Quarterly publication

N° 79 March 2018 Next issue : June 2018Last update : 27 March 2018

Participating Primary and Recognised Dealers :Barclays, Belfius Bank, BNP Paribas Fortis, Citigroup, Crédit Agricole CIB, HSBC, ING, KBC Bank, Morgan Stanley, Natixis, Natwest (RBS), Société Générale Corporate & Investment Banking

1www.nbb.be

BELGIAN PRIME NEWS BELGIAN

DEBT AGENCY

• MACROECONOMIC DEVELOPMENTS : Positive note in 2017 set to continue.

• SPECIAL TOPIC : Belgium issues inaugural Green OLO.

• FINANCIAL MARKETS AND INTEREST RATES : Towards more volatility, widening risk premiums and higher interest rates ?

• TREASURY HIGHLIGHTS : A good start for the 2018 funding plan.

CONSENSUS Average of participants’ forecasts

SUCCESSIVE FORECASTS FOR BELGIUM

2017 2018

For 2018

Real GDP growth HICP inflation

For 2019

I II III IV I II III IV0

1

2

3

2017 2018

I II III IV I II III IV0

1

2

3

Source : Belgian Prime News.

Belgium Euro area

2017 2018p 2019p 2017 2018p 2019p

Real GDP (1) 1.7 1.9 1.6 2.4 2.4 1.9

Inflation (HICP) (1) 2.2 1.7 1.7 1.5 1.5 1.5

General government balance (2) –1.0 –1.2 –1.2 –1.0 –0.9 –0.9

Public debt (2) 102.8 101.9 100.5 86.7 86.0 84.5

(1) Percentage changes.(2) EDP definition ; percentages of GDP.

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Global economy performed well in 2017. Most economies, advanced as well as emerging ones, contributed to the sustained expansion, supported by a robust recovery of world trade. Economic growth was equally vibrant in the euro area and recorded the strongest performance for a decade. Benefiting from the global momentum and against the background of a (still) accommodative monetary policy and broadly neutral fiscal stance, euro area GDP growth reached 2.4 % on average over the year. It was broad-based, driven by consumption, investment and net trade, against the backdrop of strong job creation.

Belgium’s economy benefited from a favourable external context. In particular, (business) investment, exports and employment showed strong dynamics. Net job creation reached a peak which had not been observed since the economic and financial crisis, under the combined effect of a decrease of unemployment and higher labour market participation. However, at 1.7 % in 2017, GDP growth remained below the average in the euro area and the three main neighbouring countries, as had also been the case in the two previous years. This contrasts with a stronger resilience over the period 2008-2013, during the global financial and economic crisis and the euro area sovereign debt crisis. Recent economic policies, such as wage moderation and control over public expenditure have probably exerted a temporary downward pressure on consumption and GDP growth.

Over the coming years, the fundamentals should remain in place for a continued expansion. The consensus forecast currently puts economic growth in 2018 at 1.9 % for Belgium (+0.1 percentage point up on the December estimate). A mild slowdown is then anticipated to take place in 2019, to around 1.6 %. In the euro area, GDP is expected to increase by 2.4 % in 2018 and by 1.9 % in 2019.

HICP inflation in Belgium attained 2.2 % on average in 2017. While higher oil prices had temporarily pushed headline inflation up at the beginning of 2017, some base effects related to electricity prices along with an easing of oil price growth exerted a moderating impact in the course of the year. Inflation decelerated further at the beginning of 2018, as a result of the disappearance of a tax on electricity consumption in the Flemish Region and a smaller increase of oil prices. As a result of these developments and the higher acceleration of inflation in 2017 in the euro area, the gap with the average euro area inflation rate has clearly shrunk. According to the consensus forecast, inflation in Belgium should remain at 1.7 % in 2018 and 2019, whereas in the euro area it is expected to average around 1.5 %.

