Country Risk Rating

A2
The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average. - Source: Coface

Business Climate Rating

A1
The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

  • Optimal location between the United Kingdom, Germany, and France
  • Presence of European institutions, international organizations and global groups
  • Ports of Antwerp (second-largest in Europe) and Zeebrugge, canals, motorways
  • Well-trained workforce through vocational education, multilingualism

Weaknesses

  • Political and financial tensions between Flanders and Wallonia
  • Complex institutional structure and multiple administrative levels
  • Highly dependent on the Western European economy (exports of goods and services = 84% of GDP)
  • Exports concentrated on intermediate products
  • High structural unemployment
  • Heavy public debt
  • Tight housing market
  • Saturated transport infrastructure

Current Trends

Growth to hold up in 2020 thanks to household consumption

Growth is expected to be resilient in 2020, supported by strong domestic demand, particularly household consumption, which is set to accelerate amid low unemployment (5.5% in August 2019) and resulting wage increase. Household disposable income, which has been supported since 2016 by a phased-in reduction in income tax through changes to tax brackets conducted as part of a “tax shift”, will get a final boost as the 40% bracket is widened at the expense of the 45% bracket. However, consumption may be curbed, to the benefit of savings, if household confidence continues to deteriorate in 2020. While production constraints remain high (81% capacity utilization rate in the third quarter of 2019), the reduction in the corporate tax rate from 29.58% to 25% will only partially translate into an increase in investment, due to the unfavorable European economic situation and waning business confidence. In addition, the impasse in the negotiations to form a government following the May 2019 federal parliamentary elections, precludes any new measures and has forced the caretaker government to repeat the 2019 budget. However, resilient domestic demand should make it possible to offset the difficulties caused by the unsupportive international environment. In a context of weak growth among the main Eurozone partners, particularly Germany (18% of total exports), exports will continue to cool. At the same time, with strong household consumption driving imports, the contribution of foreign trade may even turn negative in 2020.

A budget conditional on the formation of a new government

Pending the formation of a new government, the caretaker government operates using only a budget based on monthly tranches, each of which is one-twelfth of the 2019 budget. However, after widening significantly in 2019, the government deficit will continue to deteriorate, due to further corporate and income tax cuts planned in the last phase of the tax shift. Resilient economic activity and low unemployment will contribute to revenues, but not enough to prevent a deterioration in public finances in 2020. Accordingly, in the absence of a new government and fiscal corrections, which the European Commission requested in October 2019, public debt will decline slowly, thanks to very low interest rates, while remaining very high.

In addition, the current account will remain in deficit in 2020, reflecting the deterioration in the trade balance. After a three-year hiatus, the goods balance has been in deficit again since 2018. Meanwhile, the services surplus has evaporated since 2010, mainly due to the growing deficit in business services (consulting, R&D). In addition, the income deficit has widened steadily in recent years, in line with the growing gap between dividends from foreign investments in the country and the much lower dividends from Belgian investments abroad. However, as during the last two years, foreign investment should comfortably be able to finance the resulting current account deficit.

An impossible coalition?

Following the resignation of Prime Minister Charles Michel in December 2018 due to the departure of the Flemish Nationalists (N-VA) from the governing coalition, the triple elections (federal, regional and European legislative elections) held in May 2019 left the country with an even more fragmented political landscape. All the major political parties emerged from the elections weakened. While the N-VA won only 25 seats out of 150 in the Chamber of Deputies (down 8 seats), this did not benefit any of the other main parties, namely the leftist Socialist Party (PS, French-speaking, 20 seats, down 3), the prime minister’s Reformist Movement (center-right, French-speaking 14 seats, down 6), the Flemish Christian Democrats (12 seats, down 6) and the Liberals (Dutch-speaking, 12 seats, down 2). However, parties at both ends of the political spectrum, namely the PTB (far left, unitary) and, above all, the VB (extreme right-wing, separatist), recorded huge surges, climbing from 2 to 12 seats and from 3 to 18 seats respectively. Early January 2020, after the failure of the negotiations between the N-VA and the PS, special advisors commissioned by the king to identify possible coalitions to form a government were not ruling out any configuration between all the parties sitting in the Chamber of Deputies, with the exception of the PTB and the VB, but had still not found a way out of the crisis. As a result, the country is heading towards new elections or, failing that, a potential new record, beating the 541 days spent without a government in 2010/2011. Whatever the king's decision, political instability seems destined to continue, as the landscape is so fragmented and that there is also a growing divergence between Flanders, which is leaning increasingly towards the right, and Wallonia, which is moving left.

Source:

Coface (02/2020)
Belgium