Belgian Prime News N° 23PDF

BELGIAN PRIME NEWS

B

B ^{P P} N N

CONSENSUS FORECAST

MACROECONOMIC DEVELOPMENTS CONSENSUS FORECAST

MACROECONOMIC DEVELOPMENTS

Belgium

Employment ¹ Consumer prices ¹ Current account ²

Real GDP ¹

Belgium Previous consensus Consensus

Euro area ³

BELGIAN PRIME NEWS

General government balance ² Primary balance ²

Public debt ²

Euro area

Belgium Consensus

Euro area ³

1.0

¹ P.c. change. ² In p.c. of GDP. ³ European Commission (forecast available since November 2003; next publication in April 2004).

Special topic :

1.8 0.3 2.0 1.2 -2.7 0.7 70.7

March 2004 No. 23

2003 e 2004 p 2005 p

1.1 -0.4 1.5

3.5 0.2 5.8 100.5

0.4 -0.2 2.1

70.4

2.1 0.4 1.5

4.0 -0.2 5.2

2.3 0.8 1.6

4.7 -0.2 4.9

2.3 0.8 1.7 1.3 -2.7 0.8 70.7 Structural Features of the Belgian Economy

2.0 0.4 1.5

4.6 0.0 5.4 97.2 -2.7

97.6 95.1

0.8

Published by: National Bank of Belgium (NBB)

Participating institutions: NBB, Debt Agency (Federal Public Service Finance), Barclays Capital, BNP Paribas, Dexia Bank, Fortis Bank, Indosuez, ING, KBC Bank, UBS Warburg

Updated to: 23.03.2004 Next issue: June 2004 Sources: NBB, unless stated

-3 -2 -1 0 1 2 3 4

-25 -20 -15 -10 -5 0 5

2001 2002 2003 2004

Smoothed data

Belgium Euro area

Sources: EC, NAI, NBB.

GDP GROWTH AND BUSINESS CYCLE INDICATOR

(e)

points p.c.

Business confidence indicator (right-hand scale) Gross

data

Year-on-year real GDP (percentage changes, left-hand scale):

HARMONISED CONSUMER PRICES (annual percentage changes)

Source: EC.

0 1 2 3 4

2001 2002 2003 2004

Belgium Euro area

According to the National Accounts Institute's flash estimate, GDP grew by 0.6% q-o-q in the last quarter of 2003, following a 0.5%

increase in the third quarter. For the year as a whole, GDP growth reached 1.1%, well above the 0.4% growth for the euro area. After a 10-year low reached in June 2003, the recovery in activity in the second half of 2003 led to a clear upward trend in business confidence from July. In addition, though initially hesitant, the improvement in consumer confidence has become more firmly established in recent months.

The primary dealers slightly upgraded their forecast for real GDP growth for 2004, from 2.0% in January to 2.1%. Growth is expected to consolidate further at 2.3% in 2005. The acceleration with respect to 2003 stems mainly from a higher contribution by net exports, but also from domestic demand, particularly investment. However, the forecast is highly dependent on the strengthening of activity in the euro area, particularly in view of the uncertainty regarding developments in the euro exchange rate.

HICP inflation in Belgium decreased from 1.8% in November 2003 to 1.2% in February 2004, mainly because of movements in energy prices reflecting the euro appreciation and a substantial base effect due to high oil prices 12 months ago. The euro area HICP inflation rate receded as well, from 2.2% in November to 1.6% in February.

In view of the weakness of both external and domestic pressure on prices, the primary dealers expect inflation to stay moderate, at 1.5% in 2004 (unchanged since January) and 1.6%

in 2005.

Regarding public finances, Eurostat has approved the recording of the Belgacom payment as government revenue in 2003 (see BPN 22). All in all, a surplus of 0.2% of GDP was recently notified to the European Commission while public debt was estimated at 100.5%

of GDP as at the end of last year.

Primary dealers forecast the general government to exhibit a small deficit of 0.2% of GDP in 2004 and 2005, and public debt to decrease to 97.6% of GDP in 2004 and to 95.1% of GDP in 2005. Public finances in 2004 and 2005 will benefit from the improving macroeconomic environment while the impact of non-recurring operations is estimated to decrease compared to 2003. Some primary dealers expect the government to tighten fiscal policy, however, in order to stay close to the balanced budget targets defined in the November 2003 stability programme.

SPECIAL TOPIC

SPECIAL TOPIC: Structural Features of the Belgian Economy

Located at the heart of the euro area, the Belgian economy performed close to the average for the Monetary Union in terms of fundamentals over the last ten years. GDP growth and inflation followed broadly the same pattern, despite some short-term deviations.

For instance, Belgium's business cycle is usually characterised by more pronounced peaks and troughs, largely cancelling each other out over the cycle. Regarding inflation, Belgium exhibited a lower rate than the average of euro area countries prior to the launch of EMU. Since then, only short-term deviations have occurred, especially in 2002 and 2003, due to specific temporary factors (see Special topic of BPN 21).