Belgium ended 2017 with a general government deficit of 1 % of GDP – an improvement of 1.5 percentage point on 2016. The reduction was due in part to a structural improvement in public finances, reinforced by the continuing upturn in the economy, the low interest rate environment and unexpectedly favourable advance payments of corporate taxes. Belgian Prime News participants expect the public sector deficit to stabilise at 1.2 % in 2018 and 2019. This implies that additional fiscal consolidation efforts will be required to achieve the medium-term objective, which is a balanced structural budget. In March 2018 the federal government confirmed its intention to improve the structural budget balance by 0.3 % of GDP in 2018, as laid down in the draft budgetary plan of October 2017. On the basis of their own macroeconomic and budgetary forecasts, the BPN participants anticipate a slow reduction in the Belgian public sector debt, from close to 102 % of GDP in 2018 to 100.5 % in 2019.

INFLATION (HICP)(annual percentage changes)

2013 2014 2015 2016 2017 2018–1

0

1

2

3

4

5

Belgium Euro area

Source : EC.

GDP GROWTH AND BUSINESS CYCLE INDICATOR

2013 2014 2015 2016 2017 2018-2

-1

0

1

2

3

4

BelgiumEuro area

-40

-30

-20

-10

0

10p.c.

Business confidence indicator (right-hand scale)

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

points

Grossdata Smoothed

data

Sources : EC, NAI, NBB.

MACROECONOMIC DEVELOPMENTS

Positive note in 2017 set to continue

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SPECIAL TOPIC Belgium issues inaugural Green OLO

The Kingdom of Belgium issued its first-ever green bond on 26 February 2018. The OLO 86 Green OLO benchmark, with a maturity of 15 years, is the fruit of a bond issue framework jointly prepared by the Prime Minister, FPS Finance, FPS Environment and the Belgian Debt Agency.

The Green OLO framework was designed according to best market practice and is compliant with the Green Bond Principles.The size and other financial characteristics of the inaugural Green OLO are comparable with all other OLOs, but the proceeds will only be allocated to assets with the aim of transition to a sustainable economy.

Eligible Green Expenditure to which proceeds will be allocated will help address three global environmental challenges through financing projects in five economic sectors.

Among these five sectors, clean transportation will benefit the most from the Green OLO proceeds.

Use of proceeds : Clean transportation

Mainly the development / maintenance of the Belgian railway sector (SNCB & Infrabel), to the tune of more than € 2 billion per year.

SNCB Eligible Green Expenditure includes :

→ Federal State’s subsidy to SNCB’s investment :o Investment in rolling stock : € 411m

(M7 Trains = the new generation of SNCB double-decker trains)o Investment in client reception : € 103mo Maintenance facilities : € 119m

→ Federal State’s subsidy to SNCB’s operating expenditure related to rail and infrastructure assets :o Annual charge for use of Infrastructure : € 631mo SNCB maintenance costs : € 85m.

Use of proceeds : Illustration in other sectors

Energy Efficiency 2 %

Global challenges

Climate ChangeBiodiversity conservationPreservation of Natural Resources

Circular Economy 2 %

Renewable Energy 3 %

Clean transportation85 %

Living Resources& Land use 8 %

Eligible Green Expenditures

Sectors

Tax expendituresOperating expendituresInvestment expenditures

European TrainControl System

27 %

Means ofproduction

17 %

Extention andoptimisationof the railwayinfrastructurenetwork...

Renewal of theexisting railwayinfrastructure

network50 %

→ Support to the Stereo and Belgica Fidentia Funds Research programmes.

→ Fidentia Funds Investing in office buildings in Belgium and Luxembourg with a green certification.

→ International Cooperation Belgium has promised to contribute to the joint commitment by developed countries to mobilise $ 100bn / year in 2020 to support the fight against climate change in developing countries.

→ Ginkgo Funds Specialised in the sustainable rehabilitation of polluted industrial sites in urban areas across Europe.

REPORTING

The Kingdom of Belgium is obliged to provide two levels of reporting.• Allocation reporting : the Ministry of Finance and the Belgian Debt Agency will coordinate and publish an annual report

on the management / allocation of the proceeds of the preceding year to Eligible Green Expenditure or their estimates to be further refined throughout the year. This allocation of proceeds will be reviewed annually by an independent audit firm.

