## _cr08171

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### Executive Summary — Macroeconomic Situation: Key Findings
- Recovery and performance
  - Following prolonged stagnation early in the decade, a solid recovery has taken root with growth above and inflation below euro area averages, unemployment decreasing, and a strong fiscal position.
  - Growth in 2007: 3½ percent. Growth surged to 4.1 percent (y-o-y) in the second half of 2007—the highest rate in more than seven years.
  - Expansion was broad based: rebound in consumption, strong investment, and a positive external contribution.
- Labor market and inflation
  - Employment growth in 2007: 1¼–1½ percent.
  - About half of new jobs were through temporary agencies, reflecting strict employment protection legislation (EPL) for permanent workers.
  - Unemployment rate: 3.4 percent.
  - Inflation: reached 2 percent in February (HICP).
- External sector and competitiveness
  - Current account surplus in 2007: 6¾ percent of GDP.
  - Various REER measures and application of the CGER methodology point to adequate external competitiveness.
  - Export performance strong: cumulative real export growth since 2002 of almost 40 percent; reexports account for about half of Dutch exports in value.
- Fiscal position and sustainability
  - General government balance improved by a cumulative 3¾ percent of GDP over 2004-06.
  - 2007 general government balance: modest surplus; cyclically-adjusted balance slipped about ½ percent of GDP.
  - General government debt ratio: about 46 percent of GDP.
  - Population aging imposes large fiscal costs: about 7 percent of additional annual expenditures by 2040.
- Financial sector resilience and risks
  - Regulatory capital ratio of Dutch depository institutions improved from 11.9 to 13.2 percent (e-o-y) in 2007; equity capital ratios are comparatively low.
  - Losses and write-offs for 2007: about €7 billion for large international banks; overall system remained profitable.
  - Mortgage lending growth fell sharply in 2007; average LTV for mortgages: 114 percent in 2007 (source discussion).
  - Pension sector cover ratios and insurance funding improved in 2007; sectoral exposure to subprime loans is low, particularly for insurers.
  - Market impacts as of mission: lending rates increased by 50-60 basis points for corporate and mortgage loans.
- Structural concerns
  - Sluggish productivity and low profitability in the financial sector.
  - Spread of complex financial products, deepening international integration, high mortgage debt, and rising securitization create supervisory and risk-management challenges.

### Outlook — Projections, Scenarios, and Risks
- Baseline staff projection
  - Staff projects output will rise somewhat above 2 percent in 2008.
  - Growth expected to decelerate within-year in 2008; consumption slows, fixed investment slows, foreign contribution fades.
  - Inflation: expected to rise moderately, above 2 percent in 2008.
  - 2009 projection: deceleration to about 1½ percent; inflation edging just below 2 percent.
- Alternative official projections and revisions
  - Authorities projected growth of 2.3 and 1.8 percent in 2008 and 2009; comparable inflation projections were 2.4 and 2.3 percent.
  - WEO revisions: growth lowered to 2.1 and 1.6 percent; inflation at 2.4 and 1.8 percent for 2008 and 2009.
- Scenario impacts (deviations from baseline)
  - Increase in long-term interest rates of 100 basis points: GDP deviation of -0.2 to -0.6 percentage points.
  - A 20 percent decline in equity prices: GDP deviation of -0.1 to -0.1 percentage points.
  - A 10 percent decline in average house prices: GDP deviation of -0.3 to -0.4 percentage points.
- Risk assessment
  - Main risks (broadly balanced): (i) lending conditions; (ii) housing and equity prices; (iii) oil prices; (iv) external demand spillovers; (v) labor market conditions (including potential wage-price spiral).
  - For the 2009 inflation projection, overrun risks prevail.
  - Dispersion of outcomes unusually pronounced given global financial uncertainty.

### Policy Implications and Staff Recommendations — Fiscal Policy
- Short-term fiscal posture
  - Maintain strong fiscal foundations and guard against pro-cyclicality: 2007 cyclically-adjusted fiscal stance slipped about ½ percent of GDP.
  - Merit in a somewhat tighter fiscal stance in 2008-09; recommended withdrawal of fiscal stimulus such that the robust balance outcome be higher by ¼-½ percent of GDP in 2008-09.
  - If growth falls significantly short of projections, automatic stabilizers should be allowed to operate fully.
- Medium-run and sustainability targets
  - Authorities target a structural surplus of 1 percent of GDP by 2011, corresponding to a robust surplus of ¼ percent of GDP.
  - Staff and authorities concurred long-term sustainability requires a robust surplus permanently higher by some 2¼ percent of GDP than in the passive scenario—around 3 percent of GDP in 2011.
  - Staff recommended filling about one-third of the sustainability gap by 2011 and front-loading adjustment where feasible.
  - Staff suggested the 2011 robust surplus could be ½-¾ percent of GDP higher than authorities’ plan, conditional on revenue and expenditure margins.
- Instruments and transparency
  - Adjustment should focus on expenditure retrenchment or tax base broadening.
  - Staff proposals: report all tax expenditures (including mortgage interest deductibility and the tax exemption on pension payments) in the budget and, if feasible, include them in expenditure ceilings; consider excluding unemployment benefits from ceilings to eliminate cyclical components.
  - Authorities confirmed determination to strengthen transparency of tax expenditures.

### Policy Implications and Staff Recommendations — Structural Reform Priorities
- Labor market
  - Raise employment and participation: reform tax system and social entitlements; enhance activation strategies.
  - Reduce high effective marginal tax rates on second family earners.
  - Use targeted tax incentives to induce elderly participation.
  - Enforce work availability requirements and tighten reassessment of disability status (staff recommendation); authorities prefer gradual approaches and social partner agreement.
  - Liberalize EPL for regular employment and introduce a funded severance pay system (staff recommendation).
- Product markets and public sector efficiency
  - Continue “innovation pillar” and further reductions in red tape (additional 25 percent planned).
  - Liberalize zoning regulations and rigid shop opening hours to favor firm emergence and ICT adoption.
  - Pursue efficiency gains in public administration, education, and infrastructure—studies suggest potential efficiency gains of roughly 20 percent relative to best OECD practice.
- Pensions, health-care, and long-term care
  - Authorities concurred raising retirement age from 65 to 67 was appropriate and would eventually be implemented.
  - Quantified CPB-based sustainability-enhancing measures (in percent of GDP):
    - Increase of retirement age: 0.6
    - Gradual abolition of old-age allowance in income tax: 0.7
    - Reduction of cost of health care: 0.7
    - Increasing labor participation (Shortening of WW to 1.5 years): 0.2
    - Changing the tax treatment of owner-occupied homes: 0.2
    - Efficiency of other expenditures: 0.1

### Financial Sector — Resilience, Risks, and Policy Actions
- System-wide assessments and indicators
  - Regulatory capital-to-risk-weighted assets (1998–2006 sample): 11.8, 11.6, 11.6, 11.7, 12.0, 12.3, 12.3, 12.6, 11.9.
  - Risk-based capital-asset ratio (2001–07 selected): 11.7, 12.0, 12.3, 12.3, 12.6, 11.9, 13.2.
  - Return on assets remained low: 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.4, 0.4, 0.4.
  - Nonperforming loans to total gross loans (selected): 2.7, 2.5, 2.2, 2.3, 2.4, 2.0, 1.5, 1.2, 0.8.
- Stress tests, liquidity monitoring, and supervision
  - Supervisors concluded banks can withstand current global turmoil, but pension funds would suffer more.
  - Regulatory capital ratio would decline by 1.4 percent under recent stress tests.
  - DNB intensively monitors bank liquidity; reassessing internal risk management, use of ratings, internal models, and early warning systems.
- Cross-border supervision challenges
  - ABN-AMRO takeover highlighted supervisory complexities; DNB will remain consolidated supervisor of ABN-AMRO; FSA will be supervisor of RBS Group.
  - Agreements and MOUs under review to clarify crisis management and lending of last resort responsibilities.
- Mortgages, housing markets, and securitization
  - Concerns: high mortgage debt (mortgage debt at 95 percent of GDP), very large and increasing LTV ratio averaging 114 percent in 2007, predominance of bullet loans, concentration of risks in new high-LTV mortgages.
  - Authorities attribute high LTVs to tax incentives and mortgage-linked insurance/savings accounts; voluntary mortgage code of conduct has not limited LTVs as much as expected.
  - Staff and authorities: house overvaluation only slight based on regulatory constraints; WEO cross-country exercise suggests a 30 percent gap using 1997 base year, while Dutch-specific studies suggest small or no gap.
  - Recommendations: regulatory action to reduce high LTV ratios; better measurement of related collateral; fine-tune capital requirements by loan risk; gradual removal of mortgage interest deductibility; vigilance on origination standards and rating models for securitized assets.

