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Rating Action:

Moody's affirms Belgium's Aa3 ratings; maintains stable outlook

11 Oct 2019

Frankfurt am Main, October 11, 2019 -- Moody's Investors Service ("Moody's") has today affirmed Government of Belgium's Aa3 long-term issuer and senior unsecured debt ratings, as well as the senior unsecured MTN programme rating of (P)Aa3. The commercial paper rating of P-1 was also affirmed. The outlook remains stable.

The key drivers for this rating affirmation are:

1. A strong, innovative and wealthy economy with medium-term challenges

2. A gradually declining but still elevated debt burden

3. A resilient and effective institutional setup despite its complexity and political uncertainty

The stable outlook reflects Moody's expectation that Belgium's economic strength will be resilient to the global headwinds and that the very high level of institutional strength will continue to support the credit profile looking forward. The stable outlook also balances intrinsic strengths in Belgium's innovative economy with credit challenges that predominantly relate to the high government debt load that is receding only gradually.

Belgium's long-term local and foreign-currency bond and bank deposits country ceilings remain unchanged at Aaa.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aa3 RATING

FIRST DRIVER: A STRONG, INNOVATIVE AND WEALTHY ECONOMY WITH MEDIUM-TERM CHALLENGES

The first driver of the affirmation of the rating reflects Belgium's strong economic profile. Over the last decade, Belgium's GDP growth has been aligned with the European Union average and above the euro area mean. Compared to the European average, the Belgian economy tends to exhibit a smoother economic cycle, accelerating less markedly in upturns but also decelerating at a slower pace in downturns, as was the case during the Great recession and the euro area recession in 2012-2013. At around 1% on average in 2019-2020, Moody's expects the economy to grow below its potential of 1.3% against the backdrop of a more challenging external environment. Slowing external demand will weigh on net exports, which will contribute negatively to economic activity. As an open economy, risks for Belgium's growth are tilted to the downside, and external shocks such as an escalation in global trade tensions could have a material impact on economic activity in the country. Similarly, Belgium's close links with the United Kingdom means that the country would be negatively affected by a "no-deal" Brexit scenario.

However, Belgium has a strong, wealthy and well-diversified economic base. With a GDP per capita of $48,245 on a purchasing power parity (PPP) basis, the country ranks in the 80th percentile of our rated sovereign universe, albeit lower than the Aaa-Aa median of $53,023. In the recent years, external competitiveness has improved thanks to wage moderation and policy measures to reduce the tax burden on labour. This has helped export market shares to partially recover from the steady decrease registered since 2000. The positive impact on the labour market has been sizeable, with employment rates reaching historical highs, pushing unemployment to its lowest levels in the last four decades. Although its growth rate is decelerating, productivity levels remain among the highest in the European Union due to a highly skilled workforce and strong innovation performances in key sectors such as pharmaceuticals and chemicals. These and other sectors benefit from a favourable tax regime on research and development (R&D) expenditures.

Looking ahead, Moody's expects Belgium's growth to be driven by domestic demand. The tight labour market will support an increase in disposable income and thus boost private consumption, which would also benefit from the smoothing spending effect by households stemming from recent tax cuts. While Belgium's population is ageing, labour's contribution to potential growth should remain positive in the years to come as Moody's expects both participation and employment rates to continue increasing following the 2015 pension reform. According to the OECD, the effective retirement age in Belgium has increased from 60.1 years for men and 59.6 years for women in 2015 to 61.7 years and 60.1 years in 2017, respectively. Restrictions on early retirement and the increase in the statutory retirement age from 65 years to 66 years in 2025 and 67 years in 2030 should continue to support an increase in the effective retirement age.

SECOND DRIVER: A GRADUALLY DECLINING BUT STILL ELEVATED DEBT BURDEN

The second driver of the action is the continued, albeit gradual, decline in Belgium's general government debt, which went from 107.5% of GDP in 2014 to 102% of GDP in 2018. This reduction was supported by lower headline deficits and higher primary surpluses. Overall, Belgium's fiscal consolidation has been of a structural nature, with a decline in the primary expenditure/GDP ratio of almost 2 percentage points between 2014 and 2018. The country's public finances and budgetary outcomes have also benefitted from the low interest rate environment, with the 10-year Belgian yield following closely that of core euro area countries in the context of the European Central Bank's (ECB) accommodative monetary policy.