• Impact reporting : The Environment Minister will coordinate and publish a report on the environmental impact assessment of Eligible Green Expenditure. For the purpose of this reporting, a task force – consisting of the DG Environment, FPS Finance, FPS Mobility, FPS Economy/DG Energy, Government Buildings Agency, Scientific Policy and Development Cooperation, and any other relevant body – will provide input. The first impact report will be published in the year following the Green OLO issue.

INFRABEL (the Belgian railway infrastructure manager)Eligible Green Expenditure includes :

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10-YEAR INTEREST RATES(percentage points, monthly averages)

GOVERNMENT BONDS SPREADS VIS-À-VIS GERMAN BUND

2013 2014 2015 2016 2017 2018–1

0

1

2

3

2013 2014 2015 2016 2017 20180

1

2

3

4

DEBE US Euro interest rate swaps

BEIT ES NL FR

Sources : BIS, Thomson Reuters.Average over the first 20 days for March 2018.

FINANCIAL MARKETS AND INTEREST RATES

Towards more volatility, widening risk premiums and higher interest rates ?

Regarding financial markets, stock prices drew most of the attention in the first quarter of 2018. After a constant and rapid rise until the end of January, major stock indices plummeted and, in the space of a few days, lost almost all gains made in 2017. The correction was most likely triggered by market perceptions of rising inflation, especially in the US, and a corresponding adjustment in monetary policy expectations. This fall has been accompanied by an increase in implied stock market volatility to levels not seen since the Brexit vote in mid-2016. Although stock prices have in the meantime partly recovered from the fall, the VIX and VSTOXX indices continue to indicate a higher level of implied volatility in the US and the euro area. Stock prices are of course still sensitive to macroeconomic news, including those related to the Brexit negotiations and trade policy measures. All in all, stock prices remain stretched, especially in the US where the cyclically-adjusted price/earnings ratio reached 33, a level comparable to right up to the onset of the Great Depression in 1929, and the build-up of the dotcom bubble in 1998.

The turmoil in stock markets at the end of January and beginning of February 2018 did not affect bond markets substantially. However, long-term sovereign bond yields in the euro area and the US increased over the first quarter of 2018, reflecting improving market expectations of economic growth and inflation, as well as revisions to expectations regarding the associated monetary policy reaction. Over the first quarter of 2018, the ten-year sovereign bond yield in Germany and Belgium rose by, respectively, 26 and 38 bp, to 0.56 % and 0.91 %, while it increased in the US by 46 bp, to 2.86 %. More specifically, long-term sovereign yields started to rise at the end of December 2017 in the days following the ratification of a major tax reform by the US Congress. In March, they tended to decline slightly in the euro area, possibly as investors shifted funds from equity markets towards safer assets, whereas they remained broadly constant in the US where they were supported by (expectations related to) the Fed’s monetary policy. On 21 March, the Fed decided to raise the target range for the federal funds rate to 1.5 % – 1.75 %.

After following a downward trend initiated in 2017, long-term sovereign spreads vis-à-vis Germany ceased to narrow in some euro area countries. In France and the Netherlands for instance, ten-year spreads remained broadly stable in the first quarter of 2018 (at about 31 and 10 bp). The narrowing trend, however, continued in countries with higher sovereign yields, as for instance in Spain where the ten-year spread shrank by 32 bp, to 83 bp. In these countries, spread declines mainly reflect a more favourable macroeconomic outlook. In Italy in particular, the ten-year spread dipped by only 5 bp (to 144 bp), since a temporary larger decline in January was subsequently reversed in the weeks preceding the parliamentary elections in March. In Belgium, the ten-year spread widened by 12 bp, to 35 bp, which is essentially due to methodological changes in the measurement of the benchmark sovereign yield.

