Belgian Prime News N° 91PDF

Quarterly publication

N° 91 March 2021 Last update : 25 March 2021 Next issue : June 2021

Participating Primary and Recognised Dealers :

Barclays, Belfius Bank, BNP Paribas Fortis, Citigroup, Crédit Agricole CIB, HSBC, KBC Bank,

Morgan Stanley, Natixis, NatWest (RBS), Nomura, Société Générale Corporate & Investment Banking

BELGIAN BELGIAN

PRIME NEWS

PRIME NEWS

• MACROECONOMIC DEVELOPMENTS : The vaccine rollout will prove crucial for brighter economic prospects

• SPECIAL TOPIC : Sovereign yields have risen on the back of better US growth prospects

• FINANCIAL MARKETS AND INTEREST RATES : Financial market conditions favourable amid uncertainties

• TREASURY HIGHLIGHTS : Large investor demand for Belgian long-term bonds

CONSENSUS Average of participants’ forecasts

SUCCESSIVE FORECASTS FOR BELGIUM

2020

For 2021

Real GDP growth HICP inflation

For 2022

I II III IV I II III IV

2020 2021

I II III IV I II III IV

2021

0 1 2 3

0 2 4 6 8 10

Source : Belgian Prime News.

Belgium Euro area

2020 2021p 2022p 2020 2021p 2022p

Real GDP ⁽¹⁾  –6.3 3.9 3.2 –6.6 4.2 3.9

Inflation (HICP) ⁽¹⁾ 0.4 1.6 1.6 0.3 1.7 1.2

General government balance ⁽²⁾ –10.1 –7.0 –5.7 –7.2 –6.5 –4.1

Public debt ⁽²⁾ 115.1 116.6 117.2 96.9 101.6 101.7

(1) Percentage changes.

(2) EDP definition ; percentages of GDP.

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One year ago, the COVID-19 virus gradually spread from China to the rest of the world and was officially labelled a pandemic by the World Health Organisation. Many countries have since imposed strict containment measures and have been unable to completely lift them. This has resulted in an unprecedented recession, with global GDP dropping nearly 3.5 % in 2020.

As for 2021, the global economic outlook has improved but it is largely dependent on the successful deployment of vaccines across the world.

The euro area saw activity plunging 6.6 % in 2020 and suffered from renewed virus outbreaks in the last quarter of the year, although the downward impact from the containment measures was not as substantial as in the springtime. Economic activity contracted by a mere 0.7 % in Q4, outperforming expectations.

This generates an important carryover effect for the annual growth figure for 2021, which has consequently been revised upwards by BPN participants. According to the consensus forecast, the euro area economy is set to grow by some 4 % in 2021 and 2022. Inflation expectations have risen, but mostly for the near term as euro area inflation is expected to come in at 1.7 and 1.2 % respectively in 2021 and 2022.

In Belgium, economic activity also surprised on the upside in the fourth quarter, showing a minor drop of 0.1 % according to the National Accounts Institute. Although certain businesses were forced to close for a large part of this quarter, the economy as a whole was subject to fewer constraints than in the spring : more shops remained open and the construction and manufacturing industries have mostly remained fully operational this time round. Also, businesses seem to have been somewhat better prepared than in the spring to offset some of the losses from the closure of brick-and-mortar shops via e-commerce, take-away concepts and distance sales. For 2021Q1, the NBB’s recently published Business Cycle Monitor puts forward a quarterly estimate of 0.5 %. In annual terms, BPN participants now expect real GDP in Belgium to rebound by 3.9 % this year and to grow further by 3.2 % in 2022.

Meanwhile, policy support continues to cushion the hit to the labour market. Domestic employment only shrank by 0.1 % on average in 2020, representing a loss of 22 000 jobs in net terms from the start of the year. Inflation stood at 0.3 % in February 2021, compared to 0.6 % in January. Although energy prices have been rising recently, headline inflation was dampened by the effect of the prolonging of the sales period up to 15 February. According to the consensus forecast, inflation in Belgium should come to 1.6 % on average in 2021 and 2022.

In 2020, the government deficit widened substantially as a result of the economic downturn, higher spending and support

measures for individuals and businesses. Although these support measures are largely temporary, the permanent output loss in the economy will also be reflected in the budget deficit as it will be subsiding only gradually from 10.1 % of GDP in 2020 to 7 % and 5.7 % of GDP in 2021 and 2022. BPN participants anticipate a slight rise in the Belgian public sector debt, from some 115 % of GDP in 2020 to just over 117 % of GDP in 2022.

