BRUSSELS—Belgium has seen its borrowing costs fall as a combination of a growing economy, an end to a political impasse and the resilient performance of its neighbor Germany have restored market confidence in the country's ability to survive the euro-zone debt crisis, economists said Wednesday.
The lower funding costs should equate to savings of about €100 million ($125 million) this year, ING economist Philippe Ledent said in an interview, adding that "investors are classing us as one of the good students again."
The 10-year Belgian bond yield was at 3.29% Wednesday, unchanged from Tuesday, having been as high as 5.85% in November. Spreads with current safe-haven Germany for 10-year debt have narrowed to 1.82 percentage points, after having widened to 3.62 percentage points in November.
"Consumer confidence, deficit reduction and the budget measures all show we've made a vast amount of progress since last year," a spokesman for Prime Minister Elio Di Rupo said. "We've gone from comparisons with Iraq, because of the lack of government, to spreads that show we're back in the euro-zone core."
Belgium lost favor with investors late last year when its rating was downgraded after political infighting left it in the hands of a caretaker government for 18 months. Mr. Di Rupo eventually put together a six-party coalition, which has since trimmed over €11 billion off the country's budget to comply with European Union rules on deficits this year.
"Markets have understood that Belgium should not be compared with Italy, Spain or any other Mediterranean countries," National Bank of Belgium Governor Luc Coene said Monday. "The government has worked hard to find the right balance, though it's clear we need some more efforts."
Mr. Coene said the government's reforms would enable the country to meet its deficit target of 2.8% of gross domestic product this year. On the same day, the Belgian Debt Agency updated its funding plan for 2012, cutting gross financing requirements to €37.93 billion from €38.57 billion.
Still, it isn't all clear sailing for the country of 11 million. Its national bank warned that additional measures will be necessary to meet deficit targets in 2013, and local elections are due this October, risking a resurgence of the political tensions between the Dutch-speaking north and the Francophone south that led to the previous political crisis.
"I'm a bit worried this growth is artificial, that it's just riding on Germany's coat-tails," said Mr. Ledent. "Jobs have been created, but in the nontradable sector, and this just isn't translating into consumption."
Mr. Di Rupo's government will next month unveil a plan to spur the economy by restoring the country's competitiveness and boost competition in network industries, according to documents seen by Dow Jones Newswires.
The draft plan also calls for measures to tackle inflation, a perennial problem for the country, which still indexes wages to consumer-price increases, rather than productivity. Inflation reached 4% in July 2011 and is seen at 2.6% this year, and is linked to energy prices in particular. The country's inflation should be in line with the European Central Bank target of below, but close to, 2%.
However, with 63.8% of its funding needs met this year and the savings on lower interest rates set to feed into the budget-deficit reduction plans, Belgium is a more attractive option for investors.
"The perception around Belgium has changed markedly since November last year when it fell victim to peripheral contagion," Belfius Bank analyst Willem Glorie said in a note to clients. "The country has in the meantime regained its place among the (semi-)core."
Write to Frances Robinson at frances.robinson@dowjones.com
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