GDP GROWTH

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 e

-1 0 1 2 3 4

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0 1 2 3 4

Sources: EC, NAI.

Belgium Euro area Belgium Euro area

HICP INFLATION

Source: EC.

However, a similar pattern of potential output growth hides differences in the contributions of the various determinants. Indeed, since the mid-1990s, the contribution of total factor productivity to growth was larger in Belgium. It has offset contributions below the level for the euro area from both labour and capital accumulation, the weakness of public investments explaining at least part of the latter.

Labour potential Total factor productivity

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0 0.2 0.4 0.6 0.8 1 1.2

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0 0.2 0.4 0.6 0.8 1 1.2

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0 0.2 0.4 0.6 0.8 1 1.2

CONTRIBUTIONS TO POTENTIAL OUTPUT GROWTH

Source: EC.

Belgium Euro area

Capital accumulation

The lower contribution of labour to potential growth in Belgium is due mainly to the relatively low employment rate. Indeed, at 59.7% of the working age population in 2002, the overall employment rate in Belgium is lower than the 62.3% rate in the euro area, and far below the EU objective of 70% set for 2010. The gap between the two economies actually widened in 2001 and 2002. In particular, employment rates in Belgium are lower for younger workers, partly because of a longer schooling, as well as for older workers and the low skilled. Increasing the employment rate, particularly of workers over 55 years old, will become a major challenge for Belgian economic policy in view of the impending ageing of the population which will start to weight heavily on public finances in the next decade.

Although not yet sufficient, the reduction in the public debt-to-GDP ratio is certainly needed to alleviate the burden on the Belgian economy.

The debt has decreased from a peak of 137.9% of GDP in 1993 to 100.5 at the end of 2003, and the differential in relation to the average for the euro area has been reduced to some 30% of GDP.

Total Men Women 15 - 24 years 25 - 54 years 55 - 64 years Low skilled Average level of skills Highly skilled

-12 -8 -4 0 4

1997 2002

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 e

0 30 60 90 120 150

Belgium Euro area

+30 p.c. of GDP +71 p.c. of GDP

+41 p.c. of GDP

Sources: EC, NBB.

PUBLIC DEBT

(percentages of GDP)

HARMONISED EMPLOYMENT RATES IN BELGIUM AND THE EURO AREA

(difference in percentage points between employment rates expressed as a percentage of the corresponding population of working age in Belgium and the euro area)

Source: EC (second quarter of corresponding year).

GOVERNMENT SECURITIES MARKET

-0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

2001 2002 2003 2004

Government bonds

3 3.5 4 4.5 5 5.5 6 6.5 7

2001 2002 2003 2004

DE US

BE

10-YEAR INTEREST RATES

Euro interest-rate swaps

BE NL FR

IT ES

Euro-area government bonds

Spreads vis-à-vis German Bund

Sources: BIS, Datastream.

Having followed an upward trend from July 2003, long-term interest rates started to decline in December. Long-term government bond yields in both the US and the euro area decreased to the same extent; consequently, the positive yield differential between the European and American interest rates remained marginal. A comparison of the respective movements in inflation-indexed and fixed-income bonds reveals that this recent decline in long-term interest rates resulted predominantly from lower real interest rates in both economic areas.

Euro area government bond spreads vis-à-vis the German Bund tended to narrow further. However, the introduction of a new benchmark bond in January caused the Belgian spread to widen.

Finally, the euro area interest-rate swap spread vis-à-vis the German Bund oscillated around the low levels already attained during the second half year of 2003.

Gross issues Net issues

A M J J A S O N D J F M A M J J A S O N D J F -12

-9 -6 -3 0 3 6

Treasury bills OLO

PRIMARY MARKET

A M J J A S O N D J F M A M J J A S O N D J F -12

-9 -6 -3 0 3 6

2004

2002 2003 2002 2003 2004

I II III IV I II III IV I II III IV J-F 0

3 6 9 12 15

I II III IV I II III IV I II III IV J-F 0

0.5 1 1.5 2 2.5 3 3.5 4

7 10 13 16 19 22 25 28 31

Annual turnover ratio (right-hand scale)

Repos Repos (left-hand scale)

Treasury bills

Other (mainly outright, left-hand scale) Other (mainly outright) 2003

OLOs

SECONDARY MARKET

2001 2002 2004 2001 2002 2003 2004

10.6 6.7

6.2 5.0

13.0 8.5

11.4 10.5

15.8 16.5 8.5

8.0

12.4 8.4

13.5 9.6

8.5 2.0

11.9 10.2 4.5

7.9

0 2 4 6 8 10 12 14 16 18 20 0 300 600 900 1200 1500

Repos Other (mainly outright)