### Staff Appraisal — Outlook, Risks, and Procedural Note
- Overall assessment
  - The Netherlands is well equipped to deal with the global financial crisis, but the outlook is unusually uncertain.
  - Recent growth and inflation performance are excellent in the EU context; external competitiveness is adequate; government budget is in surplus; financial supervision is strong.
  - Staff expects real GDP to continue expanding above the EU average in the near term, with output remaining above potential and persistent labor market tightness.
- Key staff recommendations (summary)
  - Adopt a somewhat tighter fiscal stance in 2008-09 and improve the robust balance by about 2¼ percent of GDP relative to the path implicit in authorities’ medium-term policies to stabilize net government debt given aging costs.
  - Focus fiscal adjustment on spending restraint and tax-base broadening.
  - Raise employment and productivity through labor and product market reforms: reduce effective marginal tax rates on second earners, targeted incentives for the elderly, tighter reassessment of disability entitlements, liberalize EPL, and reduce red tape.
  - Financial sector: boost bank equity capital and profitability, improve cost efficiency and transparency, adapt stress tests to novel risks and fully incorporate insurance sector, and manage cross-border supervisory cooperation.
  - Mortgages: regulatory measures to reduce high LTVs and phased removal of mortgage interest deductibility.
- Procedural recommendation: next Article IV consultation with the Netherlands to remain on the 12-month cycle.

### Selected Indicators and Fiscal/External Tables (selected exact figures from source)
- Real GDP growth (annual): 2.2 (2004), 1.5 (2005), 3.0 (2006), 3.5 (2007), 2.1 (2008 1/ staff projections), 1.6 (2009 1/ staff projections).
- CPI (harmonized): 1.4 (2004), 1.5 (2005), 1.7 (2006), 1.6 (2007), 2.4 (2008 1/), 1.8 (2009 1/).
- Unemployment rate (in percent): 4.9 (2004), 5.0 (2005), 4.1 (2006), 3.4 (2007), 3.0 (2008 1/), 3.0 (2009 1/).
- Current account balance (percent of GDP): 2.4, 2.5, 5.5, 7.5, 7.2, 8.3, 6.6 (selected 2001–07 series).
- General government balance (percent of GDP): -1.9 (2004), -0.2 (2005), 0.6 (2006), 0.6 (2007), 1.1 (2008), 1.4 (2009).
- General government debt (percent of GDP): 52.4 (2004), 52.4 (2005), 48.0 (2006), 46.0 (2007), 43.6 (2008), 40.7 (2009).
- Pension assets: 176% of GDP (December 2007).
- Mortgage debt: 95 percent of GDP (highlighted systemic level).

### Institutional and Data Notes
- Article IV consultation: discussions held in Amsterdam and The Hague from March 6–17, 2008; consultation cycle: standard 12-month.
- Membership and Quota (IMF): Quota: 5,162.40 SDR Million; Fund holdings of currency: 4,833.08 SDR Million (93.62 percent of quota); Reserve position in Fund: 329.36 SDR Million (6.38 percent of quota).
- Exchange rate arrangement: currency: euro; arrangement: The euro "floats freely and independently against other currencies."
- Statistical one-off: Health care reform in 2006 shifted about euro 8.0 billion (1.5 percent of GDP) from private to public consumption, distorting private consumption downward by about 3 percentage points in 2006.

*Source: IMF staff report and related material for the 2008 Article IV Consultation with the Kingdom of the Netherlands (content unit: _cr08171).*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Macroeconomic Situation — Key Findings
- Recovery and performance
  - Following prolonged stagnation early in the decade, a solid recovery has taken root with growth above and inflation below euro area averages, unemployment decreasing, and a strong fiscal position.
  - Growth in 2007: 3½ percent. Growth surged to 4.1 percent (y-o-y) in the second half of 2007—the highest rate in more than seven years.
  - Expansion was broad based: rebound in consumption, strong investment, and a positive external contribution.
- Labor market and inflation
  - Employment growth in 2007: 1¼–1½ percent, on par with the rest of the euro area.
  - About half of new jobs were through temporary agencies, reflecting strict employment protection legislation (EPL) for permanent workers.
  - Unemployment rate: 3.4 percent (less than half the euro area average).
  - Inflation: reached 2 percent in February (HICP).
- External sector and competitiveness
  - Current account surplus in 2007: 6¾ percent of GDP (about 1½ percentage points off the 2006 total).
  - Various REER measures and application of the CGER methodology point to adequate external competitiveness.
  - Export performance strong: cumulative real export growth since 2002 of almost 40 percent; reexports account for about half of Dutch exports in value.
- Fiscal position
  - General government balance improved by a cumulative 3¾ percent of GDP over 2004-06, largely from buoyant revenues.
  - 2007 general government balance: modest surplus; cyclically-adjusted balance slipped about ½ percent of GDP.
  - General government debt ratio: about 46 percent of GDP (continuing to decline; below Maastricht limit).
- Long-term fiscal sustainability
  - Population aging imposes large fiscal costs: about 7 percent of additional annual expenditures by 2040, mostly on account of healthcare and pension outlays.
  - The Netherlands benefits from a relatively benign initial fiscal position and a large, fully funded pension pillar, but aging still poses a major long-term fiscal challenge if not offset by policy changes.
- Financial sector resilience and risks
  - Regulatory capital ratio of Dutch depository institutions improved from 11.9 to 13.2 percent (e-o-y) in 2007; equity capital ratios are comparatively low.
  - Despite some recovery over 2003-06, return on assets remained lackluster and noninterest expenses high in international comparison.
  - Losses and write-offs for 2007: about €7 billion for large international banks; overall system remained profitable.
  - Mortgage lending growth fell sharply in 2007; tax incentives encourage high loan-to-value (LTV) mortgages, but banks generally maintain separate collateral.
  - Average funding ratios in the pension and insurance sectors improved in 2007; sectoral exposure to subprime loans is low, particularly for insurers.
  - Short-term risks: potential for higher losses of banks and pension funds from subprime and other assets; life insurers face stagnating premia, excess capacity, strong competition, and low margins.
  - Market impacts as of mission: lending rates increased by 50-60 basis points for corporate and mortgage loans (reflecting changes in ECB policy rates more than spreads).
- Structural concerns
  - Sluggish productivity and low profitability in the financial sector weigh on ability to support growth and adaptation.
  - Spread of complex financial products, deepening international integration, high mortgage debt, and rising securitization create supervisory and risk-management challenges.

### II. Outlook — Projections and Risks
- Baseline staff projection
  - Staff projects output will rise somewhat above 2 percent in 2008.
  - Projection detail: growth expected to decelerate within-year in 2008 owing to global financial turmoil; consumption loses speed; fixed investment slows; foreign contribution fades.
  - Inflation: expected to rise moderately, above 2 percent in 2008, with wages expected to increase more than productivity amid a tightening labor market.
  - 2009 projection: further deceleration to about 1½ percent, with inflation edging just below 2 percent.
- Alternative official projections and revisions
  - During the mission, authorities projected growth of 2.3 and 1.8 percent in 2008 and 2009 respectively; comparable inflation projections were 2.4 and 2.3 percent.
  - Following the latest round of WEO revisions, growth was lowered to 2.1 and 1.6 percent, with inflation at 2.4 and 1.8 percent, respectively for 2008 and 2009.
- Scenario impacts (deviations from baseline)
  - An increase in long-term interest rates of 100 basis points: GDP deviation of -0.2 to -0.6 percentage points.
  - A 20 percent decline in equity prices: GDP deviation of -0.1 to -0.1 percentage points.
  - A 10 percent decline in average house prices: GDP deviation of -0.3 to -0.4 percentage points.
- Risk assessment
  - Main risks to the baseline (considered broadly balanced): (i) lending conditions; (ii) housing and equity prices; (iii) oil prices; (iv) external demand spillovers; (v) labor market conditions (including potential wage-price spiral).
  - For the 2009 inflation projection, overrun risks prevail.
  - The dispersion of upside and downside outcomes is unusually pronounced given uncertainty about the extent of global financial distress and its effect on consumer and producer confidence.

