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### Outlook — An uneven balance sheet recovery
- GDP: contracted in Q1 2014, expanded in Q2 by 0.7 percent (q/q), led by growing exports.
- Growth projections:
  - 0.8 percent this year (2014) — deleveraging pressures expected to keep growth low.
  - 1.2 percent in 2015 — supported by rising exports and a modest recovery in housing prices.
  - Medium-term average growth: 1.5 percent, compared to 2.3 percent during 2000-07.
- Investment: projected to remain sluggish due to weak domestic demand and reduced euro area growth.
- High-frequency indicators: PMI and industrial production point to continued expansion at a slower pace.
- Inflation and labor market:
  - Unemployment rate: 7.2 percent in 2014, some 2 percentage points above its long term average.
  - Large output gap: 4½ percent of GDP.
  - Core inflation pushed close to zero, raising real interest rates and the burden of household debt.
- National accounts: In March 2014, Statistics Netherlands started reporting under ESA 2010; GDP in current prices is nearly 8 percent larger than under ESA 95.

### Deleveraging and household debt overhang
- Housing prices: real decline of 27 percent; have held steady over the last year, halting the decline in household wealth.
- Household leverage:
  - Debt to income ratios still around 300 percent.
  - Nearly double levels in the early 2000s.
- Loss of housing wealth: about 60 percent of GDP, concentrated mainly among younger cohorts.
- Households with negative home equity: nearly two-thirds of mortgages among younger cohorts are underwater.
- Consumption dynamics:
  - Consumption still contracting on an annual basis as indebted households continue to save.
  - Private consumption is more closely related to movements in house prices than to disposable income.
- Banking sector vulnerability: NPLs in SME loans have reached 6 percent of total loans.

### The external current account surplus — the Puzzle
- Current account surplus:
  - In surplus since 1981.
  - Reached 10 percent of GDP in 2013.
- Drivers of the surplus:
  - Net lending of Dutch non-financial corporations (NFCs) has been the main driver over the past decade.
  - Corporate surpluses driven by strong profits and stagnant investment raised the current account from around 4 percent of GDP in the late 1990s to above 10 percent of GDP.
  - Trade balance: reached 7½ percent of GDP over 2010-13, reflecting the Netherlands’ role as a global trade hub for multinationals and re-exports.
  - A favorable tax environment (lower tax rate among OECD countries and specific tax provisions) has supported trade and FDI (listed provisions include: a large network of tax treaties, taxation mechanisms protecting exporters’ cash flow, advance tax rulings, reduced taxes on intangibles, favorable group financing regime, and protective rules on netting of profits and losses between affiliates).
  - Accounting/statistical factors: introduction of Intra-stat reporting in 2003 and the statistical correction (reaching nearly 1 percent of GDP in 2013) may have contributed to the rising surplus.
- Net international investment position (NIIP): strengthened since 2008 to nearly 40 percent of GDP, mostly due to higher FDI and contraction in banking sector liabilities (related to unwinding correspondent banking positions).
- Projection: current account balance projected to remain above pre-crisis levels mainly due to weak domestic demand.
- Policies to reduce external imbalance: structural reforms to raise productivity, progress in repairing household balance sheets and banking system, a slower pace of fiscal consolidation and a shift towards more productive investment.

### Risks to the outlook (Risk Assessment Matrix highlights)
- Overall risk bias: mainly on the downside; risks can interact and cause regional/global spillovers.
- Key risks and transmission channels:
  - Geopolitical tensions and euro area weakness:
    - Escalation of Russia-Ukraine crisis (more sanctions or higher fuel prices) would hurt via indirect spillovers and financial linkages.
    - Russia: fifth largest exporter to the Netherlands (supplying mostly crude oil and minerals).
    - Dutch FDI in Russia: sizeable (10 percent of GDP), mainly in the energy sector.
    - Netherlands exposed to euro area weakness: 60 percent of Dutch exports go to the euro area.
    - Outward spillovers: via Dutch banks’ exposures in Germany and the United States and links to global trade finance.
  - A decline of house prices and low inflation:
    - House prices are a key driver of private consumption; an unexpected decline would weaken household balance sheets and spending.
    - Low inflation over the medium term would exacerbate real household debt burden and increase the risk of disorderly deleveraging.
  - Financial stress:
    - Further weakness in housing prices or SME loan problems (NPLs at 6 percent) could spill over to banks and accelerate deleveraging.
    - Dutch banks’ large wholesale funding needs mean domestic shocks could prompt banks to reduce cross-border exposures.
  - Recovery in net wealth (upside):
    - Faster pick up in house prices or lower energy prices could increase household net wealth and incomes.
- RAM policy responses examples:
  - Refrain from additional fiscal tightening; maintain adherence to medium-term structural fiscal targets.
  - Implement comprehensive strategies to reduce household debt overhang.
  - Shift to neutral fiscal stance and rebalance labor market tax wedge.
  - Deregulate housing market.
  - Strengthen bank capital buffers; ensure sufficient capital and liquidity buffers.
  - Offer liquidity support to SMEs and exporters if Ukraine-Russia related sanctions lead to a credit squeeze.
  - Ease access to liquidity; accelerate structural reforms to improve productivity (labor and product markets); strategy to assist SMEs.

### Authorities’ views and policy actions
- Authorities’ assessment:
  - Saw domestic demand playing a stronger role in supporting the recovery; recovery arrived earlier than expected.
  - Stabilizing housing prices and a strong pickup in transactions (transactions up nearly 40 percent (y/y)) were cited as drivers.
  - Policy measures to stabilize housing market and reforms to tax, labor and pension systems seen as helping to lift confidence and activity.
  - Reduction in pension premiums and temporary gift tax exemptions boosted disposable income, which increased for the first time since 2007.
  - On lower inflation, authorities emphasized falling global commodity prices as driving headline prices and judged deflation risk as low given continued rise in real wages.
  - Recent ECB liquidity support measures expected to support prices mainly through exchange rate effects.
- Divergent views on household debt drag:
  - Authorities generally more sanguine on the headwinds from household deleveraging, citing studies finding younger households increased savings with small overall impact on consumption.
  - Others noted broader negative externalities: reduced labor mobility and constrained credit through lower collateral values.
- On the current account surplus:
  - Authorities attributed the surplus to multinational profits and re-exports, household deleveraging, and did not expect these to subside in the near term.
  - Saw few signs of a significantly undervalued exchange rate as inflation pressures remain weak and real wages are rising.
  - Agreed that policies to address household debt overhang and increase investment, especially by SMEs, would over the longer term reduce the surplus.

### Policies to promote orderly deleveraging and support the recovery
- Recent government steps taken:
  - Addressed the housing market and supported indebted households.
  - Implemented pension and labor reforms.
  - Policies regarding mortgages have stabilized expectations and supported a pickup in housing prices and transactions.
  - Reforms to strengthen the financial system and assist SMEs have helped boost confidence, increase policy certainty, and support the nascent recovery.
- Recommended measures (selected):
  - Encourage more reprofiling of underwater mortgages and facilitate out-of-court debt workouts.
  - Reduce the stigma of personal bankruptcy; ease restrictions that deter use of bankruptcy for insolvent borrowers.
  - Facilitate transfers between generations (e.g., tax-free monetary gifts) to assist younger indebted cohorts.
  - Strengthen bank capital and liquidity buffers; frontload capital raising before 2019 and rely on private sources and suspended dividends rather than cutting credit.
  - Adopt ambitious medium-term targets for reducing LTV ratios and mortgage interest deductibility.
  - Deregulate the private rental market, ease zoning regulations, and reform GFIs to reduce contingent fiscal liabilities.
  - Improve SME access to credit via enhanced credit information sharing and development of credit bureau covering positive and negative information.

