Belgian Region of Brussels-Capital 'AA/A-1+' Ratings Affirmed; Outlook Stable

  • We expect higher deficits for Brussels-Capital in the coming years owing to an increase in capital expenditure.
  • In our opinion, the region benefits from a supportive institutional framework and prudent and highly efficient financial management that will allow it to achieve its main budgetary target and contain debt growth, while maintaining exceptional liquidity, despite the increase in investments.
  • We are affirming our 'AA/A-1+' long- and short-term ratings on Brussels-Capital with a stable outlook.
On March 15, 2019, S&P Global Ratings affirmed its 'AA' long-term and 'A-1+' 
short-term issuer credit ratings on Belgium's Region of Brussels-Capital. The 
outlook remains stable.

The stable outlook reflects our base-case expectation that Brussels-Capital 
will maintain a moderate debt burden and very sound liquidity, while 
significantly increasing capital expenditure over the next two years.

Downside scenario
We might consider a downgrade in the next 24 months if we observed a 
structural deterioration in Brussels-Capital's budgetary performance, leading 
to a significant increase of its debt burden. This could stem from, for 
example, weakening financial positions of government-related entities (GREs) 
or the region's inability to contain expenditure.  

If we lowered our ratings on Belgium, or revised the outlook to negative, we 
would take a similar action on Brussels-Capital. 

Upside scenario
We could consider a positive rating action in the next 24 months if we took a 
similar action on Belgium, and if Brussels-Capital structurally and 
significantly improved its budgetary performance. The latter would put 
tax-supported debt on a sharp downward path or enable the operating surplus to 
structurally cover at least one-third of direct debt.

Our ratings on Brussels-Capital primarily reflect our belief that the region's 
financial management will allow it to step-up strategic investments over 
2019-2021, while achieving its main budgetary target of presenting balanced 
accounts according to the European system of national and regional accounts 
(ESA) and maintaining very sound liquidity. The region's favorable 
institutional framework and wealthy local economy also support the ratings.

Deficits will significantly increase during 2019-2021, because of a temporary 
step-up in strategic investments, but the debt burden should remain contained 
In 2018, we estimate the region's operating margin was 11% of operating 
revenue, slightly higher than in our previous base-case scenario (10%), mainly 
due to higher tax revenue. Operating performance should stay strong through 
2021--we forecast operating surpluses averaging a high 10% of operating 
revenue. However, in line with 2018 estimates, we anticipate the deficit after 
capital accounts will remain high, close to 8% of total revenue on average 
during our forecast horizon through 2021, due to the step-up in strategic 
investments, and resulting in a weaker budgetary performance. After an 
estimated €1.4 billion in 2018, we expect capital expenditure will reach an 
average of €1.5 billion per year in 2019-2021, versus an average €1.1 billion 
during 2016-2017, mainly due to strategic investments in mobility 
infrastructure. We forecast a decrease of these strategic investments from 
2022 or 2023, which should enable the region to start reducing its deficits.

Brussels-Capital continues to target a balanced budget through 2021, excluding 
strategic investments. At this stage, we do not expect the 2019 May elections 
to have any impact on this main budgetary target. As a result, 
debt-refinancing and funding needs related to strategic investments--which we 
expect will average €450 million a year in 2019-2021, or 8% of total 
expenditure--will likely continue to drive annual gross borrowing. 

Consequently, Brussels-Capital's tax-supported debt will reach 117% of 
consolidated operating revenue in 2021, compared with 92% in 2017. Our 
estimates of tax-supported debt include the debt of the municipality fund, 
"Fonds régional bruxellois de refinancement des trésoreries communales" 
(FRBRTC), which is fully consolidated under ESA 2010. FRBRTC lends the 
majority of its debt proceeds to self-supporting municipalities in the region. 
At present, this debt represents about 13% of the region's consolidated 
operating revenue.   