Under its base case scenario, Moody's expects Belgium's fiscal deficit will reach -2.1% of GDP in 2020 before slightly recovering to -1.7% of GDP in 2021 and to -1.5% of GDP in 2022, remaining well below the Maastricht threshold of -3% of GDP. The absence of a new government will weigh on policymaking at the beginning of the period, as the mandate of the caretaker administration is limited to ensuring operational continuity of the state. Nevertheless, the low rate environment will continue to limit interest payment expenditures and Moody's expects the gradual decline in public debt to continue, reaching 98.6% of GDP in 2022. Moody's also notes that during this period and beyond, the 2015 pension reforms will help the country to partially mitigate the budgetary pressures stemming from an ageing population. By the end of the next decade, Belgium's population aged 65 or above will represent 36.2% of the 15-64 years population, up from 28.4% in 2016.

Belgium performs well on debt affordability metrics: interest expenditure fell to 4.4% of general government revenue in 2018 from 8.1% in 2008. However, this is still less favourable than that of its rating peers, with a median for Aa-rated sovereigns standing at 2.3% in 2018. Interest expenditures are directly linked to the high level of gross general government debt. At 102% of GDP in 2018, Belgium's public debt is much higher than the median for Aa-rated sovereign, which stood at 34% of GDP.

THIRD DRIVER: A RESILIENT AND EFFECTIVE INSTITUTIONAL SETUP DESPITE ITS COMPLEXITY AND POLITICAL UNCERTAINTY

The third driver of the action relates to Belgium's very high institutional strength. As shown in the Worldwide Governance Indicators (WGI), the country scores favourably in key areas such as government effectiveness, voice and accountability, regulatory quality and control of corruption. In the recent years, Belgium has demonstrated its ability to achieve major reforms of the pension system and of the labour market. Despite the very complex division of powers between the different levels of government, which slows policymaking and delays implementation of decisions, broad consultation of stakeholders ensures accountability and incentivise them to strike deals. However, there has been limited progress on the implementation of the 2013 Cooperation Agreement between the federal government and the regions. This has resulted in the absence of agreement regarding the fiscal targets applicable to each level of government, which weigh on the medium's term trajectory credibility.

Looking ahead, the political uncertainty resulting from the fragmented electoral landscape exhibited in the May 2019 general elections will remain a constraint on policymaking, and Moody's expects the reform agenda to be delayed until a new federal government is formed. The formation of a new government will determine the policy direction for the years to come and Moody's credit assessment of the country going forward will be informed in part by the new administration's detailed policy agenda. In its baseline scenario however, Moody's anticipates broad policy continuity and doesn't expect the reversal of already implemented and effective reforms in the areas of pensions, labour market and competitiveness.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Belgium's economic strength will be resilient to the global headwinds and that the very high level of institutional strength will continue to support the credit profile looking forward. The stable outlook also balances intrinsic strengths in Belgium's innovative economy with credit challenges that predominantly relate to the high government debt load (above 100% of GDP) that is receding only gradually.

In addition, exposure to event risks is low. The risk that Belgium's government balance sheet will be materially affected by a further crystallisation of contingent liabilities from the banking sector has largely receded. Despite sizeable gross borrowing requirements of around 17% of GDP, government liquidity risk is very low, as Belgium benefits from excellent market access at favourable financing conditions.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Moody's takes account of the impact of environmental (E), social (S) and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk. In the case of Belgium, the materiality of ESG to the credit profile is as follows.

Environmental considerations are not material to the rating.

Social risks affect Belgium's credit profile, given the spending pressure on pensions and healthcare due to an ageing population. Similarly, participation and employment rates remain clearly below the EU average, driven by higher inactivity in the 55-64-year category. However, the 2015 pension reform will help contain pension expenditure in the future and contribute to lengthen working lives.

In terms of governance, Belgium scores very high on institutional factors, as captured in the Worldwide Governance Indicators, reflecting strong policy effectiveness and rule of law.

WHAT WOULD CHANGE THE RATING UP

Upward pressures on the rating might develop should the Belgian economy continue to strengthen its competitiveness and innovation attributes, leading to higher employment and activity rates throughout the country. A much faster-than-anticipated decline in the general government debt ratio through stronger growth and the implementation of effective reforms in the context of the spending reviews to be conducted at the federal and at the regional levels would place upward pressure on the rating. A reduction in the inter-regional disparities would also be credit positive by easing the risk of social tensions.

WHAT WOULD CHANGE THE RATING DOWN

Downward pressures on the rating might develop in the case of a material and lasting reversal in the public debt ratio following a significant deterioration in the government's fiscal balance. Similarly, a reversal of past reforms that would result in an increase in the degree of expenditure rigidity, and hence weigh on public debt and further deteriorate medium-term fiscal sustainability prospects, would also put downward pressure on the rating. Finally, a stalling of the agenda to support potential growth would be credit negative.

GDP per capita (PPP basis, US$): 48,245 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.4% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.2% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -0.7% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.3% (2018 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 09 October 2019, a rating committee was called to discuss the rating of the Belgium, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Olivier Chemla
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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