### Box 2 — Deleveraging and Household Debt Overhang (key points)
- Housing wealth shock and consumption:
  - Aggregate housing wealth reduced by approximately 60 percent of GDP; contraction impeded consumption growth.
- Distributional effects and leverage:
  - Losses in home equity greater among highly leveraged younger house owners.
  - Leverage multiplier in 2011: approximately 12 for highly levered house owners below 45 years; 1.8 for older ones.
  - Currently, approximately two thirds of younger households have negative housing equity.
- Duration and drivers of deleveraging:
  - Under no new policies deleveraging is slow and would be a drag on consumption over the medium term.
  - Staff simulations: under current house prices and deleveraging trends, it would take about 10 years before household leverage ratios return to their pre-crisis levels.
- Intergenerational rebalancing (simulation result):
  - Reduction of pension contributions could accelerate deleveraging for younger cohorts by approximately fifty percentage points in the outstanding debt to income ratio over a ten year horizon; could shorten deleveraging by one to three years when combined with rebalancing pension contributions.
  - Authorities reduced the annual pension accrual rate from 2.15 to 1.875 percent, starting in 2015. The accrual rate was already lowered from 2.25 to 2.15 percent in 2014.
- Banking sector capital, funding, and resolution:
  - Since end-2013, Dutch banks have raised €8.5 billion in capital.
  - Under the ECB’s Comprehensive Assessment, Dutch banks were found not to have a capital shortfall.
  - Dutch banks: capital-asset ratio of 4.8 percent and loan-to-deposit ratio of 133 percent.
  - Authorities estimate banks need to further raise €20 billion in capital by 2019 to meet Basel requirements, mainly through retained earnings.
  - Footnote estimate: shortfall in banking capital would reach €3.2-4.3 billion, depending on the pace of investment recovery.
  - DNB will become the resolution authority for banks in the Netherlands with BRRD and SRM in place from 2015.
- Macroprudential policy on housing:
  - Authorities’ policies: reduce LTVs on new mortgages to 100 percent by 2018 and allow MID only for new fully amortizing loans.
  - Recommendation: aim for faster LTV reduction beyond 2018, eventually reaching 80 percent.
  - Average LTV for new mortgages has declined to around 90 percent.
- NHG and NHI:
  - NHG-related contingent liabilities amount to around 27 percent of GDP.
  - Recommendations: shift NHG to risk-based pricing and lower maximum guarantee threshold; avoid expanding fiscal risks when packaging NHG-backed bonds through NHI.

### Box 3 — Reforming Social Housing Corporations (key points)
- Role and scale:
  - SHCs manage 2.4 million dwellings or 34 percent of the total stock; social housing accounts for nearly 80 percent of the rental sector.
  - About 420 SHCs dominate the rental market.
  - Housing corporations constructed 60 percent of all new dwellings in 2011.
  - Average waiting time for social housing: Amsterdam 8 years, The Hague 6 years.
- Governance, funding, and public support:
  - Since 1995, SHCs fund themselves through rents and other real-estate activities.
  - At end-2013, housing corporations had borrowed about 14 percent of GDP (€86.2 billion) from the WSW.
- Governance shortcomings and reforms:
  - Shortcomings identified in governance and transparency; top housing corporation losses in 2012 prompted strengthened oversight.
  - Proposed new instruments: debt-equity swaps, equity loans for home buyers, futures contracts to insure against idiosyncratic house price drops.
  - Authorities agreed to gradually ease restrictions on the private rental market; measures include increasing rents for higher income dwellers, encouraging sale of social dwellings, and raising municipalities’ share of property taxes from 2016.
- NHG adjustments:
  - Authorities reduced the maximum value of insured properties and increased the insurance premium.
  - Since January 2014 the NHG exposure has been reduced to 90 percent of the claims.
  - From January 2015, 15 bps of the mortgage insurance premium will be set aside to safeguard against the risk of excessive defaults.

### Fiscal, external, and macro-financial indicators (selected figures and projections)
- External and macro:
  - NIIP estimated at 53 percent of GDP in 2013; foreign assets 495 percent of GDP and liabilities 442 percent of GDP (staff calculations).
  - Current account: reached 10.2 percent of GDP in 2013; staff assessment places the cyclically-adjusted current account surplus at 9.3 percent of GDP and a current account norm at 5.0 percent of GDP. Staff assessment of the current account gap is in the range of 0-4 percent of GDP.
  - Real exchange rate: staff assessment that the real exchange rate is below the level consistent with fundamentals and desirable policy settings by 0–10 percent.
- Fiscal and macro projections (selected):
  - Net lending/borrowing (general government): -3.7 (2012), -2.3 (2013), -2.4 (2014), -2.2 (2015) (percent of GDP).
  - Output gap: -3.0 (2012), -4.4 (2013), -4.4 (2014), -3.9 (2015) (percent of potential output).
  - Consumer price index (HICP) year average: 2.8 (2012), 2.6 (2013), 0.5 (2014), 0.7 (2015).
  - Unemployment rate (Eurostat definition): 5.3 (2012), 6.7 (2013), 7.2 (2014), 6.9 (2015).
  - Current account balance (percent of GDP): 8.9 (2012), 10.2 (2013), 9.8 (2014), 9.4 (2015).
  - General government gross debt (percent of GDP): 66.5 (2012), 68.6 (2013), 69.3 (2014), 69.8 (2015).
- Public debt DSA selected projections:
  - Nominal gross public debt (percent of GDP): 54.3 (2012), 66.5 (2013), 68.6 (2014), 69 (2015), 70 (2016), 69 (2017), 68 (2018), 67 (2019).
  - Public gross financing needs (percent of GDP): -0.1 (2012), 3.7 (2013), 2.3 (2014), 6.7 (2015), 11.6 (2016), 10.3 (2017), 12.9 (2018), 11.2 (2019).
  - Real GDP growth (percent): 1.5 (2012), -1.6 (2013), -0.7 (2014), 0.8 (2015), 1.2 (2016), 1.5 (2017), 1.6 (2018), 1.8 (2019).
  - Inflation (GDP deflator, percent): 1.4 (2012), 1.3 (2013), 1.1 (2014), 0.5 (2015), 0.5 (2016), 0.8 (2017), 1.1 (2018), 1.1 (2019).
  - Effective interest rate (percent): 4.2 (2012), 2.8 (2013), 2.4 (2014), 1.2 (2015), 1.2 (2016), 1.2 (2017), 1.0 (2018), 2.0 (2019).
- DSA stress-test highlights:
  - Growth shock: real GDP growth rates lower by one standard deviation over 2015-16 (2.4 percentage points below baseline); debt-to-GDP ratio initially increases to 78 percent in 2016 under this shock.
  - Primary balance shock: 1.7 percent deterioration in primary balance over 2015-16; raises debt-to-GDP ratio to 73 percent in 2016.
  - Contingent liability shock: assumes a large shock that wipes out 10 percent of loans to the private sector; reduces primary balance in 2015 by approximately 20 percentage points and temporarily raises gross financing needs above 30 percent of GDP.
  - In all stress-test scenarios, the debt remains on a downward trajectory over the medium term after initial increases.

### Executive Board assessment and policy priorities
- Directors welcomed the continued economic recovery and pickup in exports and house prices.
- Key constraints: consumption remains sluggish due to high household indebtedness and weak incomes; inflation remains low.
- Policy priorities urged:
  - Orderly deleveraging of households (facilitate reprofiling, out-of-court workouts, intergenerational transfers).
  - Reform of the tax and pension systems.
  - Broader structural reforms to improve housing and labor markets, productivity, and potential growth.
  - Ensure banks have strong capital and liquidity buffers; complete national resolution and backstopping arrangements.
  - Macroprudential housing measures with ambitious medium-term targets to reduce LTV ratios and mortgage interest deductibility.
  - Maintain a neutral fiscal stance focused on structural targets; consider modest near-term support where appropriate.
  - Improve SME credit availability via better credit information and alternative financing sources.

