In its new annual report on Belgium, Moody's Investors Service says that its Aa1 ratings on the Belgian government's debt is underpinned by the country's advanced and diversified economy, its institutional strengths and the significant improvement in its debt affordability over the past 15 years despite debt metrics that remain quite a bit weaker than the Eurozone average.
“The high ratings reflect Belgium's position at the core of Europe and its central role in European Union institutions,” says Alexander Kockerbeck, a Vice President-Senior Credit Officer in Moody's Sovereign Risk Group and author of the report. “They also take into account the gradual convergence of the public debt ratios towards Eurozone norms. However, fresh risks for public finances are being generated by the global financial crisis.”
The analyst points out that Belgian government has provided capital to local banks and made explicit its support for the banking system more generally to restore confidence. Beyond such intervention, the budget may also be burdened by extra spending, since politicians may be tempted to follow a European trend of increased government (investment/infrastructure) spending and tax cuts to support a weakening economy.
“Indeed, the economic slowdown is likely to depress fiscal revenues and prevent any further substantial government debt reduction over the next few years,” says Kockerbeck. “As a consequence, the budget may return to larger deficits and the debt ratios are likely to reverse course for a time. The ability to absorb the impact of the global economic slowdown without placing undue stress on the government balance sheet or the economy's long-term economic strength will be fundamental to maintaining the current Aa1 ratings and positive outlook.”
The analyst said that the country's history of political stability was shaken by the long impasse over formation of a government following the elections in late 2007. He said this situation highlighted the country's low but not insignificant susceptibility to political event risk deriving from an intense dispute over regional autonomy between Wallonia and Flanders. These confrontations illustrate the potential difficulties that current as well as future governments may face when attempting to implement reforms or even annual budgets. (press release)