The rating agency Moody’s maintained the financial rating of Belgian sovereign debt at “Aa3”, but downgraded its outlook from “stable” to “negative”. This decision is justified by the risk that the next government will not succeed in stabilizing the public debt.
The rating agency Moody’s has maintained the financial rating of Belgian sovereign debt at “Aa3”. On the other hand, it has downgraded the country’s outlook to “negative”, whereas it had been “stable” until now, she communicated on Friday evening in a new assessment, two days before the elections. municipal and provincial. This means that she is considering lowering her rating. She justifies this decision by “the risk that the next government will not be able to implement measures which would stabilize the public debt burden”.
If the previous federal executive made “small efforts” at budgetary consolidation, these were not of a structural nature, believes Moody’s. In his view, without a broad fiscal consolidation program, the debt will continue to increase due to the significant structural increase in spending in recent years and the persistent pressure on spending.
Belgium has in fact experienced a structural deterioration of its budgetary situation in recent years, partly due to the indexation of salaries and social allowances, the agency develops.
The costs of aging also add 0.2% of GDP to public spending each year. Spending on pensions has increased rapidly and is expected to continue to grow faster than in most other EU countries, she points out.
Belgium has implemented a number of pension reforms since 2020, but these have not reduced the budgetary costs linked to aging. Upward pressures on defense spending and the green transition add to the spending pressures facing the government.
At the same time, the political economy of deficit and debt reduction may be more difficult in the future than it has been in the past due to structural headwinds to fiscal consolidation, adds rating agency. This while “such an effort will require that it be shared by all levels of government but Belgium lacks intergovernmental cooperation mechanisms” between its different levels, pointed out Moody’s.
The agency underlines that an increasingly significant part of the debt, even if it is the responsibility of the federal government, is generated by the Regions and Communities.
The next federal government will in any case be subject to strong pressure from the European Commission to implement greater efforts, warns Moody’s. This pressure comes as Belgium is targeted by a procedure for excessive deficits and, pending a new government, has warned the European Commission that it will not be able to present its budgetary forecasts before December.
The European Commission expects Belgium to have a public deficit reaching 4.7% of GDP in 2025, after 4.4% this year. The debt would amount to 106.6% of GDP next year compared to 105% in 2024. Among the EU Twenty-Seven, only Greece, Italy and France have even higher debt forecasts. high.
These figures are well above the limits of 3% of GDP for the deficit and 60% of GDP for the debt, which were set by European budgetary rules.
“Belgium has responded well to external pressures in the past, and it is possible that it will do so again. However, the extent of spending drift in the absence of policy change casts doubt on the sustainability of these results”, comments the agency.
The Belgian “long tradition” of budgetary consolidation is a key hypothesis underlying the assessment of the current rating, she further situates. The scale of the challenges that the country’s institutions must face in terms of public finances is, however, greater today than it has been over the last two decades, she points out.
In its assessment, Moody’s analyzed the work of the Vivaldi government, today in current affairs. “The previous seven-party coalition government allowed a significant increase in the structural deficit, mainly because it failed to find consensus on changes to fiscal policy, the labor market, pensions and to structural macroeconomic policy to reverse the current budgetary trend”, asserts the agency.
The Belgian authorities reacted quickly to the pandemic and the energy and inflation crisis by increasing spending to protect the economy. The response to the structural deterioration of public finances that accompanied it was, however, “discreet”, with small one-off reductions in spending which did not make it possible to stem negative budgetary trends, estimates Moody’s.
Maintaining the sovereign debt rating at Aa3 is supported by Belgium’s “diversified, rich and innovative” economy, which benefits from its geographical location in the heart of Western Europe. The country has demonstrated greater resilience than expected to economic shocks, particularly with regard to inflation and the energy shock of 2022, recognizes Moody’s.
“Aa” means that the agency considers the credit risk to be “very low” and “3” means that Belgium is at the bottom of this category.
But, at the same time, the Belgian economy remains faced with significant challenges, notably a low rate of participation in the labor market, adds the agency. “Although Belgian institutions face significant challenges due to the country’s fiscal situation, the overall quality of its institutions is high. Belgium’s sensitivity to event risk is determined by political risk, namely geopolitical risks linked to Russia’s war in Ukraine,” she concludes.
Therefore, the rating could be lowered if Moody’s were to conclude that it is unlikely that the next government will implement measures to stabilize the public debt burden, warns the agency. According to her, an escalation of the war in Ukraine into one directly involving NATO members would also put downward pressure on ratings.
Ratings given by international rating agencies help determine how easily a country can borrow money on international markets.
moody’s belgium debt
