Belgium: Risk Assessment
Country Rating1
Rating: A2
Business Climate Rating1
Rating: A1
Risk Assessment2
Domestic demand likely to pick up the slack for foreign trade
After contracting in 2009, the economy resumed modest growth in 2010, driven by an easing of economic policy and the recovery in global demand. A slight slowdown is expected in 2011 with a reduced contribution from the foreign trade only partially offset by the strengthening of domestic demand.
In 2010, exports benefited from the boom in Germany, Belgium's main trading partner. But they will slow in 2011 in the wake of world trade. With the import growth linked to the strengthening of domestic demand, a reduction in the contribution of foreign trade to growth will follow. Investment will stop falling and begin to grow slightly, buoyed by the return of the capacity utilization rate for companies to its historic average level and by the improvement in corporate profitability. As for the public sector, investment will benefit from the prospect of local elections in 2012. Spending on housing is also expected to begin to grow again. And household consumption will record, again in 2011, moderate growth. The surge of inflation linked to energy and to food products will be offset by the indexing of wages. Employment will develop slowly with companies, on the lookout for productivity gains, giving preference to increasing working hours rather than hire additional staff, which in all likelihood will moreover no longer benefit from temporary reductions in social contributions.
Start of the consolidation of public-sector finances in 2011
The rescue of several banks, the effect of automatic stabilizers, and the stimulus plan, all came at a high cost to public finances. The fiscal deficit soared while the debt - after being reduced to a level representing just 90% of GDP against 138% in 1993 - is verging on 100% of GDP. Despite a caretaker government since April 2010, the medium-term consolidation program will go into effect in 2011. The king widened the caretaker government powers and asked the acting Prime minister to present a 2011 budget answering European demands. Meanwhile spending will be capped at last year's level while revenues will rise as the economy grows and temporary tax breaks expire. Public sector debt will be likely to level off.
The consolidation will depend on resolution of the political crisis
Tough measures will have to be taken to reach the objective of wiping out the deficit by 2015, which presupposes resolution of the political crisis. Even though federal political problems have little impact on the economy, and a substantial portion of economic policy falls under the responsibility of federated entities, the debt is essentially federal as is the case for taxes and social security. The negotiations on a coalition government between the Flemish nationalist party and the Walloon socialist party focus on financial transfers between federated entities, the social security system, financial responsibility (since, while spending especially concerns entities, taxation is essentially federal), as well as the future prospects and financing for the Brussels Hal-Vilvorde district.
The corporate situation will improve
Belgian companies suffered in the crisis. Despite the stabilizing of social contributions, their operating income declined on average a cumulative 30% from its level in 2008-2009, which admittedly had increased twofold in the preceding five-year period. This weakening of corporate earnings performance has resulted in an annual increase in bankruptcies of about 10% through end 2010. Businesses services (logistics, consulting), hospitality, catering and some industries (including metallurgy, transport equipment, electric equipment, and textiles) were affected most. The progress nonetheless made in 2010 in improving average operating income augurs well for a reduction in the number of companies filing for bankruptcy protection.
Strengths
- Central geographic position in Europe
- Presence of European institutions and international organizations
- Quality infrastructure: Port of Anvers (second largest European port)
- Net creditor position
- High household savings rate (17%)
- Limited debt of households (equivalent to 20% of their assets)
- Private savings counterbalance net corporate and public sector debt
Weaknesses
- Complex sharing of authority among regions, linguistic communities, and federal government
- Low employment, competitiveness, and productivity rates
- Lack of professional training
- Competition restricted by regulations
- Marked regional disparities accompanied by political, cultural, and financial tensions
- Exports resting largely on intermediate products and Europe (market for 75% of sales)
- Weak banking system whose assets represent 340% of GDP