### III. Policy Implications and Areas for Action
- Fiscal policy
  - Maintain strong fiscal foundations and guard against pro-cyclicality: 2007 cyclically-adjusted fiscal stance slipped about ½ percent of GDP due to absence of an expenditure ceiling during the government interregnum and discretionary measures.
  - Address long-term sustainability risks from aging: potential additional annual expenditures of about 7 percent of GDP by 2040 unless offset by entitlement adjustments, spending cuts, or revenue measures.
- Financial sector policy and supervision
  - Continue monitoring and containing short-term vulnerabilities related to subprime exposure, valuation, liquidity, and recapitalization needs.
  - Strengthen bank profitability and internal risk management in the face of complex products and deepening international integration.
  - Review supervisory frameworks to ensure effective oversight of securitization, mortgage lending practices (including high LTV products), and cross-border exposures.
- Structural reform priorities
  - Address sluggish productivity growth, including in the finance, insurance, real estate and business services sectors, to support medium-term growth.
  - Labor market: consider policies to mitigate heavy reliance on temporary agency employment and to increase participation while preserving flexibility.

*Source: IMF staff report (Executive Summary).*

### 11.      The authorities concurred that external competitiveness is broadly adequate, but

### The authorities concurred that external competitiveness is broadly adequate, but

### External competitiveness and near-term risks
- Authorities judged external competitiveness as "broadly adequate" but warned of rapid erosion of residual competitiveness margins if:
  - wage rises exceed productivity gains (leading to increased unit labor costs); and
  - appreciation of the euro continues, which "would rapidly exhaust residual competitiveness margins."
- The business sector was seen as "in a sound position for profitability and competitiveness," but buffers could be quickly eroded.

### Long-term growth, demographics, and productivity
- Key concerns:
  - rapid aging and sluggish productivity threaten longer-term growth and competitiveness;
  - declining trend productivity growth in the Netherlands remains slower than in other partner economies despite some recent recovery;
  - imminent population aging will shrink working-age cohorts from early the next decade.
- Policy imperative: raise the employment rate and stimulate faster productivity gains, particularly by improving the "lackluster productivity record of the service sector."
- Long-term scenario indicators (as presented):
  - Productivity growth: 1/1.7-1.3 1.3 1.3 1.3 1.3 (table-style entries preserved from source)
  - Demographic contribution: 2/-0.1-0.2-0.2-0.4-0.5-0.4
  - Employment rate contribution: 3/1.9 2.1 1.1 0.7 -0.3 -0.3
  - GDP per capita growth: 3.5 0.7 2.3 1.6 0.4 0.5
  - Note: 1/ GDP per employed. Projections assume a continuation of the most recent trend. 2/ Change in the share of population 20-64 years. 3/ Employed as a share of population 20-64 years.

### Policy discussions — overarching priorities
- Discussions focused on:
  - adopting tax and public expenditure policies that promote continued economic expansion while ensuring fiscal sustainability;
  - reforming labor and product markets to enhance utilization of soon-to-be shrinking human resources and competition;
  - maintaining financial sector stability while raising its efficiency to prevent global market tensions from causing a crisis of confidence.

### Fiscal policy — assessment and staff recommendations
- Authorities' budget plans for 2008-09 envisage surpluses of about ½ percent of GDP, projected to be exceeded mainly due to high gas revenues.
- Staff assessment:
  - The fiscal balance corrected for the cyclical position, gas proceeds, and net interest payments ("robust" balance) weakens appreciably compared to 2007, indicating a pro-cyclical stance.
  - Merit in a somewhat tighter fiscal stance in 2008-09; recommended withdrawal of fiscal stimulus such that the robust balance outcome be higher by ¼-½ percent of GDP in 2008-09.
  - If growth falls significantly short of projections, automatic fiscal stabilizers should be allowed to operate fully.
- Medium-run and sustainability issues:
  - Authorities target a structural surplus of 1 percent of GDP by 2011, corresponding to a robust surplus of ¼ percent of GDP.
  - Staff and authorities concurred that long-term fiscal sustainability requires a robust surplus permanently higher by some 2¼ percent of GDP than in the passive scenario—around 3 percent of GDP in 2011.
  - Staff recommended filling about one-third of the sustainability gap by 2011 and argued front-loading the fiscal adjustment is desirable.
  - Staff suggested the 2011 robust surplus could be ½-¾ percent of GDP higher than in the authorities’ medium-term plan, contingent on revenue buoyancy and expenditure margins.
- Authorities’ stance:
  - Expressed conditional support for achieving higher surpluses in budget execution and were determined not to exceed the expenditure ceilings set by the multiannual budget.
  - Acknowledged medium-run plan still falls short of ensuring long-term sustainability and noted announced measures produce additional sustainability-enhancing effects after 2011 equivalent in present value to about ½ percent of GDP.
  - If margins cannot be preserved, additional spending should support structural reforms that reduce the sustainability gap.

### Fiscal policy — instruments and framework refinements
- Agreement that adjustment should focus on expenditure retrenchment or tax base broadening given:
  - the government’s economic footprint is already elevated and projected to increase with aging;
  - prevailing tax rates leave little upward room and international tax competition may suggest cuts in corporate taxation.
- Staff proposals to reduce procyclicality and improve transparency:
  - report all tax expenditures (including mortgage interest deductibility and the tax exemption on pension payments) in the budget and, if feasible, include them in expenditure ceilings;
  - consider excluding unemployment benefits from the ceilings to eliminate cyclical components.
- Authorities confirmed determination to strengthen transparency of tax expenditures and would consider options to eliminate the cyclical component of unemployment benefits from spending ceilings.

### Structural policies — labor, product markets, and public sector efficiency
- Reform momentum:
  - Structural advances are slowing due to "reform fatigue" and coalition dissensions that prevented action in areas like employment protection legislation (EPL).
  - Authorities established a commission to identify further labor-market reform measures; it will report by mid-2008.
- Labor-market and tax measures undertaken or planned to stimulate employment:
  - gradual elimination of the imputation of the general tax credit to the primary worker;
  - planning targeted increases of tax credits for workers aged 57 and above;
  - exempting pensioners who worked between ages 63-65 from the new levy for people over 65;
  - steps under consideration to limit use of the disability scheme for the young.
- Pension and retirement-age reform:
  - Authorities concurred that raising the retirement age from 65 to 67 years "was appropriate and would eventually be implemented";
  - current government intended to focus on raising the effective retirement age from the current 60-61 to closer to 65 through tax incentives;
  - reduction of the old-age related deduction under the income tax would contribute to offset rising aging outlays.
- Health-care and long-term care:
  - Authorities viewed savings in healthcare as significant for fiscal sustainability; most projected surge in healthcare spending attributed to medical technology and real income growth rather than demographics;
  - Staff argued an increase in user fees could moderate demand, but authorities raised concerns about burdens on the chronically ill and administrative complexity;
  - Authorities believed tighter definition of entitlements in long-term care could spawn significant savings.
- Unemployment benefits and public administration efficiency:
  - Staff suggested lowering maximum unemployment benefit duration to 18 months (from 38 months after a cut from 60 to 38 months in 2006) to raise labor participation; authorities preferred gradual decrease and focus on activation;
  - Studies suggest potential efficiency gains of roughly 20 percent in public administration, education, and infrastructure provision relative to best OECD practice.
- Product-market liberalization and entrepreneurship:
  - Authorities intended to strengthen the competition authority (NMa) and reduce red tape by an additional 25 percent;
  - Staff noted the Netherlands is an outlier in high barriers to entrepreneurship (burdensome licensing), middling rank in product market regulation, strict zoning regulations, and stringent shop opening hours; staff advocated greater liberalization, while authorities insisted on gradual steps with impact assessment.

### Quantified sustainability-enhancing measures (CPB-based effects, in percent of GDP)
- Increase of retirement age: 0.6
- Gradual abolition of old-age allowance in income tax: 0.7
- Reduction of cost of health care: 0.7
- Increasing labor participation (Shortening of WW to 1.5 years): 0.2
- Changing the tax treatment of owner-occupied homes: 0.2
- Efficiency of other expenditures: 0.1

*Source: IMF staff report (content unit: _cr08171).*

### 26.      The authorities support overseas development assistance (ODA), continuing to

### _cr08171 - 26.      The authorities support overseas development assistance (ODA), continuing to

### C. Financial Sector — overview and main concerns
- Authorities confirmed the overall robustness of the Dutch financial system but identified several concerns:
  - (i) the impact of prolonged turmoil on key banks;
  - (ii) weaknesses in ratings and regulatory reliance thereon;
  - (iii) valuation and risk management of structured products;
  - (iv) difficulties in raising liquidity or capital under disturbed market conditions, though the authorities did not believe that Dutch banks had particular problems in this regard; and
  - (v) quality of disclosure of complex products.
- Low risk-weighting and higher leverage have boosted the regulatory capital ratio and return on equity, while banks’ return on assets has been one of the lowest among peers.
- Life insurers face languishing premia and low margins; transparency of unit-linked insurance products is an issue.
- Pension funds’ cover ratio can be quite volatile (it dropped 20 percentage points in the first two months of 2008) due to large duration mismatch and asset price volatility.
- Authorities are actively participating in international fora to address these problems.