19.3 4.5

2.8 TREASURY BILLS

OLOs OUTSTANDING AMOUNTS AND TURNOVER

3-month 6-month 12-month

Outstanding amounts at 29 Feb. 2004

(billions of euros)

Turnover in February 2004

(millions of euros, daily averages)

240 468 235

458 1

263

698 596 OLO 265 - 7.25% - 04/04

OLO 275 - 7.75% - 10/04 OLO 273 - 6.50% - 03/05 OLO 294 - 4.75% - 09/05 OLO 299 - var. % - 04/06 OLO 283 - 7.00% - 05/06 OLO 297 - 4.75% - 09/06 OLO 286 - 6.25% - 03/07 OLO 257 - 8.50% - 10/07 OLO 288 - 5.75% - 03/08 OLO 268 - 7.50% - 07/08 OLO 302 - 3.00% - 09/08 OLO 292 - 3.75% - 03/09 OLO 295 - 5.75% - 09/10 OLO 296 - 5.00% - 09/11 OLO 298 - 5.00% - 09/12 OLO 262 - 8.00% - 12/12 OLO 301 - 4.25% - 09/13 OLO 303 - 4.25% - 09/14 OLO 282 - 8.00% - 03/15 OLO 300 - 5.50% - 09/17 OLO 291 - 5.50% - 03/28

406 382 289

537 404

562 514 357 88

1289 574

93 240

435

TREASURY HIGHLIGHTS TREASURY HIGHLIGHTS

I. The Kingdom syndicated 5 billion euros of its new 10-year benchmark bond (4.25 p.c. OLO 43, due 28.09.2014) with a yield spread of 13 basis points vis-à-vis the Bund maturing January 2014 and 4.5 basis points over the interpolated OAT curve, achieving a 1 basis point benchmark premium.

The allocation of the bonds was as follows:

- Belgium 23.1% - US & Canada 3.4 %

- Other Euro 51.5% - Asia 2.8%

- Europe non-Euro 18.5% - Other 0.7%

The deal was more than 2 times oversubscribed. However, the Kingdom is committed to keeping the auction size at attractive levels for investors.

II. Changes in the 2004 borrowing requirements: lower issuance of OLOs.

First of all, the estimated federal budget deficit for 2004 has been revised from €4.15 billion to €2.05 billion, taking into account the proceeds from an operation involving ALeSH / FADELS and the regional social housing companies. An agreement was reached at the end of 2003 by which the regional social housing companies would repay their debt to ALeSH / FADELS, a federal entity centralizing historical liabilities relating to social housing. At the beginning of 2004, ALeSH / FADELS transferred the amounts received to the Treasury. In return, the federal government committed itself to financing ALeSH / FADELS with the amounts needed for servicing its remaining debt. The net cash result of this operation is positive for 2004.

A second material change in the financing requirements was needed as regards the debt maturing in 2004. In December 2003, buy-backs exceeded earlier estimates, taking the total amount of debt bought back to €7.86 billion. This has an impact on the debt maturing in 2004, which now stands at €21.18 billion instead of €22.20 billion.

The lower borrowing requirements result in changes to our funding plan. The Treasury now expects to issue €26.00 billion of OLOs instead of €27.90 billion, and the increase in short-term euro debt has been revised to €1.72 billion from €3.23 billion.

OLO AUCTIONS AND SYNDICATIONS

Month Date Settlement

March 2004: Auction 29 1 April

May: Auction 24 27

July: Auction 26 29

September: Auction 27 30

LIST OF CONTACT PERSONS LIST OF CONTACT PERSONS

PARTICIPATING INSTITUTIONS: TECHNICAL EDITORS: TELEPHONE: FAX:

Federal Public Service Finance Mr Stefan Theys 32 2 233 72 23 32 2 233 71 14

Barclays Capital Mr Jacques Delpla 33 1 44 58 32 26 33 1 44 58 32 58

BNP Paribas Mr Dominique Barbet 33 1 42 98 15 67 33 1 42 98 34 77

Dexia Bank Mr Jacques de Pover 32 2 222 44 71 32 2 222 33 76

Fortis Bank Ms Carine Brasseur 32 2 565 86 49 32 2 565 62 36

Indosuez Mr Frederic Pretet 33 1 41 89 64 37 33 1 41 89 40 08

ING Mr Peter Vanden Houte 32 2 547 80 09 32 2 547 80 63

KBC Bank Ms Elke Vermeulen 32 2 429 55 51 32 2 429 01 35

UBS Warburg Ms Monique Wong 44 20 7568 3435 44 20 7567 3906

GENERAL INFORMATION

National Bank of Belgium Mr Luc Dresse 32 2 221 20 39 32 2 221 31 62

This publication is also available on the internet site www.nbb.be.

Information on the Belgian government debt can be found on the site of the Treasury: www.debtagency.be. General information on the Belgian government's action can be found on the site www.belgium.be.