Fast growing turnovers coupled with high margins and strong cash buffers would help Belgian indebted corporates withstand the rise of interest rates once the ECB start to tighten its monetary policy in 2019
Stars remain aligned for Belgian corporates in 2018
Strongest export gains in 6 years in 2017 (EUR21bn) have boosted turnover growth in the manufacturing sector (+9.9%), registering the highest growth in the Eurozone. High margins supported by past reforms (freeze of wage indexation, lower social contributions) coupled with high equity, low financing costs and high business confidence have allowed to close the investment gap compared to the crisis much ahead peers. However, over the past years corporate debt increased more than in the Eurozone as a whole. Fortunately, companies continue to enjoy strong cash buffers and high margins which will help them withstand the rise of interest rates after the ECB starts to tighten the monetary policy from H2 2019. But vulnerability stands above the Eurozone average.
Strong export growth in 2018, for the third consecutive year
GDP increased by +1.7% in 2017, the highest level in 6 years and growth should accelerate to +1.8% in 2018. Private consumption has been the strongest contributor to GDP growth (+0.6pp), albeit registering a slower growth (+1.1% vs +1.7% in 2016). Real export growth has been strong (+4.5% in real terms after +7.5% in 2016), while export gains reached EUR21bn, the highest level since 2011. The Belgian trade balance is the 5th highest in the Eurozone and SMEs make 50% of the total exported amount. In total, 10% of the total Belgian companies export, almost as much as in Germany (13%). A sound performance of the Eurozone economy (+2.3% of growth in 2018), accelerating activity in the US (+2.9%) and a well-managed soft landing in China (+6.5%) should support Belgian export growth in 2018 (+3.0% in real terms). We expect export gains to reach EUR25bn in 2018 mainly in the US (EUR5.1bn), Germany (EUR3.5bn), France (EUR2.8bn), China (EUR1.9bn) and the Netherlands (EUR1.4bn). The sectors expected to drive this export performance are expected to be: chemicals (EUR7.2bn), automotive (EUR2.5bn), agri-food (EUR2.3bn), machinery and equipment (EUR1.8bn) and energy (EUR1.5bn).
Five key drivers for corporate investment growth: strong turnover growth, high margins, high equity ratios, low financing costs and high business confidence
The corporate investment gap has closed since 2014, much ahead of the other Eurozone countries and fixed investment in real terms stands +10.5% above the 2007 level.
Belgian companies enjoy high equity which allowed for self-financed investments. Equity in % of total balance sheet stands at around 46% on average (49% for SMEs) which is relatively high compared to France and Italy (32%), Germany (34%) and even Spain (44%).
Furthermore, bank financing costs remain low, supporting the demand for loans (+6% y/y in February 2018).
Thirdly, after four years of contraction, corporate turnover growth in the manufacturing sector (+9.9%) ranked the second highest in the Eurozone in 2017 thanks to the recovery in value of global exports (+9.3%) and improved domestic pricing power.
Furthermore, non-financial corporations’ margins continued to strengthen in 2017, reaching their highest level since 2000, at 43.4% of the value added.
The gap with the Eurozone hasn’t stopped widening since 2015 as they currently stand +2pp above the Eurozone’s average.
Part of the explanation comes from the freeze of the automatic wage indexation launched in 2015 – terminated in 2017, lower employer social contributions (from 30.75% in 2014 to 25% in 2018).
This positive support should continue thanks to the corporate tax reform (from 33% to 29% in 2018 - 20% for SMEs - and to 25% by 2020).
More interestingly, Belgium managed to increase the domestic activity but also exports in sectors with high margins like Chemicals, Pharmaceuticals and Agri-food.
All of this, coupled with positive demand perspectives, strong business confidence (at the highest in 6 years) and high capacity utilization rates (79.2%, above the long-term average) should continue to support business investment growth in 2018 (+2.1%).
Chart 1: Non-financial corporates margins (% of value added)
Moderate downside risks from the corporate debt accumulation thanks to high cash holdings and margins
Non-financial corporate debt has increased by close to +70% since 2007 against a +40% increase in the Eurozone as a whole. In value terms, the increase in non-financial corporate debt stood close to EUR300bn since the start of 2007, around 9% of the total increase in debt in the Eurozone, compared to nearly EUR400bn in Germany.
Despite the high level of corporate debt, at 157% of GDP, 3rd highest in the Eurozone after Luxembourg and Ireland, and compared to 102% for the Eurozone as a whole, we see the vulnerability to a rise in interest rates as relatively contained thanks to higher corporate margins and cash buffers (14% of total balance sheet, the 4th highest in the Eurozone after France, Germany and Finland).
We have computed that an increase of +1pp in ECB key interest rates by 2022 would increase corporate bank loan interest rates by +0.9pp to close to +2.5%.
This would bring financing costs back to their 2012-13 levels and would translate into an increase in interest expenditures of close to +6pp of the operating surplus to 16% of the operating surplus (against 22% in France and 15% for the Eurozone as a whole).