits to rise to 4.9% of GDP in 2023 and to widen gradually to around 5.4% of GDP by 2028 – broadly in line with the 5.5% of GDP budget deficit projected by the Belgian Federal Planning Bureau3, and the IMF4 for 2028. Scope’s view is based on the expectation that revenue growth will be insufficient to offset rising expenditure despite the withdrawal of energy crisis measures. This represents the widest such forecasted deficit of all of EU countries and is well above those of selected rating peers such as the United Kingdom (4.1% of GDP in 2028), France (3.6%), or the Czech Republic (1.7%).
Scope also notes that the expected fiscal deficits and moderate economic growth of 1.2% on average over 2023-28, will place Belgium’s debt-to-GDP ratio on a firm upward trend from this year onwards, reaching about 118% by 2028 versus 114% in France, 112% in the United Kingdom, and 42% in the Czech Republic. The expected increase of about 13pp in the public debt-to-GDP ratio over the coming years constitutes the largest increase in public indebtedness among EU member states and would place Belgium as the EU country with the third highest debt-to-GDP ratio after Italy (140% in 2028) and Greece (142%). This puts Belgium at risk of being placed under an excessive deficit procedure by the European Commission once EU fiscal rules are reinstated, though uncertainty remains around the finalisation of the EU fiscal framework reform5.
Over the medium-term, this will leave Belgium with more limited fiscal space to face future crises amid mounting long-run spending pressures. The European Commission’s 2021 Ageing Report projects the old-age dependency ratio to rise from 32.5% in 2019 to 49.2% by 2050. This will drive a rise in the total cost of ageing for Belgian public finances from higher pension, healthcare, and long-term care expenditure. While this increase affects virtually all EU member states, Belgium’s total cost of ageing is expected to increase by 4.6pps over 2019-50 – versus an increase of 0.7pps for France, and 2.5pps across the EU on average – and reach 30.2% of GDP, the second highest level in the EU after Austria6.
In July 2022, the Belgian government agreed on a plan to improve the fairness of the pension system, including measures aimed at raising activity rates among older workers and a revaluation of minimum pension payments. Nevertheless, this policy change appears insufficient to address the impact of population ageing on the fiscal trajectory. Estimates from the Federal Planning Bureau show that the reform will in fact lead to a slight increase in the pension system’s deficit by 2070, primarily reflecting the impact of the introduction of a bonus, incentivising workers to work beyond the retirement age7. A recently announced coalition agreement to reduce the pension deficit is a positive step but is likely to yield modest fiscal gains in the near-to-medium term, with savings estimated at 0.5% of GDP by 2070.
In addition, Belgium will have to fund large investment needs to achieve its green transition and meet its target of carbon neutrality by 2050. Total green investment needs for Belgium are estimated at around 3% of GDP annually through 20508, a portion of which will be shouldered by Belgian public authorities. In addition, the escalation of the Ukraine war has led to increased pressure for NATO partners to raise public spending on defence. Belgium’s defence expenditures are estimated to reach 1.1% of GDP in 2023, the second lowest level in the alliance and below that of rating peers such as the Czech Republic (1.5%), France (1.9%), the United Kingdom (2.1%), and the United States (3.5%). Approaching the 2% of GDP NATO defence spending target amid an uncertain geopolitical landscape will translate into additional fiscal strain for the country.
The revision of the Outlook to Negative from Stable on Belgium’s AA- rating also reflects the ongoing institutional and political challenges impacting the Belgian government’s ability to effectively design and implement policies at a national level.
Belgium federalism is characterised by the absence of hierarchy between the federal government and the state governments. Consequently, no authority has precedence over another, which implies that legislative texts issued by each government level stand on an equal footing. This results in a high degree of influence of regions and communities over national policy making and underpins the importance of consensus and coalition building in Belgium. These institutional features adversely interact with elevated and rising political fragmentation and polarisation in Belgium and weigh on the government’s ability to effectively formulate and implement policy. The Belgian political landscape has undergone significant changes over recent decades, notably through the decline of previously mainstream parties, the rise of alternative political forces and rising fragmentation of its party system, particularly visible in the resurgence of linguistic divides. These trends have resulted in a lower predictability of electoral outcomes, more strenuous consensus-building and increased difficulties in forming coalition governments, as shown by the rising length of the government formation process as well as the declining longevity of coalition governments9.
After Belgium was run by a caretaker government for almost two years during which federal policy making was at an almost complete standstill, a government coalition of seven parties (the ‘Vivaldi’ coalition) was formed in September 2020. However, the current ‘Vivaldi’ coalition is dependent on a fragile political balance between its partners, which makes it difficult to adopt ambitious structural reforms ahead of the next general elections. Opposing views within the coalition have impeded progress in several important areas, including fiscal, climate, and economic policies. This is also visible in the lack of reform momentum pertaining to Belgium’s Recovery and Resilience Plan, which aims to target some of the country’s longstanding economic and fiscal challenges, notably to ensure the sustainability of its public pension system and enhancing the fairness and neutrality of its tax system. Most recently, coalition talks around a long-awaited tax reform broke down as coalition partners failed to reconcile their positions without jeopardising the government’s consolidation objectives.
In addition, support for coalition parties is weakening ahead of the scheduled Spring 2024 general elections, while polarised views across the country’s regions remain a structural issue for government formation talks. This raises the likelihood of a prolonged government formation period following the Spring 2024 general elections, which would further delay the implementation of much-needed reforms, leaving the country’s structural challenges unaddressed and resulting in a further erosion in credit fundamentals.