MACROECONOMIC

DEVELOPMENTS The vaccine rollout will prove crucial for brighter economic prospects

GDP GROWTH AND BUSINESS CYCLE INDICATOR

−16

−14

−12

−10

−8

−6

−4

−2 0 2 4

−40

−30

−20

−10 0 10

Belgium Euro area

p.c.

Business confidence indicator (right-hand scale) Year-on-year real GDP

(percentage changes, left-hand scale)

points

2016 2017 2018 2019 2020 2021

Smoothed data

Gross data

Sources : EC, NAI, NBB.

INFLATION (HICP)

(annual percentage changes)

Belgium Euro area

−1 0 1 2 3 4 5

2016 2017 2018 2019 2020 2021

Source : EC.

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A significant increase in sovereign bond yields has been the main point of attention on global financial markets over the last few weeks. The trend started in the US, but subsequently spilled over to other advanced economies. The upward trend in US sovereign yields is not a recent phenomenon, however. After their initial decline following strong policy measures in the wake of the COVID-19 outbreak, yields on US Treasury securities have been trending upwards since the summer. Since August, the yield on 10-year US Treasuries has gone up by more than 110 bps.

More recently, this trend has been accelerating. Better growth prospects, in the context of the agreement on the Biden stimulus plan and progress in vaccine roll-outs, have been pushing up yields on US government bonds, especially at the longer end of the maturity curve. Developments since February have accounted for an increase of about 60 bps in the 10-year USD OIS rate, which is currently trading at new post-pandemic highs, at around 1.5 %. Increasing inflation expectations had been the main factor driving up yields since the summer, by now exceeding 2 %. However, market expectations about an advanced tightening in monetary policy, to prevent inflation from rising further, seem to have been driving yields more recently, with real rates going up more strongly since February. At the March 17 meeting of the Federal Open Market Committee, Federal Reserve Chairman Jerome Powell signalled no intention of adjusting its policy to counter recent increases in longer-term Treasury yields, stressing that financial conditions are still accommodative.

These recent movements in US yields have also started to spill over to other advanced economies globally. In the euro area, the 10-year OIS rate has risen by some 20 bps since February. But, compared to the US, fears of a forced tightening in monetary policy have played a much more limited role in driving up yields in the euro area. Real rates in the euro area have only moved up to a limited extent over the past weeks, and have even continued falling at shorter maturities, where the ECB’s measures seem to firmly anchor nominal risk-free rates at low levels, while market-based inflation compensation – though still significantly below the ECB’s target – is going up.

Nevertheless, with government borrowing costs used as a benchmark for pricing bank loans to firms and households, any increase in yields risks trickling through to the economy and thus resulting in a tightening of financing conditions across all economic sectors. Against that background and given the ECB’s commitment to preserve favourable financing conditions during the pandemic crisis period, the ECB Governing Council decided, on 11 March, to significantly step up the pace of its

SPECIAL TOPIC Sovereign yields have risen on the back of better US growth prospects

RISK-FREE RATES ¹ IN THE EURO AREA AND THE US

(%)

Euro area

3 Aug. 2020

1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

−2.0

−1.5

−1.0

−0.5 0.0 0.5 1.0 1.5 2.0

1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

−2.0

−1.5

−1.0

−0.5 0.0 0.5 1.0 1.5 2.0

1 Feb. 2021 22 Mar. 2021

US

Source : Refinitiv.

¹ Overnight index swap rates.

MARKET-BASED INFLATION EXPECTATIONS ¹ IN THE EURO AREA AND THE US

(%, 5-day moving averages)

euro area−5Y

Jan. 20 Feb. 20 Mar.20 Apr. 20 May 20 Jun. 20 Jul. 20 Aug. 20 Sep. 20 Oct. 20 Nov. 20 Dec. 20 Jan. 21 Feb. 21 Mar. 21

0.0 0.5 1.0 1.5 2.0 2.5 3.0

euro area−5Y5Y

US−5Y US−5Y5Y

Source : Refinitiv.

¹ Inflation-linked swap rates.

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In the context of upward pressures on yields recently (see Special topic), the US 10-year government bond yield increased by 65 basis points, from 0.93% in December 2020, to 1.58 % in March 2021. The reflation trade in the US has spilled over to European markets where government bond yields broke their downward trend. Over the first quarter of 2021, German and Belgian 10-year government bond yields rose by 26 and 35 basis points, to settle at –0.36 and –0.04 %, respectively.

