Two weeks ago we speculated that S&P would downgrade Belgium next as the peripheral fire makes inroads to the core. Turns out Fitch is taking charge on this one. Expect S&P to follow shortly. EUR for now pretending it doesn't care.
FITCH REVISES BELGIUM'S OUTLOOK TO NEGATIVE; AFFIRMS AT 'AA+'
Fitch Ratings-London-23 May 2011: Fitch Ratings has revised Belgium's rating Outlook to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA+'. Fitch has simultaneously affirmed Belgium's Short-term rating of 'F1+' and Country Ceiling of 'AAA'.
"The Negative Outlook reflects Fitch's concerns over the pace of structural reform in the coming years and the ability to accelerate fiscal consolidation without a resolution to the constitutional crisis," says Douglas Renwick, Director in Fitch's Sovereign group. "However, despite the ongoing political dispute, day-to-day fiscal management has remained strong, in keeping with Belgium's high-grade rating."
In Fitch's view, without political agreement over constitutional reform, it will be difficult to achieve a balanced budget at general government level as laid out in Belgium's Stability Programme. This would require budgetary surplus at lower levels of government and/or significant social security reform, either of which would likely become entangled in Belgium's linguistic-community dispute.
Sustained debt reduction will require fiscal reform as well as fiscal discipline over the coming years, which in turn requires a new government with a fresh mandate.
Political risk is higher in Belgium than in other euro-area peers given the fractious disputes over the future shape of the state. Fitch notes, however, that the caretaker government (in place since April 2010) has significant budgetary powers and the agency does not expect the political turmoil to pose a threat to fiscal performance this year (a deficit of 3.6% of GDP is budgeted for 2011). Belgium's deficit outturn for 2010 (4.1% of GDP) was better than expected and stabilisation of debt/GDP has been achieved, in contrast to with most euro area peers.
However, the high level of public debt (96.6% of GDP in 2010) leaves the government with little spare fiscal capacity to deal with future shocks. This makes the rating sensitive to risks surrounding the government's medium-term fiscal objectives, which Fitch views as significant. Slippage from official deficit targets would likely result in a downgrade.
Despite a relatively solid economic performance through the crisis to date, Fitch notes some factors which could hinder growth over the long term. The labour market has significant rigidities, with limited responsiveness of wages to productivity. Product market regulation is also significant. Belgium's banking system was hard hit by the crisis and has required substantial state support (the upfront cost of bank bailouts has added around 6% of GDP to the public debt). Banks' domestic exposures are relatively low risk but claims on peripheral euro area and CEE entities are significant.
The 'AA+' rating is underpinned by Belgium's structural strengths: an advanced, diversified economy with high income per capita, high domestic savings and low private sector debt. The economy's external balance sheet is strong, with relatively low international leverage, current account surplus and a net foreign asset position. All these are characteristics of a "core" euro area sovereign.