### Stress tests, liquidity monitoring, and supervisory actions
- Based on recent stress tests, supervisors concluded:
  - Banks can withstand current global turmoil, but pension funds would suffer more.
  - The regulatory capital ratio would decline by 1.4 percent.
- Insurers were judged less vulnerable due to negligible exposure to subprime and other low-rated assets (insurers were not similarly tested).
- Regarding liquidity:
  - Dutch banks consolidate their conduits under IFRS, so liquidity management extends to the needs of such conduits.
  - Following global turmoil, DNB is monitoring bank liquidity intensively and reassessing banks’ internal risk management, use of ratings, internal models, and early warning systems.

### ABN-AMRO takeover and cross-border supervision challenges
- Authorities expressed satisfaction with progress of the ABN-AMRO takeover while stressing managerial and supervisory challenges.
- Cooperation and progress by the consortium—Fortis, Royal Bank of Scotland (RBS), Santander—were noted positively.
- DNB and the Financial Supervisory Agency (FSA) agreed that:
  - DNB will remain the consolidated supervisor of ABN-AMRO;
  - FSA will be the supervisor of RBS Group.
- Dutch and Belgian supervisors already have a memorandum of understanding (MOU) regarding Fortis; it will be reviewed in light of the ABN-AMRO transaction and increased Dutch activities of Fortis.
- Staff welcomed steps but highlighted difficulties of supervising large EU-wide institutions by national regulators and the burden of multiple regulations.
- Staff emphasized the importance of reviewing existing MOUs to clarify responsibility for crisis management and lending of last resort.

### Mortgages, housing markets, and securitization — risks and assessments
- Supervisors maintained that mortgages carry low risks, but identified factors requiring careful watch:
  - High mortgage debt, risk concentration, house prices, and securitization growth.
- Specific findings and concerns:
  - Staff questioned the very large and increasing LTV ratio of mortgages (averaging 114 percent in 2007) and the predominance of bullet loans.
  - Authorities attributed high LTVs to high tax incentives and highlighted mortgage-linked insurance or savings accounts as reducing systemic risk via collateral build-up.
  - Risks are concentrated in new mortgages with high LTV ratios, especially for young workers with low incomes.
  - Authorities conceded the voluntary code of conduct has not limited LTV ratios as much as expected, primarily due to high competition.
  - Authorities felt limited land supply and generous mortgage interest deductibility reduce the likelihood of sharp house price corrections in the Netherlands despite large declines elsewhere (U.S., U.K., Spain).
  - Staff and authorities concurred that, based on existing regulatory constraints which tend to cause higher prices, house overvaluation is only slight (reference to Box 2).
  - Officials accepted that mortgage interest deductibility results in high housing prices, lower affordability—especially for younger workers—and greater vulnerability to interest rate shocks.
  - Mortgage debt at 95 percent of GDP is much higher than in most mature markets, and large build-up of mortgage-related collateral distorts investment.
  - With large mortgage debt, securitization has grown rapidly, calling for high origination standards, good rating models, and supervisory vigilance about liquidity and capital requirements for securitized assets.

### Box 2 — House Prices in the Netherlands (summary of analyses)
- Cross-country WEO Spring 2008 exercise:
  - Points to a sizable house price gap; WEO estimates a gap of about 30 percent between actual increases in Dutch house prices over the last decade and those explained by common fundamentals.
  - WEO uses 1997 as the base year for its cross-country sample.
- Dutch-specific econometric studies:
  - Most suggest a small or no gap.
  - Staff work for the 2005 and 2006 Article IV consultations found house prices approximately in line with fundamentals.
  - The authorities’ own analysis broadly supports small or no gap conclusions.
  - CPB Document No. 81 (2005) found evidence of a possible 10 percent overvaluation in 2003; CPB Memorandum No. 200 (April 22, 2008) concludes that by 2007 there was no overvaluation.
- OECD study (P. van den Noord) indicates probability of a turning point is very small in the Netherlands compared with several other countries (including the U.S.).
- Differences in results may arise from:
  - Choice of base period (1997 may not be an “equilibrium” year for the Netherlands);
  - Institutional features (strict zoning regulations and generous mortgage interest deductibility) that raise equilibrium prices;
  - Measurement choices (disposable income per capita versus total disposable income; total disposable income captures household formation effects).

### IV. Staff Appraisal — outlook, risks, and policy recommendations
- Overall assessment:
  - The Netherlands is well equipped to deal with the global financial crisis, but the outlook is unusually uncertain.
  - Recent growth and inflation performance are excellent in the EU context.
  - External competitiveness is adequate, the government budget is in surplus, and financial sector supervision is strong and well designed.
  - Staff expects real GDP to continue expanding above the EU average in the near term, with output remaining above potential and persisting labor market tightness.
  - Risk factors include lending, housing, and equity market conditions, oil prices, external demand, and labor market tensions.
  - Staff regards current growth projections as conservative with fatter-than-ordinary tails.
- Long-term challenges:
  - Aging population and low productivity growth pose large future fiscal burdens (including growing health care costs).
  - Productivity growth remains slower than partner economies; working-age cohorts will shrink from early next decade.
  - Raising the employment rate and stimulating faster productivity gains are essential for long-term potential growth, competitiveness, and fiscal sustainability.
- Fiscal policy recommendations:
  - A somewhat tighter fiscal stance is advisable for long-term fiscal sustainability and cyclical reasons.
  - To stabilize net government debt despite aging costs, the robust balance must improve by about 2¼ percent of GDP relative to the path implicit in the authorities’ medium-term policies.
  - Early reduction of the sustainability gap would limit the size of needed fiscal correction and distribute burdens more equitably across generations.
  - Under current growth projections, modest withdrawal of fiscal stimulus (broadly locking in the overperformance realized in 2007) is called for; maintain a margin under expenditure ceilings set in the medium-term budget framework.
  - If growth turned markedly lower than projected, allow automatic stabilizers to operate fully.
- Fiscal composition and structural reform priorities:
  - With relatively large tax wedges on labor income, fiscal adjustment should focus on spending restraint and tax base broadening to avoid undermining labor incentives.
  - Required savings include:
    - (i) further pension reform;
    - (ii) additional efforts to rein in health care expenditures;
    - (iii) enhancements in public expenditure efficiency to curtail expenditure growth without endangering services;
    - (iv) tighter unemployment benefits.
  - More transparency of tax expenditures would strengthen budgetary discipline and reduce residual procyclicality.
- Labor market and productivity recommendations:
  - Increase employment to ease labor shortages, support growth, and address aging:
    - Reform tax system, social entitlements, and employment protection; enhance activation strategies.
    - Reduce high effective marginal tax rates on second family earners to promote female employment.
    - Use targeted tax incentives to induce elderly participation.
    - Enforce work availability requirements more strictly and tighten reassessment of disability status for those aged 45 years and over.
    - Liberalize strict employment protection legislation (EPL) for regular employment and introduce a funded severance pay system to enhance labor mobility.
  - Further liberalization to promote productivity growth:
    - Continue the “innovation pillar” and reductions in red tape.
    - Liberalize zoning regulations and rigid shop opening hours to favor firm emergence and ICT adoption.
- Financial sector recommendations:
  - Banks should boost equity capital and profitability, improve cost efficiency, transparency of complex products, and investor relations.
  - Netherlands should continue contributing leadership in international efforts to implement lessons on ratings, valuation, liquidity, risk management, and fine-tuning of capital and other prudential regulation.
  - Insurance sector needs consolidation and margin improvement to deal with global competition and excess capacity.
  - DNB stress testing is of high international standards but needs to adapt to:
    - novel risks (including difficulties in raising capital and liquidity),
    - rapid rating migration,
    - more adverse asset valuations,
    - and incorporate the insurance sector fully.
  - For mortgages:
    - Regulatory action to reduce high LTV ratios, better measurement of related collateral, and fine-tuning capital requirements for loans with different risk would be useful.
    - Gradual removal of mortgage interest deductibility would lower households’ vulnerability to price swings and interest rate shocks.
    - Rapidly growing securitization calls for vigilance on origination standards, rating models, liquidity, and capital requirements for securitized assets.
- Procedural recommendation:
  - It is recommended that the next Article IV consultation with the Netherlands remains on the 12-month cycle.