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TREASURY HIGHLIGHTS A good start for the 2018 funding plan

OLO AUCTIONS (€ 4 559 BILLION)

Date OLO NR Issued (€ Billion) Yield Bid to

cover

March 19

Non-competitive tourTotal March

OLO 0.20 % 22/10/2023OLO 0.80 % 22/06/2028OLO 1.45 % 22/06/2037OLO 2.15 % 22/06/2066

OLO 79OLO 85OLO 84OLO 80

0.9451.6980.5700.3680.9784.559

0.158 %0.851 %1.370 %1.875 %

2.341.782.121.46

The Belgian Debt Agency plans to issue € 34.25 billion worth of medium and long-term instruments in 2018, € 31.00 billion of which will be OLOs. The remainder of the funding would be raised through EMTN and Schuldscheine (€ 3.00 billion) and State Notes (€ 0.25 billion).

OLO syndication (€ 5.0 billion 10-year benchmark)

On 16 January, the Kingdom of Belgium issued its first new OLO benchmark of the year and opted for a 10-year OLO, in keeping with tradition. The new € 5.0 billion 0.80 % OLO 85 22/06/2028 was priced at a spread of –17 bps over the interpolated mid-swap reference rate, implying a re-offer yield of 0.812 %. Joint bookrunners were BNP Paribas Fortis, Citi, NatWest Markets and SG CIB.

Green OLO syndication (€ 4.5 billion 15-year benchmark)

On 26 February, the Kingdom of Belgium launched its inaugural Green OLO as the € 4.5 billion 1.25 % OLO 86 22/04/2033. The transaction priced at m/s-14 bps for a re-offer yield of 1.289 %. This represents a concession of just 1.5 bps compared to the mid-swap spread interpolated on the basis of OLOs 2031 and 2037, reflecting the quality of the book.

The lead managers for this syndicated OLO were Barclays, BNP Paribas Fortis, Crédit Agricole CIB, ING and J.P. Morgan. BNP Paribas Fortis and Crédit Agricole CIB were in charge of structuring the Green OLO. This new benchmark is quoted by all primary dealers on the regular trading platforms and benefits from the same liquidity as other OLOs.

Please refer to the Special Topic for more information.

So far, there have been no EMTN or Schuldscheine issues. The State Note issuance of 4 March 2018 resulted in € 5.7 million of funding.

Belgium has therefore already issued € 14.07 billion, corresponding to 41.1 % of its funding target.

In terms of portfolio structure, the average life of the portfolio is now 9.18 years (as of end of February) and it has an implicit yield of 2.28 %.

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GOVERNMENT SECURITIES STATISTICS

SECONDARY MARKET TURNOVER(as reported by primary and recognised dealers to the Treasury, billions of euros)

TREASURY BILLS OLOs

2014 2015 2016 2017 20180

5

10

15

20

25

30

35

40

CustomerInter-dealer

2014 2015 2016 2017 20180

5

10

15

20

25

30

Source : Belgian Debt Agency.

HOLDERSHIP BELGIAN SECURITIES(in  %)

TREASURY BILLS OLOs

Belgium

EA19 (excl. Belgium)

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0102030405060708090

100

Outside the eurozone

Belgium (incl. Central Bank)

EA19 (excl. Belgium)

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0102030405060708090

100

Outside the eurozone

Source : NBB.

PRIMARY MARKET(billions of euros)

2016 2017

Treasury bills

NET ISSUES GROSS ISSUES

OLOs

2018

M A M J J A S O N D J F M A M J J A S O N D J F–14–12–10–8–6–4–202468

1012

M A M J J A S O N D J F M A M J J A S O N D J F–14–12–10–8–6–4–202468

1012

2016 2017 2018

Source : Belgian Debt Agency.

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BEST BID/OFFER SPREADS (1)

TREASURY BILLS(basis points)

OLOs(ticks)

I I I I I I I I I I I I I I I I I I I I0

2

4

6

8

10

12

14

Best spread

Average spread on all T-bills

20172016

Average spread on assigned T-bills

I I I I I I I I I I I I I I I I I I0

20

40

60

80

100

5-year benchmark (OLO56 – OLO59 as of 03/01/2011)

20182016

30-year benchmark (OLO44 - OLO60 as of 15/04/2010)

10-year benchmark (OLO55 – OLO58 as of 13/01/2010 –OLO61 as of 19/01/2011)

2018 2017I I I I I I

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

OUTSTANDING AMOUNTS AND TURNOVER(billions of euros)

