A diversified, wealthy economy with strong funding flexibility, sound external position and structural reform efforts support the rating. High debt levels, weak productivity growth, labour market rigidities and housing price vulnerability are constraints.
Scope Ratings AG today affirms the Kingdom of Belgium’s long-term local-currency issuer rating at AA. The agency also affirms the long-term foreign-currency issuer rating of AA, along with affirming a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency is also affirmed at AA. All Outlooks are Stable.
The AA rating is supported by Belgium’s euro area membership, a wealthy and diversified economy, strong external position, strong funding position and a track record of structural reform efforts. Despite these strengths Belgium faces challenges including a high public debt to GDP ratio, weak productivity growth, labour market rigidities and rising vulnerabilities in the housing market. The confirmation of the Stable Outlook reflects Scope’s view that the risks for the ratings remain broadly balanced. Belgium’s wealthy economy, with GDP per capita 13% above the OECD average, has proven resilient. The exceptionally low GDP volatility, a strong diversification of the economy and deep integration in the euro area make the country highly resilient to shocks. Scope expects real GDP growth in 2018 to increase by 1.9% and in 2019 by 1.7%, supported by continued monetary expansion in the euro area. Relatively weak capacity investment, population ageing, and labour market rigidities keep potential growth around 1.5% over the medium-term. Employment growth has helped to reduce Belgian unemployment rates, despite ongoing misalignment between worker skills and industry needs, which results in uneven productivity growth. In recent years, domestic demand has been the main engine of the economic upswing, accompanied by a surge in business investment.
The ratings also benefit from Belgium’s external sustainability, which Scope considers to be robust given its positive net international investment position (NIIP) of 55% of GDP in 2017. The current account was in balance and is expected to remain positive over the medium-term. Both the strong external position and positive net exports buffer the government from higher risk premia.
The Belgian government has also implemented several structural reforms aimed at improving cost competitiveness, paving its way to further fiscal consolidation. The reform process initiated in 2014-15 has been continued in 2018 by the centre-right coalition with a new package of tax and labour market measures. The recent pension reform was an important step in addressing the long-term costs of population ageing. New measures expand the tax base by reducing exceptions and plans to improve disadvantaged groups’ chances on the labour market through better vocational training and major school reforms. These measures are expected to enhance potential growth over the medium term.
After limited progress in recent years, the headline deficit declined significantly in 2017 to 1.0% of GDP from 2.5% on average in 2015 and 2016. This reflected both significant structural fiscal consolidation efforts, as well as the sustained cyclical conditions and strong corporate tax revenues. The fiscal position is expected to stabilise with headline deficits at 1.1-1.3% in 2018 and 2019. The 2018 budget is anticipated to decrease in revenue and expenditures, which is mainly driven by lower tax income and interest payments. Scope anticipates local (2018), regional and national elections (2019) to raise uncertainties, especially if the winning parties face difficulties to form a new government.
Further fiscal consolidation efforts could accelerate the decline in the high public debt-to-GDP ratio. The debt to GDP ratio is projected to continue falling, from 103% of GDP in 2017 approaching to 93% in 2020 assuming primary surpluses to remain at 1.4% and GDP growth at 1.6% over the medium term.
Despite these strengths, several challenges weigh on the ratings. The combination of high public debt (103% in 2017) and private debt ratios (106.1% of GDP in 2016) entail risks to financial stability when the ECB ceases its asset purchase programmes and interest rates start to increase. The recent pension reforms contribute to a more positive outlook, but potential contingent liabilities stemming from demographic transitions remain a major risk to public finances. Compared to its peers, Belgium faces the largest gross-financing needs (GFN). However, the high share of long-term debt denominated in euro and a relatively long average debt maturity of 9.3 years in 2017, one of the highest in the euro area, contribute to low refinancing risk over the medium-term. In addition, the central government is expected to sell equity stakes in Belgian banks (a total of 10bn. Euros), the equivalent of a 2% debt reduction.
Belgium faces weak productivity growth, which largely stems from sectoral misplacement of labour and structural weaknesses in the education system. High regulation of network industries and some professional services restrict competition, resulting in a negative productivity gap, compared to Belgium’s peer rating group. The skill mismatch is a major driver of the sectoral imbalances, based on regional disparities (unemployment rates ranging from 5-6% to 16%), youth unemployment (close to 20% and higher than the EU average), as well as low employment rates among migrants (50% among non-EU28 citizens). Improving employment and labour participation rates will be key to improve sustainability of public finances with an ageing population. Overall unemployment is expected to remain clearly below the ratios of its euro area peers with the trend rate expected to decline further towards 6-6.5% over the medium-term.