The expected economic recovery worldwide also contributed to the good performance of the stock market. However, increasing inflation expectations (and a more uncertain path for inflation), the US bond sell-off episodes, and the GameStop stock saga caused temporary spikes in volatility indices. Volatility has gradually eased since then, and VIX and VSTOXX now stand close to 20 % (their historical averages). The expected rise in demand (together with supply factors) has also supported commodity markets. Oil prices are now hovering around $ 60 a barrel, close to their pre-pandemic level.

While sovereign spreads vis-à-vis Germany initially widened with the COVID-19 outbreak, they have since declined. Despite ongoing challenges, such as restrictions on economic activity and a slow vaccine roll-out in the euro area, sovereign spreads stabilised close to their pre-crisis levels, helped by the ECB renewed commitment to keep favourable financing conditions.

Over the first quarter of 2021, Belgian and Spanish spreads widened slightly by 9 and 2 basis points, to 0.32 and 0.68 % respectively ¹. Italian spreads, which also followed domestic political developments, narrowed by 12 basis points, to 1.08 %.

As far as Belgium is concerned, the still low, and even negative, sovereign yields, in combination with the extension of the average maturity of the sovereign debt portfolio over the last decade, helps shield it from any possible further pressure on sovereign yields.

PEPP purchases over the next quarter. The Governing Council judged that a “sizeable and persistent” increase in market rates would unduly tighten financing conditions “when left unchecked”, given the still-subdued inflation outlook. Following the ECB’s announcement, the upward trend in euro area sovereign bonds yields has halted.

All in all, to the extent that rising sovereign yields reflect an improving economic outlook and the prospect of reflation, policy-makers could judge them as being benign. On the other hand, an increase in nominal yields that would go hand in hand with lower inflation expectations and, thus, a more pronounced tightening in real yields, will be closely monitored by policy-makers. Indeed, the ECB will use its instruments flexibly to avoid a premature tightening of financing conditions that could derail the recovery before it is on a sustainable path.

10-YEAR INTEREST RATES

(percentage points, monthly averages)

−1 0 1 2 3 4

0 1 2 3 4

DE

BE US Euro interest rate swaps

BE

IT ES NL FR

Government Bonds Spreads vis-à-vis German Bund

2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Sources : BIS, Thomson Reuters. Average over the first 23 days for March 2021.

FINANCIAL MARKETS

AND INTEREST RATES Financial market conditions favourable amid uncertainties

¹ For Belgium, part of this increase is due to a technical issue, with the reference for the 10-year Belgian sovereign bond yield having changed in February. As the new benchmark bond has a longer maturity, its yield is about 10 bps higher than the previous reference bond.

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TREASURY HIGHLIGHTS Large investor demand for Belgian long-term bonds

In the first quarter of 2021, the Belgian Debt Agency took advantage of the favourable funding environment to make a quick start with its borrowing programme. As a result, it has already raised € 18.81 billion, equivalent to 43.11 % of its 2021 total planned funding (€ 43.61 billion).

OLO 92 syndication (€ 6.0 billion 0.00 % new 10-year benchmark)

On 12 January 2021, the Kingdom of Belgium issued its first new OLO benchmark of the year (a traditional 10-year OLO).

The new € 6.0 billion 0.00 % OLO 92 22/10/2031 was priced at a spread of –7 bps over the interpolated mid-swap reference rate, implying a reoffer yield of –0.216 %. This is the lowest yield ever seen in an OLO syndication. It implied a limited new issue concession of only 1.5 bp. With 240 investors and total orders in excess of € 50 billion, the order book was the largest one ever for a 10-year syndicated offering.

Joint bookrunners were BNP Paribas Fortis, Citi, J.P. Morgan, Natixis and Société Générale.

OLO 93 syndication (€ 5.0 billion 0.65 % new 50-year benchmark)

On 2 February 2021, the Kingdom of Belgium issued its second new OLO benchmark of the year. It opted for an ultra-long OLO of 50 year, and it was only the second time in history that such a long-dated OLO had been issued.

The new € 5.0 billion 0.65 % OLO 93 22/06/2071 was priced at a spread of +7 bps over the 22/06/2066 OLO80, implying a reoffer yield of 0.69 % and a small new issue premium of 2 bp. With 280 investors and total orders in excess of € 53 billion, the order book was the largest one ever seen for a long-end (10-year+) syndicated bond offering.