### Authorities’ statements (selected)
- Authorities are more positive than staff on fundamentals; see recovery as fragile but ongoing with exports driving growth and domestic demand improving in 2015.
- On household debt:
  - Contest that “debt overhang” is too strong a label given high aggregate net wealth (pensions, savings).
  - Note NHG backing for many underwater mortgages and low delinquency rates.
  - Disposable income expected to rise by 2% in 2014 and 1% in 2015.
  - If nominal house prices rise by 2 percent annually from 2014, prices would return to pre-crisis level in ten years and three quarters of underwater mortgages would be “above water”.
- On LTV and MID:
  - Agree on gradual LTV reduction importance but caution against too rapid reductions that could hamper recovery.
  - New MID regime for new mortgages phased in and will contribute to lowering LTV ratios after 2018.
- On social housing, pensions, and fiscal stance:
  - Support scaling back public support for SHCs and developing the private rental sector.
  - Pension reform should consider transition costs and intergenerational fairness.
  - Government committed to Stability and Growth Pact rules while noting improved public finances.

*Source: KINGDOM OF THE NETHERLANDS—NETHERLANDS, INTERNATIONAL MONETARY FUND (section 1).*

### 1. The Puzzle of the Netherlands’ Current Account Surplus _______________________________________ 6

### 1. The Puzzle of the Netherlands’ Current Account Surplus

### Outlook — An uneven balance sheet recovery
- GDP: contracted in Q1 2014, expanded in Q2 by 0.7 percent (q/q), led by growing exports.
- Growth projections:
  - 0.8 percent this year (2014) — deleveraging pressures expected to keep growth low.
  - 1.2 percent in 2015 — supported by rising exports and a modest recovery in housing prices.
  - Medium-term average growth: 1.5 percent, compared to 2.3 percent during 2000-07.
- Investment: projected to remain sluggish due to weak domestic demand and reduced euro area growth.
- High-frequency indicators: PMI and industrial production point to continued expansion at a slower pace.
- Inflation and labor market:
  - Unemployment rate: 7.2 percent in 2014, some 2 percentage points above its long term average.
  - Large output gap: 4½ percent of GDP.
  - Core inflation pushed close to zero, raising real interest rates and the burden of household debt.
- National accounts: In March 2014, Statistics Netherlands started reporting under ESA 2010; GDP in current prices is nearly 8 percent larger than under ESA 95.

### Deleveraging and household debt overhang
- Housing prices: real decline of 27 percent; have held steady over the last year, halting the decline in household wealth.
- Household leverage:
  - Debt to income ratios still around 300 percent.
  - Nearly double levels in the early 2000s.
- Loss of housing wealth: about 60 percent of GDP, concentrated mainly among younger cohorts.
- Households with negative home equity: nearly two-thirds of mortgages among younger cohorts are underwater.
- Consumption dynamics:
  - Consumption still contracting on an annual basis as indebted households continue to save.
  - Private consumption is more closely related to movements in house prices than to disposable income.
- Banking sector vulnerability: NPLs in SME loans have reached 6 percent of total loans (noted as a risk source).

### The external current account surplus — the Puzzle (Box summary)
- Current account surplus:
  - In surplus since 1981.
  - Reached 10 percent of GDP in 2013.
- Drivers of the surplus:
  - Net lending of Dutch non-financial corporations (NFCs) has been the main driver over the past decade.
  - Corporate surpluses driven by strong profits and stagnant investment raised the current account from around 4 percent of GDP in the late 1990s to above 10 percent of GDP.
  - Trade balance: reached 7½ percent of GDP over 2010-13, reflecting the Netherlands’ role as a global trade hub for multinationals and re-exports.
  - A favorable tax environment (lower tax rate among OECD countries and specific tax provisions) has supported trade and FDI (listed provisions include: a large network of tax treaties, taxation mechanisms protecting exporters’ cash flow, advance tax rulings, reduced taxes on intangibles, favorable group financing regime, and protective rules on netting of profits and losses between affiliates).
  - Accounting/statistical factors: introduction of Intra-stat reporting in 2003 and the statistical correction (reaching nearly 1 percent of GDP in 2013) may have contributed to the rising surplus.
- Net international investment position (NIIP): strengthened since 2008 to nearly 40 percent of GDP, mostly due to higher FDI and contraction in banking sector liabilities (related to unwinding correspondent banking positions).
- Projection: current account balance projected to remain above pre-crisis levels mainly due to weak domestic demand.
- Policies to reduce external imbalance: structural reforms to raise productivity, progress in repairing household balance sheets and banking system, a slower pace of fiscal consolidation and a shift towards more productive investment.

### Risks to the outlook (Risk Assessment Matrix highlights)
- Overall risk bias: mainly on the downside; risks can interact and cause regional/global spillovers.
- Key risks and channels:
  a. Geopolitical tensions and euro area weakness:
     - Escalation of Russia-Ukraine crisis (more sanctions or higher fuel prices) would hurt via indirect spillovers and financial linkages.
     - Russia: fifth largest exporter to the Netherlands (supplying mostly crude oil and minerals).
     - Dutch FDI in Russia: sizeable (10 percent of GDP), mainly in the energy sector.
     - Netherlands exposed to euro area weakness: 60 percent of Dutch exports go to the euro area.
     - Outward spillovers: via Dutch banks’ exposures in Germany and the United States and links to global trade finance.
  b. A decline of house prices and low inflation:
     - House prices are a key driver of private consumption; an unexpected decline would weaken household balance sheets and spending.
     - Low inflation over the medium term would exacerbate real household debt burden and increase the risk of disorderly deleveraging.
  c. Financial stress:
     - Further weakness in housing prices or SME loan problems (NPLs at 6 percent) could spill over to banks and accelerate deleveraging.
     - Dutch banks’ large wholesale funding needs mean domestic shocks could prompt banks to reduce cross-border exposures.
  d. Recovery in net wealth (upside):
     - Faster pick up in house prices or lower energy prices could increase household net wealth and incomes.
- Policy responses recommended in RAM (examples listed):
  - Refrain from additional fiscal tightening; maintain adherence to medium-term structural fiscal targets.
  - Implement comprehensive strategies to reduce household debt overhang.
  - Shift to neutral fiscal stance and rebalance labor market tax wedge.
  - Deregulate housing market.
  - Strengthen bank capital buffers; ensure sufficient capital and liquidity buffers.
  - Offer liquidity support to SMEs and exporters if Ukraine-Russia related sanctions lead to a credit squeeze.
  - Ease access to liquidity; accelerate structural reforms to improve productivity (labor and product markets); strategy to assist SMEs.

### Authorities’ views and policy actions
- Authorities’ assessment:
  - Saw domestic demand playing a stronger role in supporting the recovery; recovery arrived earlier than expected.
  - Stabilizing housing prices and a strong pickup in transactions (transactions up nearly 40 percent (y/y)) were cited as drivers.
  - Policy measures to stabilize housing market and reforms to tax, labor and pension systems seen as helping to lift confidence and activity.
  - Reduction in pension premiums and temporary gift tax exemptions boosted disposable income, which increased for the first time since 2007.
  - On lower inflation, authorities emphasized falling global commodity prices as driving headline prices and judged deflation risk as low given continued rise in real wages.
  - Recent ECB liquidity support measures expected to support prices mainly through exchange rate effects.
- Divergent views on household debt drag:
  - Authorities generally more sanguine on the headwinds from household deleveraging, citing studies finding younger households increased savings with small overall impact on consumption.
  - Others noted broader negative externalities: reduced labor mobility and constrained credit through lower collateral values.
- On the current account surplus:
  - Authorities attributed the surplus to multinational profits and re-exports, household deleveraging, and did not expect these to subside in the near term.
  - Saw few signs of a significantly undervalued exchange rate as inflation pressures remain weak and real wages are rising.
  - Agreed that policies to address household debt overhang and increase investment, especially by SMEs, would over the longer term reduce the surplus.