*IMF staff appraisal and findings as presented in the source content.*

### 1.6 percentage points of GDP.

### 1.6 percentage points of GDP.

### Fiscal and structural balance notes
- The calculation of the structural balance is based on the standard methodology which uses fixed elasticities with respect to GDP. Biases can occur, in particular in the context of asset price boom and busts (as discussed for the Netherlands in Country Report No. 04/301).
- The increase in expenditure growth in 2006 largely reflects the introduction of the new health care system.
- The robust primary balance is defined as the structural balance adjusted for net interest payments and gas revenues.
- The reform of the health care system at the beginning of 2006 resulted in a shift of health care expenditures of about euro 8.0 billion (1.5 percent of GDP) from private to public consumption, distorting private consumption downward by about 3 percentage points in 2006.

### Financial soundness indicators (Deposit-taking institutions, 1998–2006)
- Regulatory capital-to-risk-weighted assets: 11.8, 11.6, 11.6, 11.7, 12.0, 12.3, 12.3, 12.6, 11.9
- Regulatory Tier I capital-to-risk-weighted assets: 8.6, 8.7, 8.9, 8.6, 9.1, 9.6, 9.9, 10.3, 9.4
- Capital to assets: 5.5, 5.6, 5.2, 5.2, 5.1, 5.0, 4.8, 3.1, 3.0
- Nonperforming loans net of provisions to capital (1/): 30.0, 32.3, 31.3, 31.1, 31.2, 24.3, 19.2, 15.7, 12.2
- Nonperforming loans to total gross loans (1/): 2.7, 2.5, 2.2, 2.3, 2.4, 2.0, 1.5, 1.2, 0.8
- Sectoral distribution of loans to total loans — Households: 46.3, 47.2, 49.5, 50.2, 50.2, 51.0, 49.9, 49.3, 48.8
- Sectoral distribution of loans to total loans — Nonfinancial companies: 41.6, 39.8, 37.6, 36.3, 34.2, 31.7, 29.6, 28.6, 29.3
- Sectoral distribution of loans to total loans — Insurance companies and pension funds: 1.2, 1.0, 1.0, 1.3, 1.4, 1.0, 1.7, 2.0, 2.0
- Sectoral distribution of loans to total loans — Other financial institutions: 10.9, 12.1, 11.9, 12.2, 14.1, 16.3, 18.8, 20.2, 19.8
- Return on assets: 0.5, 0.5, 0.5, 0.5, 0.5, 0.5, 0.4, 0.4, 0.4
- Return on equity: 11.5, 15.6, 15.6, 15.7, 11.8, 14.8, 16.8, 15.4, 15.4
- Interest margin to gross income (ratio): 58.4, 57.8, 52.0, 56.3, 60.1, 60.5, 58.9, 54.1, 51.4
- Noninterest expenses to gross income (ratio): 77.0, 73.3, 72.1, 77.7, 80.2, 75.5, 70.5, 70.1, 74.0
- Net open position in foreign exchange to capital: 59.5, 72.1, 100.4, 89.4, 77.0, 59.9, 79.6, 80.6, 91.1
- Source for table: Data provided by the authorities.

### Indicators of external and financial vulnerability (selected entries, 2001–07)
- Exports goods and services (annual percent change, in U.S. dollars): -0.7, 4.4, 17.8, 17.0, 9.0, 12.9, 18.6
- Imports goods and services (annual percent change, in U.S. dollars): -0.3, 4.4, 23.6, 17.9, 9.7, 10.5, 18.7
- Terms of trade goods (annual percent change): 8.1, 1.5, 0.8, -0.4, -0.1, -1.4, -0.5
- Current account balance (percent of GDP): 2.4, 2.5, 5.5, 7.5, 7.2, 8.3, 6.6
- Inward portfolio investment: -33.6, 621.8, -1179.9, 1964.6, -1162.4, -234.0, -1864.5
- Inward foreign direct investment: 128.2, 1050.5, 1129.9, 291.9, 705.3, 110.0, 3482.1
- Official reserves (in billions of U.S. dollars): 16.9, 19.0, 21.6, 21.2, 20.5, 23.9, 26.9
- Foreign assets of the banking sector (in billions of U.S. dollars): 211.4, 256.2, 308.2, 376.9, 409.0, 568.1, 741.8
- Foreign liabilities of the banking sector (in billions of U.S. dollars): 250.1, 305.8, 328.2, 392.5, 418.0, 562.9, 709.0
- Official reserves in months of imports: 0.8, 1.0, 1.0, 0.9, 0.7, 0.8, 0.8
- Exchange rate (per U.S. dollar, period average): 1.12, 1.06, 0.88, 0.80, 0.80, 0.80, 0.73
- Public sector debt (Maastricht definition): 50.7, 50.5, 52.0, 52.4, 52.4, 48.0, 46.0
- Government bond yield: 5.0, 4.9, 4.1, 4.1, 3.4, 3.8, 4.3
- Government bond yield (real): -0.1, 1.1, 1.9, 2.7, 1.9, 2.1, 2.7
- Stock market index: 506.8, 322.7, 337.7, 348.1, 436.8, 495.3, 515.8
- Spread of government bond yield with Germany: 0.16, 0.11, 0.05, 0.06, 0.02, 0.02, 0.07
- Residential mortgage loans to total loans (in percent): 25.3, 25.3, 25.2, 25.1, 28.6, 26.0, 24.1
- Nonperforming loans to total gross loans (in percent) (1/): 2.28, 2.38, 1.99, 1.54, 1.22, 0.75, ...
- Geographical distribution of credit (percent of total) — Domestic economy: 40.98, 35.16, 33.69, 33.08
- Geographical distribution of credit (percent of total) — Advanced economies: 54.72, 59.81, 60.45, 61.60
- Contingent and off-balance-sheet accounts to total assets (in percent): 20.3, 19.5, 16.7, 15.3, 14.6, 14.9, ...
- Risk-based capital-asset ratio: 11.7, 12.0, 12.3, 12.3, 12.6, 11.9, 13.2
- Sources: Data provided by the authorities; and IMF, IFS.
- Note: 1/ Average of the three largest banks.

### Structural measures to raise labor participation and enhance productivity — Recent and planned actions
- General:
  - Government formed a commission to advise measures to increase labor participation; proposals expected in summer 2008.
- Disability:
  - Actions taken: Latest reform effective January 2006 strengthening eligibility criteria and work incentives for partially disabled; on 2/1/2008 wage subsidies introduced to foster “bridge-jobs.”
  - Actions planned: Cabinet preparing changes in the Wajong to stimulate participation by postponing Wajong eligibility until 27 years of age (while maintaining income support rights).
- Unemployment benefits:
  - Actions taken: Effective October 2006, maximum duration cut from 60 to 38 months.
  - Actions planned: Abolishing social assistance for people aged less than 27 years in combination with a study/work obligation; change some unemployment insurance rules to stimulate job take-up; develop plans to allow UWV to give wage subsidies to the long-term unemployed; permit “participation jobs.”
- Poverty and inactivity traps:
  - Actions taken: Changes in the real estate tax and amendments to the child credit (2006) reduced spikes in marginal effective tax rates.
  - Actions planned: New cabinet to introduce an earned income tax credit (EITC) in 2009 (parameters TBD).
- Female participation:
  - Actions taken: Increased childcare subsidies by €130 million in 2006; further €125 million in 2007; legislation requiring primary schools to organize childcare from 2007–08 if parents request.
  - Actions planned: Phasing out, by 6⅔ percent every year, the imputation of the general tax credit to the primary worker over 2009–2024 (applying only to partners born after 1971 who do not have children aged under six years).
  - Fiscal impact: Starting in 2009, these measures will boost household revenues by €0.5 billion annually (until 2011). An extra €700 million by 2011 will be made available for child care over the cabinet’s term.
- Elderly participation:
  - Actions taken: Fiscal incentives for early retirement removed in January 2006.
  - Actions planned: Action plan 45+ to assist 30,000 people aged 45+ to find a job; plan to increase work-related tax credits for workers over age 57 and restrict pensioners’ exemption from social contributions only to those retiring at 65, with phasing over [ten years].
- Employment protection legislation (EPL):
  - Actions taken: Effective October 2006, LIFO principle eased and dismissed workers no longer have to prove they resisted layoff to get unemployment benefits.
- Product markets:
  - Actions taken: Competition agency (NMa) became formally independent in July 2006 and investigative/enforcement powers enhanced on October 1, 2007; progress toward lowering red tape by 25 percent by end-2007.
  - Actions planned: Further reduction of red tape by 25 percent.