To abide by its budgetary target, Brussels-Capital could use its budgetary 
flexibility, both on the revenue and spending side, if any deviation risks 
occur. Its modifiable tax revenue, which is composed of the supplementary tax 
on personal income tax as well as regional taxes, accounts for a high 50% of 
operating revenue. Still, we believe that Brussels-Capital would be more 
likely to use its spending flexibility if needed rather than increase taxes, 
since it recently reduced tax pressure. Capital expenditure would be the 
primary source of leeway, in our view, accounting for 26% of total expenditure 
in 2019-2021 in our forecast.

Brussels-Capital enjoys a very favorable liquidity position. The region 
benefits from a direct multiyear €1.2 billion account facility, and FRBRTC 
holds €225 million in liquidity lines. Combined with the available cash 
reserves of the consolidated GREs' accounts, we expect these liquidity sources 
will cover more than 120% of its total debt service needs (including FRBRTC's 
short- and long-term debt repayments) over the next 12 months. Additionally, 
we think that the region has strong access to external funding via financial 
markets, especially through its medium-term note program, its Belgian 
commercial paper program, and its access to investors in Schuldschein loans.

We consider Brussels-Capital's contingent liabilities to be moderate. They 
mainly relate to the region's exposure to social housing mortgage companies, 
such as the "Fonds du Logement de la Région de Bruxelles-Capitale," and to the 
municipal sector's credit standing. Unlike ESA 2010 treatment of social 
housing mortgage companies, we do not include these companies' debt in the 
region's tax-supported debt, because we view them as self-supporting. The 
region's financial guarantees, mainly for social housing mortgage companies, 
accounted for about 30% of its consolidated operating revenue at year-end 
2018. We understand that the social housing mortgage companies sector in 
Brussels-Capital is still undergoing some mergers, which should strengthen its 
overall financial situation. When assessing the region's contingent 
liabilities, we also factor in the financial situation of the municipal 
sector, which we view as having some weaknesses. Furthermore, we continue to 
see the public body "Commission communautaire commune" as a contingent risk 
since we would expect the region to provide extraordinary support in case of 
need. However, at this stage we view this risk as very limited. 

The institutional framework, strong economy, and prudent management remain key 
credit strengths 
Brussels-Capital benefits from a buoyant, service-based, and wealthy economy. 
We estimate its GDP per capita at an elevated €66,900 in 2018, which exceeds 
the national GDP per capita by some 1.7x. However, these levels are offset by 
a large number of commuter workers who work in the region but live and pay 
taxes outside it, and a relatively high level of unemployment. This results in 
the region's personal income per capita being one-fifth less than that of 
Belgium, and makes the region's tax base somewhat narrower. While the region 
makes up around 18% of Belgium's GDP, it accounts for only around 8% of 
national personal income tax receipts. 

At the same time, we believe that Brussels-Capital benefits from the maturity 
and stability of the institutional system for Belgian regions and communities, 
and a generally adequate revenue and expenditure balance, not least due to the 
regions' relatively high tax autonomy. In our opinion, the gradual pace of the 
implementation of the sixth Belgian state reform since 2015--including the 
devolution of new responsibilities to regions and communities and revenue 
sources to regions--has demonstrated the system's predictability. We also 
think that Belgium's framework enables regions and communities to play an 
active role in the design and implementation of federal reforms, preventing or 
moderating those measures that potentially undermine their institutional and 
financial position.

Brussels-Capital has shown its capacity to handle new revenue sources and 
expenditure responsibilities under the sixth state reform, thanks to its very 
strong financial management. We view positively the region's political and 
managerial strength, reliable budgeting, close oversight of intra-annual 
budget execution, prudent and sophisticated debt management, efficient 
liquidity management, and close monitoring of GREs and other contingent risks, 
including its well-defined and active guarantee-management system. The region 
continually seeks improvements in its financial practices, demonstrated by 
ongoing policy efforts to enhance liquidity, debt-service, and financial risk 
management on a consolidated basis, including the region's GREs. 
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