### Policies to promote orderly deleveraging
- Recent government steps taken:
  - Addressed the housing market and supported indebted households.
  - Implemented pension and labor reforms.
  - Policies regarding mortgages have stabilized expectations and supported a pickup in housing prices and transactions.
  - Reforms to strengthen the financial system and assist SMEs have helped boost confidence, increase policy certainty, and support the nascent recovery.

*Source: KINGDOM OF THE NETHERLANDS—NETHERLANDS, INTERNATIONAL MONETARY FUND (section 1).*

### 11.      To secure a robust recovery, it will be important to build on these reforms to reduce

### 11.      To secure a robust recovery, it will be important to build on these reforms to reduce

### Context
- High household debt is central to the weak economy: a legacy of the housing crisis left a large household debt overhang, a distorted housing market, and leveraged banks that depress aggregate demand.
- Indebted homeowners have reduced consumption to repay debt, holding back investment demand.
- Banks with large mortgage portfolios are overleveraged and vulnerable to a growth shock or a cutoff in wholesale funding.
- Public recapitalization of the banks and various support of home ownership create risks for the fiscal sector.
- These factors have contributed to excess savings and growing external imbalances.

### Distribution of household balance sheets
- Aggregate household net wealth is high at 400 percent of GDP but is concentrated mainly among older generations with high pension savings and low mortgage debt.
- Younger households who purchased at the market peak remain heavily in debt; their deleveraging pressures, given a higher marginal propensity to consume, are a drag on personal consumption and on the economy’s ability to adjust and reallocate resources.
- Staff simulations: under current house prices and deleveraging trends, it would take about 10 years before household leverage ratios return to their pre-crisis levels (even longer for a new lower “equilibrium” debt ratio).
- During this deleveraging period, growth would remain subdued as reduced spending (higher savings) by low net wealth households more than offsets higher spending by older households.

### Comprehensive strategy to address household indebtedness
- Objective: raise household surpluses to pay down debt (flow problem) and alleviate debt burden among the young (stock problem), including through intergenerational transfers and more efficient workouts.
- Policies to assist younger cohorts with a higher propensity to consume would lift overall spending.

### Policy recommendations and measures discussed
- Increasing transfers between generations
  - A temporary tax exemption for monetary gifts of up to €100,000 was introduced last year to reduce mortgage debt and was used by more than 50,000 households.
  - Staff estimates suggest that around 0.4 percent of GDP has been transferred and likely contributed to the nascent housing recovery.
  - The measure expired at end-December; absent any extension, authorities could consider increasing the €50,000 limit for tax-free transfers, allowing gifts to all family members to be used to repay mortgage debt.
  - To help lower income groups, individuals could be allowed to spread payments over several years up to the limit.

- More reprofiling of underwater mortgages
  - Banks have taken steps to renegotiate mortgages with distressed borrowers, but progress on reprofiling debt has been slow.
  - Supervisors should encourage banks to remove restrictions and limits on prepayment and sequestered savings accounts to facilitate reprofiling into longer-term, amortizing mortgages.
  - Regulatory measures, such as higher risk weights on interest-only loans, could lead to greater price differentiation in favor of traditional annuity mortgages.

- Reducing the stigma of personal bankruptcy
  - Mortgages in Dutch law are full-recourse and easily enforceable, even in personal bankruptcies, which has kept mortgage defaults very low but limited use of the system for insolvent borrowers.
  - Easing restrictions on certain professions or constraints on financial services resulting from bankruptcy would encourage greater use of the system for the heavily indebted and reduce the stigma associated with bankruptcy.
  - Targeting a nominal debt repayment amount rather than a percent of income could encourage work and debt repayment under probation.
  - Greater use of out-of-court alternative dispute resolution mechanisms such as arbitration or mediation could help avoid foreclosure and personal bankruptcy.

### Authorities’ views and program design
- The authorities saw the temporary tax break on monetary gifts as having contributed to a revival in the housing sector.
- The program was designed to be temporary to bring forward spending and was allowed to expire as part of a broader effort to scale back exceptional support to the housing market.
- Authorities saw merit in expanding the general €50,000 exemption for tax-free transfers to give lower income groups more time to build up savings and benefit from the transfers.

*Source: Content unit _cr14327 - 11.*

### Box 2. Deleveraging and Household Debt Overhang

### Box 2. Deleveraging and Household Debt Overhang

### Housing wealth shock and consumption
- The deflation of the Dutch housing bubble has reduced the aggregate housing wealth by approximately 60 percent of GDP and impeded consumption growth.
- International comparison shows the influence of house prices on household consumption is particularly strong in the Netherlands; recent contractions of private consumption can be at least in part attributed to the loss in housing wealth and the debt overhang.
- House prices influence consumption through changes in net wealth of house owners; the strength of the effect depends on country specific characteristics.

### Distributional effects and leverage
- Losses in home equity have been greater among highly leveraged younger house owners than among the old.
- Younger households purchased houses near the peak and, due to high leverage, experienced larger declines in home equity.
- The loss in house equity equals the percentage change in house prices times the leverage multiplier; the leverage multiplier is equal to (1-LTV)^-1 and grows rapidly with leverage.
- In 2011, the leverage multiplier for highly levered house owners below 45 years of age was approximately 12 and only 1.8 for older ones.
- Currently, approximately two thirds of younger households have negative housing equity.

### Duration and drivers of deleveraging
- Duration of deleveraging depends on the magnitude of debt overhang and macroeconomic environment.
- Young buyers face a negative shock to housing wealth and low financial wealth, incentivizing increased savings to rebuild net wealth.
- Speed of debt overhang reduction depends on the rate of saving, income growth, inflation, and growth of house prices.
- A flow of funds analysis shows deleveraging is a slow process; under the assumption of no new policies it would be a drag on consumption over the medium term.

### Intergenerational rebalancing and simulated effects
- Reducing pension contributions could accelerate deleveraging of young households and reduce the negative effect on their consumption.
- Simulations show that, for younger cohorts, over a ten year horizon the reduction of the outstanding debt to income ratio could be accelerated by approximately fifty percentage points, should such transfers be implemented.
- Rebalancing pension contributions to an actuarially fair level while keeping the career-average accrual rate unchanged could shorten the duration of deleveraging for younger generations by one to three years by helping to lower debt faster and support demand.
- The authorities reduced the annual pension accrual rate from 2.15 to 1.875 percent, starting in 2015. The accrual rate was already lowered from 2.25 to 2.15 percent in 2014.
- Any more drastic measures such as using pension savings to pay down mortgages would need to be considered in the context of broader reforms to safeguard the fully funded system.

### Mortgage market outcomes, bankruptcy, and policy stance
- Despite a high share of underwater mortgages, default rates have remained low and are unlikely to rise; authorities saw little need to reprofile underwater mortgages on a large scale.
- Banks have encouraged switching from interest-only to longer-maturity amortizing mortgages but face challenges due to strong tax incentives to retain current loans (MID).
- Dutch personal bankruptcy code allows for a “fresh start”: discharge after meeting payment requirements for three years, plus education and training programs; mortgage debt relief is possible under discharge, though track record and stigma remain issues.
- Providing tax allowances for the buildup of home equity could encourage using pension savings to pay down mortgages.

### Banking sector capital, funding, and resolution
- Since end-2013, Dutch banks have raised €8.5 billion in capital.
- Under the ECB’s Comprehensive Assessment, Dutch banks were found not to have a capital shortfall.
- Dutch banks remain highly leveraged with a capital-asset ratio of 4.8 percent and a loan-to-deposit ratio of 133 percent, strongly reliant on wholesale funding.
- Authorities estimate banks need to further raise €20 billion in capital by 2019 to meet Basel requirements, mainly through retained earnings.
- Footnote estimate: shortfall in banking capital would reach €3.2-4.3 billion, depending on the pace of investment recovery.
- The national leverage ratio of 4 percent, the SIFI surcharge, and new requirements for the Deposit Guarantee Scheme and Single Resolution Fund were not fully accounted in banks’ targets.
- The DNB will become the resolution authority for banks in the Netherlands with the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation in place from 2015.