### Labor and product market reform recommendations and authorities’ views (summarized)
- Labor market / Taxation:
  - Staff recommendation: Reduce high effective tax rate on second family earners; speed elimination of imputation of the general tax credit to the primary worker.
  - Authorities’ view: Reducing tax on second earners is costly and must be gradual; authorities support faster elimination of imputation but note political/social compromise constraints.
- Unemployment and disability benefits:
  - Staff recommendation: Stricter enforcement of work-availability requirements; extend tighter disability reassessments to those over 45; tighten benefit duration or diminish benefits over the unemployment spell.
  - Authorities’ view: Opposition to tougher reassessments for older workers; considering limiting use of young disabled scheme; unemployment entitlement changes require social partner agreement.
- EPL:
  - Staff recommendation: Liberalize EPL and introduce a funded severance pay scheme to promote mobility.
  - Authorities’ view: Coalition differences make action unlikely during current legislature.
- Product market:
  - Staff recommendation: Reduce administrative burden and liberalize regulations (zoning, shop opening hours).
  - Authorities’ view: Innovation pillar and strengthened NMa should support competition; liberalization should be gradual; further 25 percent red tape reduction planned.

### Key messages from figures and charts (economic expansion, competitiveness, and financial stability)
- Economic expansion:
  - GDP growth has strengthened in recent years; consumption growth has recently increased and is now steadily positive.
  - Equity prices contributed to expansion and house prices remain firm though increases have slowed.
  - Consumer confidence recovered reflecting growing employment, though it has recently dropped.
  - Profit margins have recently benefited from modest increases in unit labor costs; exports have benefitted from strong foreign demand.
  - Investment growth picked up with rising producer confidence but slowed more recently.
- Comparative performance and competitiveness:
  - The Netherlands’ economic growth is higher than most Euro Area countries across several indicators (real GDP, private consumption, exports).
  - The health care reform moved about euro 8.0 billion (1.5 percent of GDP) from private to public consumption in 2006.
  - Unit labor costs declined relative to competitors; aggregate market share data do not point to particular difficulties.
  - Nominal exchange rate appreciation has reversed recent real depreciation; current account is significantly in surplus.
- Financial stability indicators:
  - Banks are well-capitalized but profitability has declined.
  - Financial positions of private pension and insurance companies continue to recover (pensions: cover ratio; insurers: solvency ratio).
  - House price inflation is slowing while private sector credit growth appears to be picking up.
  - Households and nonfinancial corporations remain vulnerable to interest rate increases due to high levels of debt (corporates: debt to equity; households: debt to GDP).
- Monetary conditions:
  - Interest rates increased steadily in 2006 and into 2007; monetary conditions tightened through August and then paused as rising inflation reduced real short-term interest rates.

*Source: Data provided by the authorities; and IMF, IFS.*

### Appendix I. Netherlands: Fund Relations

### Appendix I. Netherlands: Fund Relations (As of March 31, 2008)

### I. Membership and Quota
- Membership status: Joined December 27, 1945; Article VIII.
- Quota: 5,162.40 SDR Million (100.00 percent of quota).
- Fund holdings of currency: 4,833.08 SDR Million (93.62 percent of quota).
- Reserve position in Fund: 329.36 SDR Million (6.38 percent of quota).

### II. SDR Department
- Net cumulative allocation: 530.34 SDR Million (100.00 percent of allocation).
- Holdings: 553.76 SDR Million (104.42 percent of allocation).

### III. Outstanding Purchases and Loans
- None.

### IV. Latest Financial Arrangements
- None.

### V. Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Charges/interest and total projected obligations by year:
  - 2008: Charges/interest 0.03; Total 0.03
  - 2009: Charges/interest 0.03; Total 0.03
  - 2010: Charges/interest 0.03; Total 0.03
  - 2011: Charges/interest 0.03; Total 0.03
  - 2012: Charges/interest 0.03; Total 0.03

### VI. Exchange Rate Arrangements
- Currency: euro.
- Arrangement: The euro "floats freely and independently against other currencies."

### VII. Article IV Consultation (timing and recent actions)
- 2008 Article IV consultation discussions: held in Amsterdam and The Hague from March 6–17, 2008.
- Previous staff report: 2007 Article IV Consultation (IMF Country Report No. 07/216, 6/22/07) considered by the Executive Board on June 13, 2007.
- Consultation cycle: standard 12-month consultation cycle.

### VIII. Exchange Restrictions
- The Netherlands maintains an exchange system free of restrictions on payments and transfers for current international transactions, except for restrictions maintained solely for security reasons.
- These measures are established by European Union regulations and have been notified to the Fund pursuant to Executive Board Decision No. 144-(52/51).

---

### Staff Analytical Work, 2000–07 (select themes and reports)

### Fiscal Policy
- Volatility of Tax Revenues in the Netherlands, IMF Country Report No. 06/284.
- Budgetary Policymaking in the Netherlands, IMF Country Report No. 05/225.
- Recent Fiscal Developments in the Netherlands, IMF Country Report No. 04/301.
- Medium-Term Fiscal Policy, IMF Country Report No. 02/123.
- Health Care Reform, IMF Country Report No. 02/123.

### The Financial Sector
- House Prices in the Netherlands: Determinants, Concerns, and Considerations Related to Phasing Out the Tax Deductibility of Mortgage Interest Payments, IMF Country Report No. 06/284.
- The Financial Sector in the Netherlands: A Health Check and Progress Report on the FSSA Recommendations, IMF Country Report No. 05/225.
- House Prices in the Netherlands, IMF Country Report No. 05/225.
- Second Pillar Pensions, Stock Market Returns, and Labor Demand, IMF Country Report No. 03/240.

### Labor Markets
- Wage Bargaining in the Netherlands, IMF Country Report No. 03/240.
- Inactivity and Poverty Traps, IMF Country Report No. 02/123.
- Reform of the Disability Program, IMF Country Report No. 02/123.
- The Labor Income Tax Credit in an International Perspective, IMF Country Report No. 01/96.

### Growth, Productivity, and Cyclical Issues
- Potential Growth and Total Factor Productivity in the Netherlands, IMF Country Report No. 06/284.
- The External Competitiveness of the Dutch Economy: A Short Note on Evidence from both Aggregate and Disaggregate Data, IMF Country Report No. 05/225.
- Long-Run Household Consumption Equilibrium in the Netherlands, IMF Country Report No. 05/225.
- Recent Productivity Trends in the Netherlands, IMF Country Report No. 04/301.
- Estimating Potential Growth and Output Gaps for the Netherlands, IMF Country Report No. 03/240.
- Dealing with Cyclical Tensions, IMF Country Report No. 00/88.

---

### Past Fund Policy Recommendations and Implementation (select summaries)

### Fiscal Policy
- Past recommendations: structural fiscal adjustment of at least ½ percentage point of GDP per year; closer coordination between central and local governments; refinements to enhance transparency (e.g., reporting of tax expenditures in the budget and their inclusion in the expenditures ceiling); reduce procyclical features.
- Implementation: Fiscal consolidation of over 2½ percentage points of GDP, in structural terms, was achieved during 2003–07. Authorities improved coordination across government levels, recently excluded interest payments from the expenditures ceiling, lowered the "signaling value," and introduced fixed funding of the FES.
  - Note: The "signaling value" reduced to 2 percent from 2½ percent of GDP.

### Labor Market
- Past recommendations: tighten unemployment benefits, abolish fiscal incentives for early retirement, reduce inactivity traps, reassess disability entitlements, liberalize employment protection legislation.
- Implementation: Maximum duration of unemployment benefits lowered to 38 months; tax/benefit incentives for early retirement eliminated; "poverty traps" attenuated; disability rights tightened.
- Recommendations not yet implemented include:
  - (i) reducing the still high effective tax rate on second family workers (through faster elimination of the imputation of the general tax credit to the primary worker);
  - (ii) tightening access to the disability scheme by the young;
  - (iii) stricter enforcement of work availability requirements for the partially disabled and unemployed;
  - (iv) extension of more severe rules for periodic reassessment of disability status to those aged 45 and over;
  - (v) raising the retirement age or linking it to life expectancy.
- Observation: Unemployment benefit maximum length remains quite generous.

