Announcement: Moody's: Belgium's credit profile supported by diversified economy and strong financial asset position; debt burden poses challenge

Belgium's (Aa3, stable) credit profile is supported by a diversified and well-balanced economy with a strong net financial asset position and limited external imbalances, Moody's Investors Service said in a new report. The authorities' record in executing prudent and adaptable fiscal policy is also supportive.

The annual update, "Government of Belgium -- Aa3 Stable, Annual credit analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"The favourable impact of Belgium's recent employment reforms will support domestic demand over the next few years, while the broader euro area recovery will also strengthen exports," said Sarah Carlson, a Moody's Senior Vice President and co-author of the report. "However, the government debt burden remains higher than the levels of Belgium's rating peers, although it is set to gradually decline."

High levels of social transfers and government services limit spending flexibility, a challenge likely to intensify as Belgium's population ages. At the same time, Belgium's regional disparities, political labour market and wealth divisions constrain the government's ability to address the country's significant structural macroeconomic challenges.

Belgium's high economic strength reflects its robust, diverse economy with limited macroeconomic imbalances and a wealthy, skilled population with significant assets. However, the country's growth model faces medium-term challenges to maintain its competitiveness and to increase labour participation. That said, in recent years the authorities have begun to address these issues, and Moody's expects policy momentum in these areas to continue.

The economy's growth performance remains relatively weak against rating peers. Moody's expects an average real growth rate of 1.3% between 2012 and 2021, compared to a median of 2.2% for Aa-rated sovereigns.

Belgium's high fiscal strength balances its high government debt that has now peaked at 106% of GDP with the debt's relative affordability, reflected in interest spending that is now just over 5% of government revenues.

Moody's expects that fiscal consolidation efforts will continue, aimed at keeping the deficit within prudent margins below the 3% of GDP Maastricht threshold.

Exceptionally large corporate income tax advance payments this year, and the favourable impact of stronger economic growth on broader general government revenue, should drive a significant reduction in the fiscal deficit this year, which Moody's now projects at 1.3% of GDP, down from 2.5% in 2016.

Upward pressure on Belgium's sovereign rating might develop if some of the country's key structural challenges were to be decisively addressed. A faster-than-expected reduction of government debt, through materially stronger economic growth and/or more aggressive deficit reduction, would be positive.

Improvements in the labour market - particularly higher employment rates - and tax reform would also be credit positive, given the impact that they could have on Belgium's economic dynamism.

Downward pressure on the rating might develop if the government's debt trend were to diverge significantly from Moody's expectation that it will continue to decline at a gradual pace following its 2015 peak of 106% of GDP. In particular, a sustained deterioration in the government's fiscal position or, over the medium term, a failure to reduce indebtedness would exert downward pressure on the rating.