Statement by the IMF Staff Representative March 9, 2012

This 2011 Article IV Consultation reports that the vulnerability of Belgium’s sovereign debt to market pressures makes credible medium-term fiscal consolidation a priority. The 2012 budget includes sizable consolidation measures, and the government is committed to take additional measures as needed with the aim of reaching structural balance by 2015. In light of the weak growth prospects, automatic stabilizers should be allowed to operate freely around the consolidation path. There is a need to strengthen banking supervision and to implement the Basel III and Solvency II regulatory frameworks.

Abstract

This 2011 Article IV Consultation reports that the vulnerability of Belgium’s sovereign debt to market pressures makes credible medium-term fiscal consolidation a priority. The 2012 budget includes sizable consolidation measures, and the government is committed to take additional measures as needed with the aim of reaching structural balance by 2015. In light of the weak growth prospects, automatic stabilizers should be allowed to operate freely around the consolidation path. There is a need to strengthen banking supervision and to implement the Basel III and Solvency II regulatory frameworks.

1. This statement provides additional information on economic and financial developments in Belgium since the issuance of the Article IV consultation staff report. The additional information does not change the thrust of the staff appraisal.

2. Indicators point to weak domestic demand in the first quarter of 2012, in line with expectations. Domestic orders as well as business confidence in construction and domestic trade continued to weaken in January and February. However, overall business confidence in February improved for the third month in a row, mirroring the recent improvement in German business confidence. The improvement followed a decline in September—November that was linked to a sharp drop in exports.

3. Annual consumer price inflation in February was 3 ¾ percent. The main drivers of inflation in February continued to be energy prices. The increase in consumer prices thus far remains below the threshold that triggers an automatic wage and benefit increase in the public sector. It is expected that the automatic wage indexation will take place in March.

4. Several large banks have announced their 2011 results and they have been broadly in line with expectations. Dexia Group announced substantial losses (€12 billion) for 2011, reflecting losses from asset disposals, including of Dexia Bank Belgium, and impairment on Greek sovereign debt. In contrast, KBC and ING Belgium announced net profits in 2011. Despite a doubling in net profits over 2010, ING Belgium decided not to distribute dividends in order to further strengthen its capital base. In the case of KBC, net profits were substantially smaller than in 2010, reflecting loan loss provisions on its exposure to Ireland and Hungary, and the impairment recorded on Greek sovereign debt. The bank distributed a small technical dividend to remain on track with its restructuring plan. In a further restructuring step, KBC sold its Polish subsidiary Kredyt Bank to Santander in a transaction that should raise KBC’s Tier 1 capital by 0.8 percentage point (compared with 12.3 percent at end–December 2011).

5. The authorities and Dexia SA’s management are finalizing the restructuring plan that is to be submitted to the European Commission in late March. So far, Dexia Crédit Locale has issued €41 billion in government guaranteed bonds, within the envelope of sovereign guarantees of €45 billion. The proceeds have been used to reimburse unsecured liabilities to Dexia Bank Belgium (recently renamed Belfius) and emergency liquidity assistance of the Belgian and French central banks, and to satisfy the funding needs of Dexia SA. As a result, the unsecured exposure of Belfius to Dexia SA has fallen substantially, thus almost eliminating a significant financial stability risk for Belgium arising from Dexia’s restructuring.

6. The government has made good progress towards meeting its funding needs. By end–February, a quarter of the sovereign medium– and long–term funding needs for 2012 were met.

Belgium: Staff Report for the 2011 Article IV Consultation
Author: International Monetary Fund