### Measures to support banking intermediation
- Supervisors should encourage banks to frontload capital raising plans before 2019 to ensure preparedness for Basel III and adequate capital to support lending in the recovery.
- Capital raising plans should be based on tapping private sources and suspending dividend payments, rather than cutting credit.
- Greater use of securitization and covered bonds could help reduce funding costs and mortgage and SME loan exposure; securitization faces challenges due to high LTVs, a large share of non-amortizing loans, and public mortgage insurance which push credit enhancement costs to a very high 6-15 percent.
- National arrangements for resolution and backstopping should be completed to safeguard financial stability.

### Macroprudential policy on housing
- Authorities’ policies to gradually reduce loan-to-value ratios (LTVs) on new mortgages to 100 percent by 2018 and allow mortgage interest deductibility (MID) only for new fully amortizing loans are appropriate to mitigate housing risks.
- Beyond 2018, authorities should aim for a faster pace of LTV reduction, eventually reaching 80 percent; clarifying the LTV path after 2018 would enhance regulatory certainty.
- The average LTV for new mortgages has declined to around 90 percent.
- Lower LTVs should be part of comprehensive housing reforms to promote intergenerational transfers, improve debt monitoring, and expand the private rental market.
- The Financial Stability Committee (FSC) will address housing related macro prudential measures in November.

### Pension funds and procyclicality
- Dutch pension funds should reduce the procyclical link between interest rates and payouts; the 2008 crisis shrank real pension fund assets by 11 percent and, together with low interest rates, increased liabilities triggering benefit reductions and increased contributions to restore coverage ratios above the regulatory minimum of 105 percent.
- To address procyclicality, encourage pension funds to hedge interest rate risk more aggressively and use more stable discount rates.
- Authorities prioritize translating reduced accrual rates into lower pension contributions as part of the pension reform whose second stage will be implemented in January 2015.
- More hedging would lower expected returns by increasing investment in treasury securities to better match assets to liabilities.

### Structural housing market reforms
- The Dutch private rental market is small, squeezed between an oversized social housing sector (owns nearly one in every three dwellings) and strong ownership demand fueled by full MID and other fiscal support.
- Authorities have raised rents for higher income individuals, shifted SHC rents closer to market levels, imposed a levy, and encouraged sale of dwellings into the non-regulated sector.
- Recommendations:
  - Scale back the SHC sector to focus on its social mandate and allow private rental market development.
  - Continue to raise taxes on SHCs, apply more rigorous and frequent means testing for eligibility, and complete the shift to market-based rents.
  - Scale back public guarantees for SHCs to core social tasks and replace with targeted direct subsidies to lower income groups to reduce fiscal contingent risks.
  - Lift price controls on rents to attract private investors and help expand the private rental market.
  - Ease zoning regulations to expand housing supply by incentivizing municipalities to open land for development and by elevating more zoning decisions to provinces or central government.
- The National Mortgage Guarantee (NHG) scheme insures lenders, sets flat below-market premiums, and NHG-related contingent liabilities amount to around 27 percent of GDP.
- Recommendations on NHG and NHI:
  - Shift to risk-based pricing and lower the maximum guarantee threshold to reduce distortions and contingent liabilities.
  - If packaging NHG-backed mortgage bonds through the National Mortgage Institute (NHI), avoid expanding fiscal risks beyond packaging of NHG-backed bonds.

*Source: International Monetary Fund (Box 2, Deleveraging and Household Debt Overhang).*

### Box 3. Reforming Social Housing Corporations in the Netherlands

### Box 3. Reforming Social Housing Corporations in the Netherlands

### Role and scale of Social Housing Corporations (SHCs)
- SHCs manage 2.4 million dwellings or 34 percent of the total stock and offer cheap housing to low and middle-income households.
- Social housing accounts for nearly 80 percent of the rental sector.
- In big cities, such as Amsterdam and Rotterdam, more than half of all dwellings are social.
- About 420 SHCs dominate the rental market.
- Most housing corporations were established before 1930, with the oldest ones founded in the second half of the 19th century.
- Housing corporations constructed 60 percent of all new dwellings in 2011.
- Housing corporations operate their dwellings within government rent-price regulation and tenure protection in various forms.
- Housing corporations manage tenures through a complex scoring system for dwellings and waiting lists; average waiting time for social housing in Amsterdam and The Hague is 8 and 6 years, respectively.

### Governance, funding, and public support
- The 1995 reform (“Brutering” or Balancing-out agreement) ended subsidies and public support to housing corporations and gave full ownership of the social housing stock to the SHCs.
- Since 1995, SHCs fund themselves through rents and other real-estate activities; selling dwellings allows SHCs to realize the latent value added on their books.
- SHCs rely on cross-subsidies and financial transfers among housing corporations, mainly from stronger to weaker SHCs.
- SHCs are incorporated as non-profit corporations under a Board of Directors, with a majority established as foundations.
- They are eligible for government guarantees when raising funding from the Guarantee Fund for Social Housing (WSW), and reduced prices for purchasing land from local governments.
- At end-2013, housing corporations had borrowed about 14 percent of GDP (€86.2 billion) from the WSW.

### Governance shortcomings and financial risks
- Some SHCs were found lacking proper governance and transparency.
- SHC Board of Directors are self-appointed with limited supervision by public authorities.
- SHCs often engage in activities beyond their core business, including risky non-real estate related investments.
- Large losses on derivative deals by the top housing corporation in 2012 prompted the authorities to strengthen oversight and enforce more stringent reporting.

### Proposed reforms, new instruments, and authorities’ actions
- New risk-sharing instruments could be introduced to protect homeowners:
  - Examples: debt-equity swaps for underwater mortgages, equity loans for home buyers, or futures contracts to insure against idiosyncratic drops in house prices.
  - Purpose: diversify housing risks across the economy and facilitate an orderly adjustment of household balance sheets.
  - Authorities could explore supporting these instruments by setting market standards, pricing benchmarks or offering GFI preferential treatment of such contracts.
- Authorities agreed on the need to gradually ease restrictions on the private rental market:
  - Measures already taken: increasing rents in the social housing sector for higher income dwellers and making the rent-setting mechanism less administrative and more market based.
  - Authorities encouraged the sale of social dwellings, including through a tax on social housing corporations.
  - Noted difficulty: introducing changes to SHC governance through legislative measures because SHCs are private entities.
- To encourage further housing developments, authorities increased the share of property taxes received by municipalities from 2016 onwards.
- Authorities noted that the lack of land for residential construction was not a binding constraint given unused land available for construction and low demand.
- Government exposure to housing risk through the NHG is set to decline:
  - Authorities reduced the maximum value of insured properties and increased the insurance premium.
  - Since January 2014 the NHG exposure has been reduced to 90 percent of the claims.
  - From January 2015, 15 bps of the mortgage insurance premium will be set aside to safeguard against the risk of excessive defaults.
  - Authorities cautioned against reducing further the NGH’s guarantee limit and raising its premium which could undermine the NHG’s social mandate to promote affordable housing.
- Authorities’ view on new financial risk-sharing instruments:
  - Saw benefits for households to hedge risk to their most important asset but noted this went against the push for greater simplicity in financial instruments.
  - Over time with a firm housing recovery and stronger balance sheets, banks could consider developing such instruments to help borrowers hedge their risks.

*Source: Box 3, _cr14327 - Box 3. Reforming Social Housing Corporations in the Netherlands_*

### 17.      Addressing the private debt overhang is key to securing a robust recovery. Faster

### _cr14327 - 17.      Addressing the private debt overhang is key to securing a robust recovery. Faster

### Private debt overhang and household balance sheets
- Faster progress in repairing household balance sheets would support a more robust and sustained recovery and reduce intergenerational imbalances.
- Policy options to address heavily indebted borrowers:
  - Encourage more reprofiling of underwater mortgages.
  - Reduce the stigma of personal bankruptcy.
  - Facilitate transfers between generations to support deleveraging while stimulating spending.