Finally, the Belgian institutional framework’s high degree of expenditure decentralisation and comparatively weak policy coordination across levels of government constitute a significant hindrance to fiscal consolidation in view of the difficulties in coordinating budget planning, as highlighted by the IMF10 and the European Commission11. The most recent Cooperation Agreement, signed in 2013, has not yet been fully implemented. The absence of an agreement on budgetary targets at each level of government prevents the effective monitoring of compliance by the High Council of Finance and undermines the credibility of multi-annual budget planning.
These issues are particularly salient given the high share of subnational government spending in total general government expenditure (49% of total).
These factors raise credibility concerns over the government’s medium-term fiscal plans. Scope notes that Belgium still lacks a detailed, comprehensive, and credible consolidation strategy that benefits from broad support among coalition partners. Though piecemeal progress on selected policy issues is possible, building consensus around the needed fiscal consolidation measures, in the context of the forthcoming 2024 elections and waning support for main coalition parties, will be particularly challenging, underpinning Scope’s decision to assign the Negative Outlook.
Despite these credit weaknesses, Belgium retains considerable credit strengths.
First, Belgium’s ratings are supported by its wealthy and diversified economy. High income per capita (USD 50,114 in 2022), as measured by GDP per capita, supports economic resilience and exceeds per-capita GDP in the United Kingdom (USD 45,295), France (USD 42,409) and the Czech Republic (USD 27,613). Wealth is also reflected in the very large net financial assets of Belgian households (EUR 1.2trn, or 207% of GDP as of Q1 2023), which constitutes a strong buffer against risks associated with episodes of 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 Belgian economy’s high degree of sophistication and diversification is reflected in favourable scores on the Observatory for Economic Complexity’s economic complexity indices, where Belgium ranked 18th globally for trade, 15th for technology and 9th for research12.
Economic growth has decelerated markedly amid heightened price pressures, tightening borrowing conditions and slowing activity among European trading partners. Real GDP grew by 0.2% quarter-on-quarter in Q2 2023, after 0.4% in Q1, dampened by lower household investment and a negative contribution from net exports. Government support measures and automatic wage indexation have helped mitigate the impact of the energy shock on the private sector, while the roll-out of Belgium’s Recovery and Resilience Plan (EUR 5.9bn in grant-funded investments over 2021-2026, or about 1.2% of 2021 GDP) should support long-term growth. Scope expects annual growth will decelerate to 1.1% in 2023, down from 3.2% in 2022. GDP growth should then gradually converge towards its medium-run growth potential of 1.2%. This compares to growth potential estimates of 1.4% for France, 1.5% for the United Kingdom, 2.0% for the United States, and 2.5% for the Czech Republic.
Second, Belgium’s ratings are bolstered by its strong market access and favourable debt profile. Government debt is characterised by a long average maturity, which stood at 10.7 years as of July 2023. More than 92% of outstanding debt is long term, with a marginal share of inflation-linked securities and no foreign-currency exposure after accounting for swap agreements. Funding costs have risen in recent years, in a context of heightened inflation expectations and tightening monetary policy. 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 53% of GDP as of Q1 2023, comparing favourably to the United Kingdom (-13.8% of GDP), the Czech Republic (-18.7% of GDP) and France (-28.3% of GDP). Risks related to a high gross external debt stock (about 241% of GDP) are partially mitigated by a favourable debt composition, with around 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 2016-2021. The current account balance turned negative in 2022 (-3.6% of GDP) due to a sharp deterioration of the trade balance, amid soaring nominal energy imports and normalising pharmaceutical exports. 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.
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 ‘a+’ 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) macro-economic stability & sustainability; ii) debt profile and market access; iii) external debt structure; iv) resilience to short-term shocks; v) banking sector performance. 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 a one-notch positive 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 20% in the methodology’s qualitative overlay (QS).
Environment-related credit risks for Belgium are average compared to peers. The economy is more carbon intensive than that of France or the United Kingdom, with limited emissions reductions in recent years. The country’s environmental performance is penalised by its elevated level of greenhouse gas emissions per capita, similarly to other advanced economies. Belgium faces some risks linked to storms and flooding but its vulnerability to natural disasters remains low within an international context. The country is currently set to miss its 2030 carbon emissions reduction target according to the European Commission, in part reflecting the slow development of new renewable energy generation capacities13. 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.
The main points discussed by the rating committee were: i) growth performance and outlook; ii) fiscal developments and trajectory; iii) structural reform progress and economic bottlenecks; iv) institutional and governance challenges; v) scorecard assessments and vi) peer comparisons.
Rating driver references
1. European Commission - Belgium Stability Programme 2023
2. National Bank of Belgium, July 2023 - The impact of high inflation on Belgian public finances: a simulation exercise
3. Bureau fédéral du Plan, June 2023 - Perspectives économiques 2023-2028
4. IMF, March 2023 – Belgium: 2022 Article IV Report
5 La Libre, May 2023 - La Belgique n’éviterait pas une procédure de déficit excessif en 2024, selon le ministre Vincent Van Peteghem
6. European Commission (2021), The 2021 Ageing Report
7. Federal Planning Bureau, November 2022 - L’accord sur les pensions de juillet 2022 – Chiffrage des mesures
8. McKinsey & Company, June 2023 - Net zero or growth? How Belgium can have both
9. Dandoy, Joly, August 2018 - Party system change in Belgium : From stability to fragmentation?
10. IMF, March 2023 - Fiscal Federalism in Belgium: Challenges in Restoring Fiscal Sustainability
11. European Commission, May 2023 - European Semester Country Reports - Belgium
12. Observatory for Economic Complexity – Economic Complexity Index
13. European Commission, May 2023 - European Semester Country Reports - Belgium
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.
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Lead analyst Thibault Vasse, Associate Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 14 October 2022.
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