### Product Market
- Fund support for authorities' liberalization program: regional unbundling of the energy market, reduction in required licenses and permits, increased competition, reduction in cost of doing business.
- Progress: powers of the competition authority increased; previous government achieved 25 percent reduction in administrative burden; new government intends an additional 25 percent reduction.
- Remaining issues: licensing requirements remain burdensome, zoning regulations stringent, shop opening/delivery hours strict; barriers to entrepreneurship and product market regulation are still relatively high.

### Financial Sector
- Key FSSA recommendations: new Financial Supervision Act; clarify supervisory framework and ministerial authority; improve security settlement systems; new regulatory framework for pension funds; establishment of a Financial Stability Division; expand stress testing models; strengthen the AML-CFT framework; eliminate or reduce mortgage interest deductibility; introduce a mortgage code of conduct.
- Implementation: Most recommendations implemented. Partial progress on mortgage interest deductibility (not phased out but small reductions made). Mortgage code of conduct strengthened but has not been very effective in reducing high LTV ratios. Approach to stress testing could be further extended.

---

### Statistical Issues (April 10, 2008)

### General assessment
- The Netherlands publishes a wide range of economic and financial statistics: national accounts (Central Bureau of Statistics), financial and balance of payments data (De Nederlandsche Bank), and fiscal data (Ministry of Finance).
- Data increasingly available electronically; macroeconomic data generally of high quality.
- Authorities subscribe to the Special Data Dissemination Standard and have committed to a ROSC data module mission tentatively set for later this year.

### One-off data impact in 2006
- Institutional reforms had significant impact on national account and other data in 2006.
- Reform of health care insurance caused significant reclassification of private consumption into public consumption; big impact on growth rates of components, but overall GDP was not affected.

### Table of Common Indicators Required for Surveillance (selected latest observations and frequencies, as of April 10, 2008)
- Exchange Rates: Date of Latest Observation — Current; Date Received — Current; Frequency of Data — Daily and Monthly; Frequency of Reporting — Daily and Monthly; Frequency of Publication — Daily and Monthly.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation — 02/08; Date Received — 3/18/08; Frequency of Data/Reporting/Publication — Monthly.
- Reserve/Base Money: Date of Latest Observation — 02/07; Date Received — 04/07; Frequency of Data/Reporting/Publication — Monthly.
- Broad Money: Date of Latest Observation — 02/07; Date Received — 04/07; Frequency of Data/Reporting — Monthly; Frequency of Publication — Weekly and Monthly.
- Central Bank Balance Sheet: Date of Latest Observation — 02/08; Date Received — 4/7/08; Frequency — Monthly.
- Consolidated Balance Sheet of the Banking System: Date of Latest Observation — 02/08; Date Received — 4/7/08; Frequency — Monthly.
- Interest Rates: Date of Latest Observation — Current; Date Received — Current; Frequency — Daily and Monthly.
- Consumer Price Index: Date of Latest Observation — 03/08; Date Received — 4/17/08; Frequency — Monthly.
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of Latest Observation — 03/07; Date Received — 7/10/07; Frequency — Monthly.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation — Q1 2007; Date Received — Apr. 07; Frequency — Quarterly.
- External Current Account Balance: Date of Latest Observation — Q3 2007; Date Received — 1/22/08; Frequency — Quarterly.
- Exports and Imports of Goods and Services: Date of Latest Observation — Q3 2007; Date Received — 1/22/08; Frequency — Quarterly.
- GDP/GNP: Date of Latest Observation — Q4 2007; Date Received — 4/7/08; Frequency — Quarterly.
- Gross External Debt: Date of Latest Observation — Q4 2006; Date Received — Apr. 07; Frequency — Quarterly.

---

### Statement by the IMF Staff Representative (May 21, 2008) — Key updates
- The statement summarizes developments since the staff report and notes the additional information does not change the thrust of the staff appraisal.
- Real GDP rose by 0.2 percent in the first quarter of 2008 (quarter-on-quarter), the lowest quarter-on-quarter rate for three years.
- Preliminary euro area quarterly growth: 0.7 percent.
- Year-on-year expansion from the same quarter of last year: 3.1 percent (Netherlands) vs. 2.2 percent (euro area).
- Slowdown drivers: deceleration of consumption (especially consumer durables) and exports; business investment remained strong.
- Harmonized inflation: dipped to 1.7 percent (12-month change) in April from a recent peak of 2.0 percent in February.
- Euro area harmonized inflation: 3.3 percent.
- Explanation: comparatively smaller price increases for food, rent, and energy in the Netherlands.
- These GDP growth and inflation developments broadly consistent with the projections in the staff report.

---

### Public Information Notice (PIN) No. 08/64 — Executive Board conclusion (June 3, 2008)
- IMF Executive Board concluded the 2008 Article IV consultation with the Kingdom of the Netherlands on May 21, 2008.
- Background summary:
  - Strong macroeconomic foundations have largely shielded the Netherlands from recent financial turbulence.
  - Growth in recent years above and inflation below euro area averages.
  - Economic expansion expected to slow in 2008 to "2-2¼ percent", reflecting a substantive deceleration owing to global turmoil and spillover from the U.S. downturn (noting a large carryover from 2007).
  - Inflation expected to remain subdued, "slightly above 2 percent", although with a tightening labor market wage increases anticipated to accelerate somewhat and to exceed productivity growth.
  - Uncertainties surrounding the outlook are high, mainly owing to uncertainties on the extent of global financial distress and its impact on consumer and producer confidence; risks broadly balanced.
  - The external current account surplus remains large.

*Source: Appendix I. Netherlands: Fund Relations; Appendix II–IV; Statement by the IMF Staff Representative; Public Information Notice No. 08/64 (content as provided).*

### conclusion that Dutch competitiveness is satisfactory. Thus, standard real effective exchange

### _cr08171 - conclusion that Dutch competitiveness is satisfactory. Thus, standard real effective exchange

### Competitiveness and external sector
- Conclusion: Dutch competitiveness is satisfactory; standard real effective exchange rates have been relatively stable in recent years.
- CGER application: the Consultative Group on Exchange Rates (CGER) methodology suggests that the real exchange rate is broadly in equilibrium.
- External performance:
  - Rapid export growth implies external competitiveness is not at stake, though sectoral analyses capture some early signs of erosion.
- Selected balance of payments indicators (percent of GDP unless otherwise indicated):
  - Trade balance: 6.7 (2004), 7.1 (2005), 6.7 (2006), 6.6 (2007), 6.2 (2008), 5.7 (2009)
  - Current account: 7.5 (2004), 7.2 (2005), 8.3 (2006), 6.6 (2007), 5.9 (2008), 5.6 (2009)
  - Exports of goods and services (level, percent of GDP): 64.2 (2004), 67.6 (2005), 70.8 (2006), 73.7 (2007), 76.5 (2008), 79.4 (2009)
    - Exports volume, growth (percent): 8.0 (2004), 6.1 (2005), 7.3 (2006), 7.0 (2007), 6.5 (2008), 6.3 (2009)
  - Imports of goods and services (level, percent of GDP): 56.7 (2004), 59.2 (2005), 62.8 (2006), 65.5 (2007), 68.5 (2008), 71.8 (2009)
    - Imports volume, growth (percent): 6.2 (2004), 5.2 (2005), 9.0 (2006), 7.1 (2007), 7.4 (2008), 7.6 (2009)
  - Net oil exports (billions of US$): -1.6 (2004), -1.8 (2005), -0.9 (2006), 0.6 (2007), 0.0 (2008), 1.6 (2009)
  - Net foreign direct investment: -4.0 (2004), -13.9 (2005), -5.8 (2006), -4.8 (2007), -3.7 (2008), -3.6 (2009)
  - Official reserves, excl. gold (US$ billion, as of January for 2008): 10.7 (2004), 9.0 (2005), 10.8 (2006), 10.7 (2007), 10.6 (2008)

### Fiscal performance and long-term sustainability
- Recent fiscal stance:
  - Overall surplus unchanged at ½ percent of GDP in 2007.
  - With output above potential, the structural balance slipped by about ½ percent of GDP in 2007.
- Fiscal strengths and risks:
  - Declining government debt ratio, strong fully-funded pillar of the pension system.
  - Population aging is projected to increase government expenditure by some 7 percentage points of GDP in the coming decades and, absent retrenchment or growth-enhancing reforms, could render public accounts unsustainable.
- Public finance indicators (percent of GDP):
  - General government balance: -1.9 (2004), -0.2 (2005), 0.6 (2006), 0.6 (2007), 1.1 (2008), 1.4 (2009)
  - Structural balance: -1.2 (2004), -0.2 (2005), 1.0 (2006), 0.4 (2007), 0.7 (2008), 1.3 (2009)
  - General government debt: 52.4 (2004), 52.4 (2005), 48.0 (2006), 46.0 (2007), 43.6 (2008), 40.7 (2009)
- Executive Board guidance and recommendations:
  - Given above-potential output and tight labor market, a somewhat tighter fiscal stance for 2008 and 2009 would be appropriate for sustainability and cyclical reasons.
  - If growth is markedly lower than projected, automatic stabilizers should be allowed to operate fully.
  - Support for the government’s medium-term structural surplus target of 1 percent of GDP; most Directors saw scope for further gradual improvement in the structural primary balance (net of gas proceeds).
  - Fiscal adjustment should rely on spending restraint and broadening the tax base, given relatively large tax wedges on labor income.
  - Possible savings and reforms include: controlling health care spending, improving public sector efficiency, increasing the effective retirement age, reducing unemployment benefits, and increasing transparency of tax expenditures.