Joint bookrunners were BNP Paribas Fortis, Credit Agricole CIB, J.P. Morgan, Morgan Stanley, Natwest Markets and Nomura.

United Kingdom 30.1 %

Other Europe 16.0 % Scandinavia 12.0 %

Italy 9.3 % France 9.3 %

Netherlands 8.9 %

Germany 7.9 % Other World 6.4 %

Bank Treasury 34.5 %

Fund Manager 32.9 % Central Bank /

Other public Entity 10.6 % Hedge Fund 7.2 %

Pension Fund 7.1 %

Bank 5.7 % Insurance Company 2.0 %

OLO 92 : Geographical OLO 92 : Investor types

United Kingdom 17.3 %

Other Europe 12.2 %

Scandinavia 3.3 % Italy 8.6 % France 17.1 %

Netherlands 9.4 % Germany 16.0 %

Other

World 16.3 % Bank

Treasury 14.0 %

Fund Manager 56.6 % Central Bank/

Other public Entity 2.0 % Hedge Fund 7.9 %

Pension Fund 7.2 %

Bank 3.1 % Insurance Company 9.1 %

OLO 93 : Geographical OLO 93 : Investor types

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PRIMARY MARKET

(€ billion)

0 2 4 6 8 10 12

Net issues Gross issues

Treasury bills OLOs

−20

−10 0 10 20 30 40

J F M A M J J A S O N D J F M A M J J A S O N D J F J F M A M J J A S O N D J F M A M j j A S O N D J F 2021

2019 2020 2019 2020 2021

Source : Belgian Debt Agency.

GOVERNMENT SECURITIES STATISTICS

OLO auctions (€ 5.31 billion)

Date OLO NR Issued

(€ billion) Yield Bid-to-cover February 22

Non-competitive subscriptions Total February

OLO 0.80 % 22/06/2025 OLO 0.80 % 22/06/2028 OLO 1.25 % 22/04/2033

OLO 74 OLO 85 OLO 86

0.755 0.803 0.751 0.000 2.309

–0.568 % –0.322 % 0.053 %

2.21 2.192.46

March 22

Non-competitive subscriptions Total March

OLO 1.00 % 22/06/2026 OLO 0.00 % 22/10/2031 OLO 0.40 % 22/06/2040

OLO 77 OLO 92 OLO 90

0.627 1.485 0.890 Not yet known

3.002

–0.538 % –0.013 % 0.495 %

3.29 1.901.64

Moreover, on 5 February, the Belgian Debt Agency issued an additional € 495 million through its ORI facility.

ORI (€ 0.495 billion)

Date OLO NR Issued

(€ billion) Yield Bid-to-cover February 5

Total

OLO 1.00 % 22/06/2026

OLO 5.00 % 28/03/2035 OLO 77 OLO 44

0.350 0.145 0.495

–0.56 % –0.03 %

There have been no EMTN, Schuldscheine or State Notes issues so far.

However, Belgium received a second and third tranche of SURE funding from the EU on 2 February 2021 for a total amount of € 2.00 billion (nominal) and € 2.08 billion (cash). The EU provided a € 0.7 billion 7-year loan maturing on 02/06/2028 at a cost of –0.497 %, and a € 1.3 billion 30-year loan maturing on 04/11/2050 at a cost of 0.134 %. With this, Belgium has already received € 4.2 billion from the SURE package of € 7.8 billion, € 6.2 billion of which will be used for federal government measures. Moreover, Belgium has applied for € 0.394 billion of extra SURE financial assistance, but this amount will be transferred entirely to the Regions and Communities.

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SECONDARY MARKET TURNOVER

(as reported by primary and recognised dealers to the Treasury, € billion)

Inter-dealer 0

5 10 15 20 25

0 5 10 15 20 25 30 35 40 45

Treasury bills OLOs

Customer

2017 2018 2019 2020 2021 2017 2018 2019 2020 2021

Source : Belgian Debt Agency.

BEST BID/OFFER SPREADS ⁽¹⁾

Average spread on assigned T-bills Best spread

Treasury bills

(basis points) OLOs

(ticks)

2019 2020 2021 2019 2020 2021

5-year benchmark (OLO82 – OLO74 as of 21/01/2020 – OLO77 as of 15/01/2021) (right-hand scale)

30-year benchmark (OLO88)

10-year benchmark (OLO87− OLO89 as of 21/01/2020 – OLO92 as of 15/01/2021)

A M J J FMA J FM

M J AS O N D M J J ASO N D MA M J J AS O N D J FMAM J J ASO N D J FM 0

5 10 15 20 25

0 20 40 60 80 100 120 140 160

0 100 200 300 400 500 600 700 800

Source : Treasury.