Scope believes that short-term vulnerabilities are emerging in Belgium’s housing market. Real estate prices increased by 20% since the great financial crisis leading to steady increases in household debt to around 104% of income, higher than the euro area average. Although households have high net financial wealth of approximately 243% of GDP in 2017, a third of the households can cover no more than six months of debt service. Both the large ratio of private mortgage debt among lower-income households and high repayment rates relative to income contribute to a potential vulnerability. The housing market faces the risk of a significant price correction when interest rates start to rise. A low ratio of variable interest loans mitigates this risk to some extent, but this would nonetheless adversely affect household wealth and thus hence the balance sheets for financial institutions. The recent rejection of a proposed capital surcharge on risky mortgages from the National Bank of Belgium (NBB) by the government inhibits pre-cautionary actions by the NBB. A new proposal is currently under discussion with the government.
Sovereign rating scorecard (CVS) and Qualitative Scorecard (QS)
Scope’s Core Variable Scorecard (CVS), which is based on relative rankings of key sovereign credit fundamentals, signals an indicative A (a) rating range for Belgium. This indicative rating range can be adjusted by up to three notches on the Qualitative Scorecard (QS) depending on the size of relative credit strengths or weaknesses versus peers based on qualitative analysis. For Belgium, the following relative credit strengths have been identified: i) economic policy framework, ii) macro-economic stability and sustainability iii) fiscal policy framework, iv) debt sustainability v) market access and funding sources, vi) current account vulnerability vii) external debt sustainability, viii) vulnerability to short-term external shocks, ix) banking sector performance and x) banking sector oversight and governance.
The combined relative credit strengths and weaknesses indicate a sovereign rating of AA for Belgium. A rating committee has discussed and confirmed these results.
For further details, please see Appendix 2 of the Rating Report.
Outlook and rating-change drivers
The assignment of AA Stable trend reflects Scope’s view that risks to the ratings are now broadly balanced.
The ratings could be downgraded following: i) a sharp deterioration in the economic outlook, ii) a strong deterioration in fiscal results, and/or iii) a reversal of structural reforms. The rating could be upgraded if: i) growth accelerated sharply, ii) debt were to be reduced more than expected, and/or iii) reforms significantly boosted growth potential.
The main points discussed during the rating committee were: i) Belgium’s impact on economic growth potential, ii) fiscal performance and debt sustainability, iii) market access and funding sources, iv) vulnerabilities in the housing market.
Oil extends losses as Texas prepares to ramp up output
By Ahmad Ghaddar
LONDON (Reuters) – Oil prices fell from recent highs for a second day on Friday as Texas energy firms began to prepare for restarting oil and gas fields shuttered by freezing weather.
Brent crude futures were down $1.16, or 1.8%, to $62.77 per barrel, by 1150 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell $1.42, or 2.4%, to $59.10 a barrel.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, according to analysts.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
However, firms in the region on Friday were expected to prepare for production restarts as electric power and water services slowly resume, sources said.
“The market was ripe for a correction and signs of the power and overall energy situation starting to normalise in Texas provided the necessary trigger,” said Vandana Hari, energy analyst at Vanda Insights.
Oil fell despite a surprise fall in U.S. crude stockpiles in the week to Feb. 12, before the freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about both nations returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons.
While the thawing relations could raise the prospect of reversing sanctions imposed by the previous U.S. administration, analysts did not expect Iranian oil sanctions to be lifted anytime soon.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” StoneX analyst Kevin Solomon said.
(Additional reporting by Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; editing by Jason Neely)
Analysis: Carmakers wake up to new pecking order as chip crunch intensifies
By Douglas Busvine and Christoph Steitz
BERLIN (Reuters) – The semiconductor crunch that has battered the auto sector leaves carmakers with a stark choice: pay up, stock up or risk getting stuck on the sidelines as chipmakers focus on more lucrative business elsewhere.
Car manufacturers including Volkswagen, Ford and General Motors have cut output as the chip market was swept clean by makers of consumer electronics such as smartphones – the chip industry’s preferred customers because they buy more advanced, higher-margin chips.
The semiconductor shortage – over $800 worth of silicon is packed into a modern electric vehicle – has exposed the disconnect between an auto industry spoilt by decades of just-in-time deliveries and an electronics industry supply chain it can no longer bend to its will.
“The car sector has been used to the fact that the whole supply chain is centred around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor makers actually do have an alternative.”
Automakers are responding to the shortage by lobbying governments to subsidize the construction of more chip-making capacity.
In Germany, Volkswagen has pointed the finger at suppliers, saying it gave them timely warning last April – when much global car production was idled due to the coronavirus pandemic – that it expected demand to recover strongly in the second half of the year.
That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery.
