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BELGIUM: CONCLUDING STATEMENT OF THE 2014 ARTICLE IV MISSION
December 16, 2013
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
With financial stability risks receding, strengthening growth performance emerges as the critical challenge for Belgium. This challenge will need to be met by increasing the employment of underused labor resources and enabling the economy to strengthen its position in the global value chain. To that end, policy priorities should go to increasing the productivity of the economy and the capacity of enterprises to adapt to international competition, ensuring that wages are better aligned with productivity developments, and enhancing activation policies. High public debt and the fiscal cost of ageing call for continued steady fiscal adjustment, which should be rebalanced to support growth by limiting tax hikes that undermine incentives to work and invest and by preserving space for productivity enhancing spending.
I. OUTLOOK AND RISKS
1. We project real GDP growth of 0.2 percent in 2013 and 1.1 percent in 2014. This modest pick up is predicated on a recovery of export growth, as well as domestic demand. This improvement will still fall short of what is needed to reduce the unemployment rate, which we expect to remain roughly unchanged at current levels. Inflation should remain low on the back of declines in network industry prices (including the planned reduction of the VAT on electricity), and wage moderation.
2. Short term risks to macroeconomic stability are mostly related to external factors, while domestic risks are more medium-term. Chief among the external risks is that of protracted low growth in Europe, which would further complicate fiscal adjustment. Interlinkages between the sovereign and the banks remain a source of vulnerability in the event of renewed financial stress. In the medium term, the most significant domestic risk is a failure of structural reforms to keep up with international competitiveness requirements.
3. On the positive side, the Belgian economy has demonstrated considerable resilience. Private sector balance sheets remain healthy and the restructuring of the banking sector has not undermined the flow of credit to the economy. Combined with low interest rates, the absence of deleveraging pressures in the non-financial private sector should enable domestic private demand to respond apace with an improvement in external conditions. Another feature of Belgium through the crisis has been the countercyclical role played by social safety nets and job support measures. However, the sustainability of these countercyclical policies depends on making the social insurance and welfare system better targeted to social and inactivity risks and more cost efficient.
II. POLICY CHALLENGES
4. Since taking office, the government has taken positive measures to restore financial stability and improve economic performance, but structural challenges remain substantial. Market confidence has been restored, and structural measures are bearing fruit, notably in terms of labor activation among older workers, a marked lowering of energy and telecommunication prices, and wage moderation. Still, much more needs to be done in the face of an external environment that is itself becoming more competitive as other European countries engage in structural reforms. Given the weight of energy-intensive industry in Belgium, an added competitive challenge comes from the widening energy cost differential relative to North America, which reinforces the importance of economic diversification and innovation.
Raising productivity, adaptability, and activation
5. Growth impediments reflect the interaction of rigidities and distortions across a range of factors. Therefore, the growth strategy should be based on a comprehensive policy approach of mutually reinforcing measures covering wage setting, the efficiency of labor and product markets, supply side incentives (social benefits, activation, and taxation), and productivity and innovation capacity. The success of policies will determine whether external competitiveness will be restored by maintaining an edge in existing and new high productivity sectors. Failing that, wages will have to be adjusted more aggressively to compete on prices in traditional sectors.
More strategic approach to fiscal adjustment
6. Structural fiscal adjustment in 2012-13 is projected at about 1 percent of GDP and at least another 2.5 percentage points are needed to meet the medium-term fiscal objective. We consider that annual average structural adjustment of 0.75 percent of GDP, as recommended in the last Article IV consultation, remains appropriate given the need to rebuild fiscal space, and to prepare for the rising cost of ageing. Given the very modest structural fiscal improvement projected for 2014, additional structural measures will be needed to meet the target.
7. Going forward, the quality of fiscal adjustment should be improved in terms of both composition and method:
Consolidating the improvement in financial stability
8. Banking sector restructuring has reduced financial vulnerabilities all the while preserving the ability of the banks to provide credit to the economy. Deleveraging has reduced the balance sheet of banks from 410 percent of GDP in 2008 to 268 percent in 2013Q2. Risks associated with legacy assets have declined and the remaining portfolio will be unwound gradually. Liquidity and solvency positions have continued to improve. Financial sector risks going forward are mostly related to low structural profitability and thus the ability of banks to build capital buffers from retained earnings, should the need arise. Pressures on profits come from high operating costs, the low interest rate environment and the structural constraint of operating in a mature, low-growth market. The National Bank has continued to strengthen supervision in line with FSAP recommendations, and the tightening of capital requirements on mortgage lending is a welcome preventive measure in a context where further outrunning of real estate prices relative to incomes could raise risks.
9. The banking law now under discussion would help safeguard financial stability, by strengthening the resolution framework and ring fencing risky trading activities. It would also adapt the regulatory and supervision framework to European requirements and is generally aligned with key FSAP recommendations. In line with international proposals to strengthen the resilience of the financial sector, the draft law will determine how banking activities should be delinked from pure risk taking activities. In defining the perimeter of permissible activities, care should be taken not to undermine the banks’ ability to compete with foreign banks in serving their clients’ needs. Attention also needs to be given to the implications of shifting these activities outside the supervised perimeter. The repercussion of front running common legislation in Europe on the priorities of bank creditors should also be weighed carefully because of possible competitive distortions. We continue to support a leveling of the playing field on the taxation of income from savings by extending the coverage of tax exemption on savings deposits to all financial assets. This would diversify the channels through which household savings are allocated to financing the real economy.
The IMF mission team wishes to thank the authorities for their generous hospitality and the open and constructive discussions.
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