(1) As reported by three electronic platforms (MTS, Broker Tec and BGC eSpeed).

HOLDERSHIP BELGIAN SECURITIES

(in %)

Treasury bills OLOs

Belgium

EA19 (excl. Belgium)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0 10 20 30 40 50 60 70 80 90 100

Outside the euro area

Belgium (incl. central bank) EA19 (excl. Belgium) 0

10 20 30 40 50 60 70 80 90 100

Outside the euro area

Source : NBB.

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LIST OF CONTACT PERSONS

PARTICIPATING INSTITUTIONS TECHNICAL EDITORS TELEPHONE E-MAIL

Belgian Debt Agency Mr Jean Deboutte +32 2 574 72 79 [email protected] Barclays Mr François Cabau +44 20 3134 3592 [email protected]

Belfius Bank Ms Catherine Danse +32 2 222 71 13 [email protected]

BNP Paribas Fortis Mr Philippe Gijsels +32 2 565 16 37 [email protected] Mr Arne Maes +32 2 312 12 10 [email protected]

Citigroup Mr Guillaume Menuet +44 20 7986 3281 [email protected]

Crédit Agricole CIB Mr Louis Harreau [email protected]

Mr Pierre Benadjaoud +33 1 43 23 97 36 [email protected]

HSBC Mr Olivier Vigna +33 1 40 70 32 66 [email protected]

KBC Bank Mr Peter Wuyts +32 2 417 32 35 [email protected]

Mr Hans Dewachter +32 2 429 80 08 [email protected] Morgan Stanley Mr Jacob Nell +44 20 7425 7494 [email protected]

Natixis Mr Jean-Christophe Machado [email protected]

NatWest (RBS) Mr Giovanni Zanni [email protected]

Nomura Mr Marco Brancolini +44 20 7102 0724 [email protected]

Société Générale Corp. & Inv. Banking Mr Michel Martinez +33 1 42 13 34 21 [email protected] Mr Yvan Mamalet +44 20 7762 5665 [email protected] GENERAL INFORMATION

National Bank of Belgium Mr Luc Dresse +32 2 221 20 39 [email protected]

Published by :National Bank of Belgium (NBB).

Sources : NBB, unless otherwise stated.

This publication is also available on the website : www.nbb.be.

Information on the Belgian government debt can be found on the Treasury website : www.debtagency.be.

General information on the Belgian government’s action can be found on the website : www.belgium.be.

OUTSTANDING AMOUNTS AND TURNOVER (€ billion)

0 5 10 15 20 25

0 5 10 15 20 25 0 2

Treasury bills

Nominal outstanding amounts at the end of February 2021

OLOs

Outstanding amounts at 19 March 2021 Outright turnover in February 2021 3-Month

6-Month 12-Month

3 4

1 20.2

2.6 5.8

14.1 16.9 13.7 16.2

9.5 15.9

12.9 20.0

11.3 16.5

8.0 13.7

15.5 19.3 12.7 16.8 7.5 14.6

8.49.7

7.8 19.8

5.6 8.6

5.9 17.3

9.711.1 6.27.4

5.0 6.8 OLO93 2021/2071OLO80 2018/2066OLO83 2018/2057OLO88 2019/2050OLO78 2018/2047OLO71 2013/2045OLO60 2010/2041OLO90 2020/2040OLO76 2015/2038OLO84 2017/2037OLO44 2004/2035OLO73 2014/2034OLO86 2018/2033OLO66 2012/2032OLO92 2021/2031OLO75 2015/2031OLO89 2020/2030OLO87 2019/2029OLO85 2018/2028OLO31 1998/2028OLO91 2020/2027OLO81 2017/2027OLO77 2016/2026OLO64 2011/2026OLO74 2014/2025OLO82 2017/2024OLO72 2014/2024OLO79 2016/2023OLO68 2013/2023OLO65 2012/2022OLO48 2006/2022OLO61 2011/2021 1.0 0.4 1.1 0.30.4 0.20.3 0.1 2.4

0.50.7 0.1 0.4

1.4 1.8 0.6 3.7

0.1 2.8 0.3 1.5 0.30.3

0.3 1.4

0.50.6

1.0 2.8

1.0 2.7

2.4

Source : Belgian Debt Agency.