### Labor market and structural reforms
- Long-term challenges:
  - Imminent population aging will shrink the working-age population starting early in the next decade.
  - Comparatively low productivity growth could challenge long-term fiscal sustainability and external competitiveness.
- Policy recommendations:
  - Early progress on labor and product market reforms to raise employment and stimulate faster productivity gains.
  - Reduce effective marginal tax rates on second family earners; target tax incentives to induce participation by the elderly.
  - Tighten enforcement of work availability requirements and reassessments of disability status.
  - Further liberalize employment protection legislation and enhance labor mobility.
  - Carefully liberalize barriers to entrepreneurship and product market regulation to facilitate innovative firms and the use of productivity-enhancing information technologies.
- Authorities’ measures highlighted in the Statement by Age Bakker:
  - Increased budget for childcare; obligation for primary schools to arrange pre- and after-school childcare.
  - Planned changes in law for young disabled and abolition of social assistance for people under 27 (income support for education if needed).
  - Introduction of wage-subsidies for ‘participation jobs’.
  - Change in tax credit for secondary earners to reduce the effective marginal tax rate.
  - A commission to analyze further labor market reforms, with a report to be published in early June.

### Financial sector resilience and risks
- Overall assessment:
  - Financial system generally resilient to recent market turmoil; supervisory and regulatory framework enhanced.
  - Stress tests suggest banks can withstand quite strong shocks associated with ongoing financial turbulence.
  - Risk-weighted capital ratios comfortable; return on assets remains low.
- Specific vulnerabilities:
  - Mortgage lending has slowed, but outstanding stock remains among the highest in relation to GDP in mature markets due to policy-induced distortions—especially tax deductibility of mortgage interest payments—exposing households to interest rate and housing price risks.
  - High household mortgage indebtedness and house price developments warrant careful monitoring.
  - Large and increasing loan-to-value (LTV) ratios on new mortgages noted by staff.
- Supervisory and regulatory responses:
  - Renewed Mortgage Lenders’ Code of Conduct in force in 2007; AFM announced tightened supervision on excessive mortgage lending and compliance with the Code.
  - Recommendation: regulatory action to reduce high LTV ratios, improve measurement of related collateral, and fine-tune capital requirements for loans with different risks.
  - Gradual removal of mortgage interest deductibility would help decrease loan-to-value ratios and lower household vulnerability to house price swings and interest rate shocks.
  - Importance of strengthening cooperation and information-sharing among supervisors in home and host countries, greater transparency in reporting complex products, and increasing cost efficiency and equity capital.
- Cross-border supervision challenges:
  - The takeover of a large bank (ABN AMRO) by an international consortium exemplifies rising challenges for cross-country supervision.
  - Close cooperation with UK, Spanish, Belgian authorities; joint risk assessments for Fortis; bilateral MOU with Belgium on crisis management; EU-wide MOU on financial stability to be published.

### Executive Board assessment and outlook
- Directors’ view:
  - Sizeable fiscal consolidation and stability-oriented macroeconomic policies, complemented by broad-based structural reforms, underpinned extended strong growth outperforming the EU average and shielded the economy from recent global financial turmoil.
  - Near-term prospects remain favorable despite expected deceleration following the U.S. slowdown; real GDP expected to continue expanding above the EU average.
  - Outlook subject to greater-than-usual uncertainty.
- Policy priorities emphasized by Directors:
  - Make early progress on labor and product market reforms to raise employment and productivity.
  - Frontload fiscal adjustment where feasible to limit the size of the needed fiscal correction and distribute the burden across generations.
  - Rely on spending restraint and tax-base broadening for fiscal adjustment.
  - Increase transparency of tax expenditures.
  - Manage growing cross-border financial integration risks with stronger supervisory cooperation.
- PIN note: the staff report for the 2008 Article IV Consultation with the Kingdom of the Netherlands is available.

### Selected macroeconomic indicators (annual values)
- Real economy (change in percent):
  - Real GDP: 2.2 (2004), 1.5 (2005), 3.0 (2006), 3.5 (2007), 2.1 (2008 1/ staff projections), 1.6 (2009 1/ staff projections)
  - Domestic demand: 0.6 (2004), 0.9 (2005), 3.4 (2006), 2.6 (2007), 2.3 (2008 1/), 1.2 (2009 1/)
  - CPI (harmonized): 1.4 (2004), 1.5 (2005), 1.7 (2006), 1.6 (2007), 2.4 (2008 1/), 1.8 (2009 1/)
  - Unemployment rate (in percent): 4.9 (2004), 5.0 (2005), 4.1 (2006), 3.4 (2007), 3.0 (2008 1/), 3.0 (2009 1/)
  - Gross national saving (percent of GDP): 26.5 (2004), 26.2 (2005), 28.1 (2006), 26.7 (2007), 25.8 (2008 1/), 25.1 (2009 1/)
  - Gross domestic investment (percent of GDP): 19.0 (2004), 19.1 (2005), 19.7 (2006), 20.1 (2007), 19.9 (2008 1/), 19.5 (2009 1/)
- Interest rates (percent, as of January for 2008):
  - Money market rate: 2.1 (2004), 2.2 (2005), 3.1 (2006), 4.3 (2007), 4.5 (2008 1/)
  - Government bond yield: 4.1 (2004), 3.4 (2005), 3.8 (2006), 4.3 (2007), 4.1 (2008 1/)
- Exchange rate:
  - U.S. dollar per euro: 1.34 (2004), 1.19 (2005), 1.32 (2006), 1.46 (2007), 1.47 (2008 1/), 1.48 (2009 1/)
  - Nominal effective rate (2000=100): 107.6 (2004), 107.7 (2005), 108.2 (2006), 110.2 (2007), 113.1 (2008 1/)
  - Real effective rate (2000=100, based on relative normalized unit labor costs): 112.6 (2004), 112.3 (2005), 112.6 (2006), 115.3 (2007), 119.4 (2008 1/)

### Statement by Age Bakker, Executive Director for the Kingdom of the Netherlands — Netherlands (May 21, 2008) — key points
- General:
  - Dutch economy performed well: satisfactory growth, low inflation and unemployment, strong fiscal performance; broad-based expansion expected to slow in 2008.
  - IMF growth forecast of 2.1 for 2008 described as cautious given a 1.9 percentage point growth carry-over from 2007 and first quarter data.
  - WEO 2008 cross-country housing analysis overstated Dutch house price overvaluation relative to Dutch-specific studies.
- Fiscal policy:
  - Pension assets amount to 176% of GDP (December 2007).
  - Debt ratio reduced from close to 80% in the mid-nineties to below 50% of GDP in 2007; continued surpluses expected to bring debt ratio below 40% in 2009.
  - Authorities set a target of a structural surplus of 1% of GDP in 2011.
- Financial sector:
  - New supervisory ‘twin peaks model’ introduced in 2004 (DNB for systemic/prudential supervision; AFM for conduct-of-business).
  - DNB intensified banks’ liquidity monitoring during the market turbulence; stress tests confirmed robustness of bank safety margins.
  - Up to Q1 2008, bank lending to households and firms not materially affected; lending to households gradually down since 2006; lending to firms increasing strongly.
  - LTV ratios stabilized since early 2006; buildup of assets in insurance and savings accounts; high share of long-term fixed-rate mortgages limits interest-rate shock impact on debt service costs.
  - Lower profitability of banks attributed to lower risk-taking and intensified competition from cross-border integration.
  - Cooperation and MOUs in place regarding ABN AMRO takeover and Fortis; EU-wide MOU on financial stability to be published.

*Source: IMF staff report and Executive Board assessment for the 2008 Article IV Consultation with the Kingdom of the Netherlands (Netherlands).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08171.pdf_