### Banking sector resilience and reform
- Dutch banks face pressures from the weak economy and their own need to deleverage.
- Strengthening bank resilience recommended:
  - Build stronger capital and liquidity buffers to ensure banks can support the recovery and household balance-sheet adjustment.
  - Further strengthen the framework for risk management and resolution.
  - Adopt more ambitious medium-term targets for reducing LTV ratios and mortgage deductibility to reduce housing risks.

### Housing market distortions and supply-side measures
- The Dutch housing market suffers from numerous distortions contributing to the debt overhang.
- Recommended reforms:
  - Deregulate the private rental market to ease pressures on home ownership.
  - Make the supply of land for residential construction more elastic.
  - Reform government-owned financial institutions (GFIs) to reduce contingent liabilities.

### Macro-fiscal framework and growth-supporting policy
- Supportive macro-fiscal and structural policies are needed to safeguard the recovery.
- Fiscal policy during deleveraging should focus on structural targets.
- Move to a medium-term budget framework to strengthen predictability and responsiveness of fiscal policy to shocks.
- The upcoming tax reform should reduce the debt bias and distortions in the VAT exemptions.
- Structural reforms to boost potential growth would support activity during the adjustment period.

### Access to credit for SMEs and information sharing
- Improving the quality and sharing of credit information would enhance the availability of credit for SMEs.
- Suggested measures:
  - Develop a credit bureau system to collect and share loan exposures, collateral, and payment history.
  - Ensure the system features both positive and negative information and covers nonfinancial and public agencies.
  - A credit bureau could contribute to greater standardization of SME loans and facilitate securitization.

### External sector and macroeconomic context (selected assessments)
- External position: NIIP estimated at 53 percent of GDP in 2013; foreign assets amounting to 495 percent of GDP and liabilities at 442 percent of GDP (staff calculations).
- Current account: reached 10.2 percent of GDP in 2013; staff assessment places the cyclically-adjusted current account surplus at 9.3 percent of GDP and a current account norm at 5.0 percent of GDP. Staff assessment of the current account gap is in the range of 0-4 percent of GDP.
- Real exchange rate: staff assessment that the real exchange rate is below the level consistent with fundamentals and desirable policy settings by 0–10 percent.
- Financial account: net FDI and portfolio outflows dominate; financial account likely to remain in deficit while the corporate sector invests substantially abroad.

### Fiscal and macroeconomic indicators (selected figures from source)
- Net lending/borrowing (general government): -3.7 (2012), -2.3 (2013), -2.4 (2014), -2.2 (2015) (percent of GDP).
- Output gap: -3.0 (2012), -4.4 (2013), -4.4 (2014), -3.9 (2015) (percent of potential output).
- Consumer price index (HICP) year average: 2.8 (2012), 2.6 (2013), 0.5 (2014), 0.7 (2015).
- Unemployment rate (Eurostat definition): 5.3 (2012), 6.7 (2013), 7.2 (2014), 6.9 (2015).
- Current account balance (percent of GDP): 8.9 (2012), 10.2 (2013), 9.8 (2014), 9.4 (2015).
- General government gross debt (percent of GDP): 66.5 (2012), 68.6 (2013), 69.3 (2014), 69.8 (2015).

### Progress on past IMF recommendations (Annex I highlights)
- Authorities implemented tighter macroprudential measures, differentiated rents in social housing by income, and structural reforms to improve labor market functioning.
- Housing and macroprudential: measures to increase supply of land via property tax revenue sharing with municipalities; increases in social housing rents for higher-income dwellers; no announced measures to phase in caps to the size of MID in nominal terms or to target MID to lower-income citizens.
- Financial sector: banks increased capital base, but leverage ratio remains comparatively high and more capital is needed to reach Basel III targets.
- Fiscal stance: 2013 Article IV recommended a more relaxed fiscal stance; authorities prioritized lowering the headline deficit below the SGP limit of 3 percent of GDP.
- Structural reforms: authorities proposed reforms to increase potential growth, including aligning employment conditions of the self-employed with regular employees; Netherlands set to reach R&D spending target of 2.5 percent by 2020.

### Institutional recommendation
- It is recommended that the next Article IV consultation be held in the usual 12-month cycle.

*Source: IMF staff report excerpt _cr14327 (Kingdom of the Netherlands—Netherlands).*

### Annex II. Public Debt Sustainability Analysis

### Annex II. Public Debt Sustainability Analysis

### Key findings and outlook
- Public debt-to-GDP ratio is forecast to peak at 70 percent of GDP in 2015 and decline steadily onwards to close to 66 percent by 2019.
- Public debt is expected to remain sustainable supported by recent fiscal consolidation and favorable growth.
- A negative growth shock represents the largest risk to the debt outlook and could increase the debt by about 8 percent of GDP in 2016.
- In all stress test scenarios, the debt remains on the downward trajectory over the medium term.
- Gross financing needs are projected to be between 10-13 percent of GDP in the medium term.
- Under all macro-fiscal stress tests, the debt-to-GDP ratio first increases in response to the shocks and afterwards declines over the medium term.

### Macroeconomic assumptions
- Growth is projected to reach [0.8] percent in 2014, driven mostly by expanding exports.
- Growth will average [1.3] percent over the medium term.
- Inflation is expected to be low in 2014-15 at between 0.5 and 0.7 percent and is projected to remain below 2 percent over the forecast horizon, reflecting weak domestic demand.
- The output gap will narrow but not close completely by 2019.
- The Netherlands’ level of government debt, which exceeds 60 percent of GDP, calls for using the higher scrutiny framework.

### Realism of baseline assumptions and forecast accuracy
- Staff’s forecasts of the relevant macroeconomic variables are broadly within the 27-75 interquartile range, indicating that there are few forecast outliers that could bias the analysis.
- Median forecast error for real GDP growth during 2005−2013: -0.45 percent.
- Median forecast error for the primary balance: 0.05.
- Median forecast error for inflation (GDP deflator): 0.16.

### Baseline scenario and stress-test results
- Baseline: debt-to-GDP ratio projected to decrease to 66 percent by 2019, after peaking at 70 percent of GDP in 2015.
- Strongest shocks to the baseline:
  - Real GDP growth shock: debt-to-GDP ratio initially increases to 78 percent in 2016 and declines thereafter.
  - Primary balance shock: elevates the debt-to-GDP ratio to 73 percent in 2016.
- Gross financing needs remain at or below 20 percent of GDP in most scenarios; the contingent liability shock temporarily increases financing needs above 30 percent of GDP.
- In the contingent liability shock, the primary balance is reduced in 2015 by approximately 20 percentage points (large but temporary increase in gross financing needs and gross public debt to GDP ratio).

### The main shocks (definitions and magnitudes)
- Growth shock:
  - Real output growth rates are lower by one standard deviation over 2015-16, that is, 2.4 percentage points below the baseline scenario.
  - The assumed decline in growth also lowers inflation by 0.6 percentage points over the same period.
- Primary balance shock:
  - Dual shock of lower revenues and rise in interest rate, leading to a 1.7 percent deterioration in primary balance over 2015-16.
  - This shock increases the debt-to-GDP ratio to 73 percent in 2016.
- Contingent liability shock:
  - Assumes an increase in the need to support the banking system due to a large shock that wipes out 10 percent of the loans to the private sector.
  - The shock reduces the primary balance in 2015 by approximately 20 percentage points.
  - Magnitude is large due to the large size of the Dutch banking system; represents a tail risk event.

