OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed Belgium's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with a Negative Outlook. The issue ratings on Belgium's senior unsecured foreign- and local-currency bonds are also affirmed at 'AA'. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign-currency IDR at 'F1+'.

KEY RATING DRIVERS
The affirmation of Belgium's IDRs with a Negative Outlook reflects the following key rating drivers:

The ratings balance Belgium's high public debt burden and recent fiscal slippage against its strong net external creditor position, high income and diversified economy, track record of macroeconomic stability and relatively strong governance.

Gross general government debt (GGGD) was 106.6% of GDP at end-2014, the highest in the 'AA' range, and up from 86.8% at end-2007. Fitch expects GGGD to peak this year at 107% of GDP and to remain above 100% of GDP until 2020 (unchanged from our previous review). Further ESA2010 statistical revisions released in April 2015 left Belgium's public debt levels unaffected following a net upward historical revision amounting to approximately 3% of GDP in an October 2014 release.

Belgium's budget deficit has suffered from recent fiscal slippage and the meeting of medium-term targets has been delayed. The general government deficit was 3.2% of GDP in 2014, 0.3% above its 2013 level and 0.8pp above the original 2014 budget target, adjusted for the impact of ESA2010 statistical changes. In its April 2015 Stability Programme, the government revised up its target for the 2015 budget deficit to 2.5% of GDP, above the 2.1% in the original 2014 budget. Fitch has revised up its forecast deficit to 2.7% of GDP in 2015 (slightly above our prior forecast of 2.5%). The Stability Programme also postpones achieving a structural budget balance by two years to 2018.

The government's strategy for meeting its revised fiscal targets is to curb expenditure, including a 2% a year cut in real terms in wages and operational costs at the federal level. However, around 0.4pp and 1pp of GDP of measures have not yet been specified for 2016 and 2017, respectively. The government plans to keep the tax burden broadly unchanged in net terms, while implementing a 'tax shift' to lower taxes on low paid income.

The coalition government, which came into power in October 2014, is implementing some structural reforms that will benefit competitiveness. It has implemented a temporary freeze to the wage indexation system that will effectively lower wage costs by 2%-3% by end-2016 and will also cut employers' social security contributions by 1%. This will help to lower relative unit labour costs. The current account moved back to a surplus of 1.4% of GDP in 2014, from a deficit of 0.2% in 2013 and 1.9% in 2012.

The government has also announced reforms that strengthen the age and career requirements for pensions and reduce the generosity of public pension schemes and incentives for early retirement. The Committee on Ageing estimates this will lower the increase of ageing costs on the budget deficit to 2.1 % of GDP by 2060 from 4.2% last year.

Real GDP grew 1.1% in 2014, slightly above our expectations. Fitch has revised its 2015 growth forecast to 1.1% (from 0.9% previously) and 1.5% in 2016 (from 1.1% previously). The improvement in the growth outlook is largely driven by net exports, private consumption, and a general pick-up in eurozone economic activity, supported by euro depreciation, lower oil prices and quantitative easing.

Fitch views Belgium's financing risk as low, reflecting an average debt maturity of 7.75 years and an average cost of borrowing of 2.9%. The average cost of borrowing in the first six months of 2015 was just 0.8% for an average maturity of 12 years. Government debt is predominantly euro-denominated.

The ratings are supported by a high-value added and diversified economy, and low GDP and price volatility. Belgium has a strong net external creditor position of 69% of GDP. Household debt is moderate and net wealth is fairly high. Governance indicators are stronger than the 'AA' range median, but a complex division of political and fiscal power exists between regions and multiple tiers of government.

Risks from the banking sector have receded. State funding guarantees provided to Dexia remain the largest contingent liability from the banking sector, at around EUR34.5bn at end-May 2015 (8.4% of 2015 GDP). The banking sector has deleveraged significantly, with total assets declining to 248% of GDP at end-2014 from 400% at end-2008. The overall asset quality of the banking system remains satisfactory, with impaired claims at 3.9% at end-2014.

The country has a proven track record of fiscal consolidation and public debt reduction. Belgium's public debt levels were reduced from roughly 130% of GDP in 1995 to 87% of GDP in 2007 on the back of a revenue-driven consolidation programme, supported by favourable economic growth conditions.

RATING SENSITIVITIES

The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade:
-Fiscal easing or growth underperformance, reducing confidence that public debt will peak in 2015 and be placed on a firm downward trajectory.
-Political turmoil and policy uncertainty that undermine confidence in fiscal commitments and economic growth prospects.

Given the Negative Outlook, Fitch's analysis does not currently expect developments with a material likelihood of leading to an upgrade. However, future developments that may, individually or collectively, result in a revision of the Outlook to Stable include:
-Fiscal deficit reduction consistent with the public debt-to-GDP ratio being placed on a downward trajectory.
-Strengthening growth prospects and competitiveness, particularly through implementation of structural reforms.

KEY ASSUMPTIONS

Fitch assumes there will be no constitutional crisis in Belgium.

There will be no sizeable recapitalisation of the financial sector by the Belgian sovereign leading to a worsening of public finances.

In the event of a Greek exit from the eurozone, Fitch assumes this would be unlikely to trigger a systemic crisis like that seen in 2012, or another country's rapid exit. However, it would increase financial market volatility and dent economic confidence.