“Last year we had to furlough staff and bear the cost of carrying idle capacity,” said a source at one European semiconductor maker, who spoke on condition of anonymity.
“If the carmakers are asking us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”
The auto industry spends around $40 billion a year on chips – about a tenth of the global market. By comparison, Apple spends more on chips just to make its iPhones, Mirabaud tech analyst Neil Campling reckons.
Moreover, the chips used in cars tend to be basic products such as micro controllers made under contract at older foundries – hardly the leading-edge production technology in which chipmakers would be willing to invest.
“The suppliers are saying: ‘If we continue to produce this stuff there is nowhere else for it to go. Sony isn’t going to use it for a Playstation 5 or Apple for its next iPhone’,” said Asif Anwar at Strategy Analytics.
Chipmakers were surprised by the panicked reaction of the German car industry, which persuaded Economy Minister Peter Altmaier to write a letter in January to his counterpart in Taiwan to ask its semiconductor makers to supply more chips.
No extra supplies were forthcoming, with one German industry source joking that the Americans stood a better chance of getting more chips from Taiwan because they could at least park an aircraft carrier off the coast – referring to the ability of the United States to project power in Asia.
Closer to home, a source at another European chipmaker expressed disbelief at the poor understanding at one carmaker of how it operates.
“We got a call from one auto maker that was desperate for supply. They said: Why don’t you run a night shift to increase production?” this person said.
“What they didn’t understand is that we have been running a night shift since the beginning.”
NO QUICK FIX
While Infineon, the leading supplier of chips to the global auto industry, and Robert Bosch, the top ‘Tier 1’ parts supplier, both plan to commission new chip plants this year, there is little chance of supply shortages easing soon.
Specialist chipmakers like Infineon outsource some production of automotive chips to contract manufacturers led by Taiwan Semiconductor Manufacturing Co Ltd (TSMC), but the Asian foundries are currently prioritising high-end electronics makers as they come up against capacity constraints.
Over the longer term, the relationship between chip makers and the car industry will become closer as electric vehicles are more widely adopted and features such as assisted and autonomous driving develop, requiring more advanced chips.
But, in the short term, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time it takes to deliver a microcontroller has doubled to 26 weeks and shortages will only bottom out in March.
That puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. European chip industry executives and analysts agree that supply will not catch up with demand until later in the year.
Chip shortages are having a “snowball effect” as auto makers idle some capacity to prioritize building profitable models, said Anwar at Strategy Analytics, who forecasts a drop in car production in Europe and North America of 5%-10% in 2021.
The head of Franco-Italian chipmaker STMicroelectronics, Jean-Marc Chery, forecasts capacity constraints will affect carmakers until mid-year.
“Up to the end of the second quarter, the industry will have to manage at the lean inventory level,” Chery told a recent Goldman Sachs conference.
(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; Additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; Editing by Susan Fenton)
Aussie and sterling hit multi-year highs on recovery bets
By Tommy Wilkes
LONDON (Reuters) – The Australian dollar rose to near a three-year high and the British pound scaled $1.40 for the first time since 2018 on optimism about economic rebounds in the two countries and after the U.S. dollar was knocked by disappointing jobs data.
The U.S. currency had been rising in recent days as a jump in Treasury yields on the back of the so-called reflation trade drew investors. But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.
On Friday it traded down 0.3% against a basket of currencies, with the dollar index at 90.309.
The Aussie rose 0.8% to $0.784, its highest since March 2018. The currency, which is closely linked to commodity prices and the outlook for global growth, has been helped by a recent rally in commodity prices.
The New Zealand dollar also gained, and was not far off a more than two-year high, while the Canadian dollar rose too.
Sterling rose to $1.4009 on Friday, an almost three-year high amid Britain’s aggressive vaccination programme.
Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy, the better for the currency. Sterling was also helped by better-than-expected purchasing managers index flash survey data for February.
The U.S. dollar has been weighed down by a string of soft labour data, even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.
Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.
“Our view remains that the Fed will hold the line and remain very cautious about tapering asset purchases. We think it will keep communicating that tightening is very far off, which should dampen pro-dollar sentiment,” said UBS Global Wealth Management strategist Gaétan Peroux and analyst Tilmann Kolb.
ING analysts said “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher”.
They see the greenback index trading down to the 90.10 to 91.05 range.
The euro rose 0.4% to $1.2134. The single currency showed little reaction to purchasing manager index data, which showed a slowdown in business activity in February. However, factories had their busiest month in three years, buoying sentiment.
The dollar bought 105.39 yen, down 0.3% and a continued retreat from the five-month high of 106.225 reached Wednesday.
(Editing by Hugh Lawson and Pravin Char)
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