### Selected quantitative indicators and projections (as published)
- Nominal gross public debt (in percent of GDP): 54.3 (2012), 66.5 (2013), 68.6 (2014), 69 (2015), 70 (2016), 69 (2017), 68 (2018), 67 (2019).
- Public gross financing needs (in percent of GDP): -0.1 (2012), 3.7 (2013), 2.3 (2014), 6.7 (2015), 11.6 (2016), 10.3 (2017), 12.9 (2018), 11.2 (2019), 11.1 (2020?) [table shows sequence].
- Public debt (in percent of potential GDP): 54.1 (2012), 64.5 (2013), 65.6 (2014), 66.3 (2015), 66.9 (2016), 67.0 (2017), 66.5 (2018), 66.2 (2019), 65.5 (2020?) [table shows sequence].
- Real GDP growth (in percent): 1.5 (2012), -1.6 (2013), -0.7 (2014), 0.8 (2015), 1.2 (2016), 1.5 (2017), 1.6 (2018), 1.8 (2019), 1.9 (2020?) [table shows sequence].
- Inflation (GDP deflator, in percent): 1.4 (2012), 1.3 (2013), 1.1 (2014), 0.5 (2015), 0.5 (2016), 0.8 (2017), 1.1 (2018), 1.1 (2019), 1.2 (2020?) [table shows sequence].
- Effective interest rate (in percent): 4.2 (2012), 2.8 (2013), 2.4 (2014), 1.2 (2015), 1.2 (2016), 1.2 (2017), 1.0 (2018), 2.0 (2019), 2.1 (2020?) [table shows sequence].
- Change in gross public sector debt (cumulative): 1.2 (2003-2011 actual), 5.3 (2012), 2.1 (2013), 0.8 (2014), 0.3 (2015), -0.3 (2016), -0.9 (2017), -0.7 (2018), -1.1 (2019), -2.0 (2020?) [table shows sequence].
- Identified debt-creating flows (selected):
  - Primary deficit (in percent of GDP): -1.7 (2003-2011 actual), 2.6 (2012), 1.2 (2013), 1.4 (2014), 1.2 (2015), 1.0 (2016), 0.7 (2017), 0.4 (2018), 0.1 (2019), 4.7 (cumulative).
  - Primary (noninterest) revenue and grants: 44.2 (2003-2011), 42.9 (2012), 43.8 (2013), 43.2 (2014), 42.7 (2015), 42.7 (2016), 42.6 (2017), 42.5 (2018), 42.4 (2019), 256.1 (cumulative).
  - Primary (noninterest) expenditure: 42.4 (2003-2011), 45.4 (2012), 45.1 (2013), 44.6 (2014), 43.8 (2015), 43.6 (2016), 43.3 (2017), 42.9 (2018), 42.5 (2019), 260.8 (cumulative).
- Automatic debt dynamics contribution (in percent of GDP): 0.6 (2003-2011), 1.9 (2012), 1.3 (2013), 0.0 (2014), -0.4 (2015), -0.7 (2016), -1.1 (2017), -0.6 (2018), -0.6 (2019), -3.5 (cumulative).
- Residual, including asset changes: 2.3 (2003-2011), 0.8 (2012), -0.5 (2013), -0.5 (2014), -0.5 (2015), -0.5 (2016), -0.5 (2017), -0.5 (2018), -0.5 (2019), -3.2 (cumulative).
- Ratings (2014): Moody's Aaa (foreign and local), S&P AA+ (foreign and local), Fitch AAA (foreign and local).
- Bond spread (long-term over German bonds, bp): 26 bp (as reported).

(Note: Figures reflect the tables and projections published by IMF staff in the DSA.)

### Stress-test scenarios (underlying assumptions shown)
- Baseline (selected underlying assumptions):
  - Real GDP growth: 0.8 (2014), 1.2 (2015), 1.5 (2016), 1.6 (2017), 1.8 (2018), 1.9 (2019).
  - Inflation: 0.5 (2014), 0.5 (2015), 0.8 (2016), 1.1 (2017), 1.1 (2018), 1.2 (2019).
  - Primary balance: -1.4 (2014), -1.2 (2015), -1.0 (2016), -0.7 (2017), -0.4 (2018), -0.1 (2019).
  - Effective interest rate: 1.2 (2014), 1.2 (2015), 1.2 (2016), 1.0 (2017), 2.0 (2018), 2.1 (2019).
- Primary balance shock (selected path):
  - Primary balance: -1.4 (2014), -2.9 (2015), -2.7 (2016), -0.7 (2017), -0.4 (2018), -0.1 (2019).
- Real GDP growth shock (selected path):
  - Real GDP growth: 0.8 (2014), -1.1 (2015), -0.9 (2016), 1.6 (2017), 1.8 (2018), 1.9 (2019).
  - Inflation path under this shock: 0.5 (2014), -0.1 (2015), 0.2 (2016), 1.1 (2017), 1.1 (2018), 1.2 (2019).
- Real interest rate shock and combined shocks use higher effective interest rates in projection years (details in DSA tables).
- Contingent liability shock example:
  - Primary balance: -1.4 (2014), -23.5 (2015), -1.0 (2016), -0.7 (2017), -0.4 (2018), -0.1 (2019) in the presented contingent liability scenario.

### Risk assessment and vulnerabilities
- The DSA risk heat map indicates the largest vulnerability is to real GDP growth shocks.
- Gross financing needs and contingent liabilities are identified as important risk channels; contingent liability shock can push financing needs above 30 percent of GDP temporarily.
- Market perception indicators reported include bond spread (26 bp) and CDS (48 bp).

### Recent housing and mortgage-related policy measures (relevant fiscal/financial context)
- Prepayment on mortgages with 10 years or less of remaining maturity is possible without penalty.
- The maximum purchase threshold for NHG guarantee was gradually reduced back to its pre-crisis €265,000 level in July 2014; it will further decline to €225,000 in 2016, then will adjust to the average house price.
- The NHG premium has increased from 0.7 percent to 1.0 percent; the fee remains tax-deductible and lowers mortgage rates by 40-50 bps.
- Creation of a National Mortgage Institution (NHI) in 2014 to assist banks in securitizing mortgage loans through a state-supported credit guarantee.
- Since January 2013, only interest on fully amortizing mortgages is tax deductible; mortgages outstanding as of January 1, 2013 are unaffected.
- Transfer tax on purchase of existing homes was reduced from 6 to 2 percent.
- Interest paid on outstanding debt remaining after a house sale can be deducted for up to 10 years.
- As a temporary measure until end-2014, mortgage debt can be reduced through a one-time tax-free donation for a maximum €100,000.
- LTV was capped to 106 percent (104 + 2 percent transaction tax) in January 2013. It will fall further by 1 percent per year until it reaches 100 percent, with possible further reduction after 2018. Interest-only mortgages are capped at 50 percent LTV.

*Source: IMF staff.*

### 2013. The Article IV discussions with the Netherlands are on the standard 12-month consultation

### 2013. The Article IV discussions with the Netherlands are on the standard 12-month consultation cycle.

### Membership and Fund Financial Position
- Membership Status: Joined December 27, 1945; Article VIII.
- General Resources Account (SDR Million; Percent of Quota)
  - Quota: 5,162.40 (100.00)
  - Fund holdings of currency: 4,032.59 (78.11)
  - Reserve Tranche Position: 1,129.89 (21.89)
  - Lending to the Fund: 1,201.08
- SDR Department (SDR Million; Percent of Allocation)
  - Net cumulative allocation: 4,836.63 (100.00)
  - Holdings: 4,569.63 (94.48)
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None

### Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Forthcoming principal: (no amounts shown)
- Charges/interest:
  - 2014: 0.04
  - 2015: 0.14
  - 2016: 0.14
  - 2017: 0.14
  - 2018: 0.14
- Total:
  - 2014: 0.04
  - 2015: 0.14
  - 2016: 0.14
  - 2017: 0.14
  - 2018: 0.14

### Exchange Rate Arrangement
- The Netherlands’ currency is the euro, which floats freely and independently against other currencies.