TREASURY BILLSNominal outstanding amounts at 26 March 2018

0 5 10 15 20 25

4.8

3.0

18.9 12-Month

6-Month

3-Month

OLOsOutstanding amounts at 26 March 2018 Outright turnover in January 2018

0 5 10 15 20 25

9.02.5

9.112.1

12.719.2

16.514.0

16.213.5

7.315.7

5.316.5

10.714.4

13.719.3

7.010.2

8.24.5

7.319.6

3.76.6

17.39.7

8.93.03.5 OLO80 2016/2066

OLO83 2017/2057OLO78 2016/2047OLO71 2013/2045OLO60 2010/2041OLO76 2015/2038OLO84 2017/2037OLO44 2004/2035OLO73 2014/2034OLO86 2018/2033OLO66 2012/2032OLO75 2015/2031OLO85 2018/2028OLO31 1998/2028OLO81 2017/2027OLO77 2016/2026OLO64 2011/2026OLO74 2014/2025OLO82 2017/2024OLO72 2014/2024OLO79 2016/2023OLO68 2013/2023OLO65 2012/2022OLO48 2006/2022OLO61 2011/2021OLO58 2010/2020OLO67 2012/2019OLO55 2009/2019OLO69 2013/2018OLO70 2013/2018OLO52 2008/2018

0 1 32 54 7 86

0.01.5

0.81.0

1.50.7

1.00.80.9

2.50.9

1.82.4

0.34.1

7.30.9

2.01.2

0.3

0.40.6

1.00.6

0.30.6

0.30.4

1.2

0.7

Source : Belgian Debt Agency.

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LIST OF CONTACT PERSONSPARTICIPATING INSTITUTIONS TECHNICAL EDITORS TELEPHONE E-MAIL

Belgian Debt Agency Mr Jean Deboutte +32 2 574 72 79 jean.deboutte@minfin.fed.beBarclays Mr François Cabau +44 20 3134 3592 francois.cabau@barclays.com Mrs Apolline Menut apolline.menut@barclays.comBelfius Bank Mr Geert Gielens +32 2 222 70 84 geert.gielens@belfius.be Mr Catherine Danse +32 2 222 71 13 catherine.cd.danse@belfius.beBNP Paribas Fortis Mr Philippe Gijsels +32 2 565 16 37 philippe.gijsels@bnpparibasfortis.com Mr Arne Maes +32 2 312 12 10 arne.maes@bnpparibasfortis.comCitigroup Mr Guillaume Menuet +44 20 7986 3281 guillaume.menuet@citi.comCrédit Agricole CIB Mr Louis Harreau louis.harreau@ca-cib.com Mr Ludovic Martin +33 1 43 23 39 37 ludovic.martin@credit-agricole-sa.frHSBC Mr Olivier Vigna +33 1 40 70 32 66 olivier.vigna@hsbc.frING Mr Peter Vanden Houte +32 2 547 80 09 peter.vandenhoute@ing.be Mr Philippe Ledent +32 2 547 31 61 philippe.ledent@ing.beKBC Bank Mr Peter Wuyts +32 2 417 32 35 peter.wuyts@kbc.be Mr Jan Van Hove +32 2 429 59 50 chiefeconomist@kbc.beMorgan Stanley Mr Daniele Antonucci +44 20 7425 8943 daniele.antonucci@morganstanley.comNatixis Mr Cyril Regnat +33 1 58 55 82 20 cyril.regnat@natixis.comNatwest (RBS) Mrs Oriane Parmentier +44 20 3361 1743 oriane.parmentier@natwestmarkets.comSociété Générale Corp. & Inv. Banking Mr Michel Martinez +33 1 42 13 34 21 michel.martinez@sgcib.com Mr Yvan Mamalet +44 20 7762 5665 yvan.mamalet@sgcib.com

GENERAL INFORMATION

National Bank of Belgium Mr Luc Dresse +32 2 221 20 39 luc.dresse@nbb.be

Published by : National Bank of Belgium (NBB).

Sources : NBB, unless otherwise stated.This publication is also available on the internet site : 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.