### Statistical Issues — Assessment of Data Adequacy for Surveillance
- National accounts
  - The Netherlands adopted the European System of Accounts 2010 (ESA 2010) in March 2014.
  - The transition from the ESA 1995 (ESA 95) entailed a revision of national accounts data.
  - New data sources have been incorporated in the new estimates.
  - As a result of these changes, the GDP level in 2010 has been revised 7.6 percent upward (only 3 percent because of the ESA 2010).
  - Historical data series are available from 2001.
- Government Finance Statistics
  - Government finance statistics reported to Eurostat and the Fund are compiled using the ESA 95 methodology and are converted to the Government Finance Statistics Manual 2001 format.
  - Starting from September 2014, government finance statistics data will be based on ESA 2010 methodology which is likely to include revisions of the general government deficit and debt levels from 1995 onwards.
  - Revised ESA based data series will be published in October 2014.
- External Sector Statistics
  - The DNB compiles the balance of payments in close cooperation with the CBS; an agreement between the CBS and the DNB was formally ratified in 2006.
  - Balance of payments and international investment position (IIP) statistics are compiled according to the Balance of Payments Manual, fifth edition (BPM5) and the legal requirements of the ECB and Eurostat.
  - The Data Template on International Reserves and Foreign Currency Liquidity is disseminated monthly and quarterly external debt data are reported to the World Bank for redissemination in the Quarterly External Debt Statistics (QEDS) database.
- Monetary and Financial Statistics
  - Monetary data reported for International Financial Statistics are based on the European Central Bank’s (ECB) framework for collecting, compiling, and reporting monetary data.
- Financial Soundness Indicators
  - The Netherlands participates in the financial soundness indicators (FSIs) project.
  - Quarterly data for most of the 40 FSIs are posted on the FSI website for the period 2008:Q1 to 2012:Q4.

### Data Standards and Quality
- Subscriber to the Fund’s Special Data Dissemination Standard since June 11, 1996.
- Data ROSC is available.

### Table of Common Indicators Required for Surveillance (As of November 18, 2014) — Selected entries and metadata
- Exchange Rates: Latest observation — Current; Date received — Current; Frequency of Data/Reporting/Publication — D and M
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation — 10/14; Date received — 11/14; Frequency — M
- Reserve/Base Money: Latest observation — 10/14; Date received — 11/14; Frequency — M
- Broad Money: Latest observation — 10/14; Date received — 11/14; Frequency — M (W and M for publication)
- Central Bank Balance Sheet: Latest observation — 10/14; Date received — 11/14; Frequency — M
- Consolidated Balance Sheet of the Banking System: Latest observation — 10/14; Date received — 11/14; Frequency — M
- Consumer Price Index: Latest observation — 9/14; Date received — 10/13; Frequency — M
- Revenue, Expenditure, Balance and Composition of Financing—General Government: Latest observation — Q2/14; Date received — Q3/14; Frequency — Q
- GDP/GNP: Latest observation — Q2/14; Date received — Q3/14; Frequency — Q
- External Current Account Balance: Latest observation — Q2/14; Date received — Q3/14; Frequency — Q
- Gross External Debt and International Investment Position: Latest observation — Q2/14; Date received — Q3/14; Frequency — Q
- Note: Data quality assessments use the Data ROSC mission findings (published January 10, 2008; mission October 3-17, 2007); methodological soundness and accuracy/reliability ratings include O (fully observed) and LO (largely observed) designations in the table.

### Press Release — Executive Board Conclusions (Press Release No. 14/552; December 5, 2014)
- On December 3, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Netherlands.
- Macroeconomic conditions and recent developments
  - The Dutch economy continues to improve, supported by exports, rising house prices, and improving sentiment.
  - Exports are rising on expanding global trade, but consumption remains sluggish as indebted households continue to save.
  - The external current account surplus now exceeds 10 percent of GDP, led by an improving trade balance.
  - Labor slack and the large output gap have pushed down core inflation, raising real interest rates.
  - Following a decline of 27 percent in real terms, housing prices have gradually increased this year, halting the decline in household wealth.
  - Household leverage remains high, concentrated mainly among younger cohorts.
- Growth projection
  - Growth is expected to reach 0.8 percent this year.

*cr14327 - 2013. The Article IV discussions with the Netherlands are on the standard 12-month consultation*

### 1.2 percent in 2015, supported by rising exports and a modest recovery in housing prices.

### _cr14327 - 1.2 percent in 2015, supported by rising exports and a modest recovery in housing prices.

### Outlook and risks
- GDP growth projected at 1.2 percent in 2015, supported by rising exports and a modest recovery in housing prices.
- Investment is projected to remain subdued due to weak domestic demand.
- Near-term risks:
  - Euro area weakness.
  - Geopolitical spillovers.
- Medium-term risks:
  - Large household debt overshadowing growth prospects.
- Factors that could lift growth:
  - Lower energy prices.
  - A faster pickup in housing prices.

### Executive Board Assessment — summary findings
- Directors welcomed the continued economic recovery and the pickup in exports and house prices.
- Consumption remains sluggish, constrained by:
  - High household indebtedness.
  - Weak incomes.
- Inflation remains low.
- Elevated current account surplus noted; accommodative macroeconomic policies recommended to:
  - Boost domestic demand and growth.
  - Facilitate external rebalancing.
- Policy priorities urged:
  - Orderly deleveraging of households.
  - Reform of the tax and pension systems.
  - Broader structural reforms to improve housing and labor markets, productivity, and potential growth.

### Financial stability and household deleveraging — recommendations
- Further repair of household balance sheets necessary to sustain a more robust recovery.
- Recommended measures for heavily indebted young borrowers:
  - Facilitate reprofiling of underwater mortgages.
  - Enable out-of-court debt workouts.
  - Encourage intergenerational transfers to pay down mortgage debt.
- Consideration: reducing pension contributions for younger generations as part of broader reform, while safeguarding pension system soundness.
- Banking sector resilience:
  - Ensure banks have strong capital and liquidity buffers.
  - Complete national arrangements for resolution and backstopping in support of euro area institutional reforms.
- Macroprudential housing measures:
  - Set ambitious medium-term targets to reduce maximum loan-to-value (LTV) ratios and mortgage interest deductibility, while accounting for stability and broader economic developments.

### Housing market and social housing reforms
- Directors welcomed government’s comprehensive housing market reform to remove distortions and restore confidence.
- Supported steps:
  - Deregulate the private rental market.
  - Scale back public support for the social housing sector.
- Continued reforms to social housing corporations needed to reduce rental market distortions.

### Fiscal policy and tax reform
- Broad support for a neutral fiscal position and focus on structural targets.
- Medium-term goal: maintain a structural balance (though a few Directors saw scope for a more expansionary near-term stance to prop up growth).
- Recommendation: more frequently updated trend forecasts in the Netherlands’ medium-term budget framework to improve predictability and responsiveness to shocks.
- Several Directors supported maintaining fiscal rules under the Stability and Growth Pact.
- Planned tax reform welcomed; considerations included:
  - Options to promote equity financing.
  - Reduce the labor tax wedge.
  - Simplify the value-added tax.

### SMEs and credit availability
- Highlighted role of SMEs in promoting employment and growth.
- Calls for continued efforts to enhance SME credit availability by:
  - Improving quality and sharing of credit information.
  - Developing alternative financing sources.

### Selected economic indicators and key statistics (2012–15)
- National accounts (2013, in billions of euros and percent of GDP):
  - Private consumption: 289.6 (45.0)
  - Public consumption: 169.3 (26.3)
  - Gross fixed investment: 117.6 (18.3)
  - Stockbuilding: 0.3 (0.0)
  - Exports of goods and nonfactor services: 533.2 (82.9)
  - Imports of goods and nonfactor services: 466.8 (72.6)
  - Nominal GDP (at market prices): 642.9 (100.0)
- National accounts (constant prices) — annual values:
  - Gross domestic product: 2012 -1.6; 2013 -0.7; 2014 0.8; 2015 1.2
  - Private consumption: 2012 -1.4; 2013 -1.6; 2014 -0.2; 2015 0.3
  - Public consumption: 2012 -1.6; 2013 -0.3; 2014 -0.6; 2015 0.0
  - Gross fixed investment: 2012 -6.0; 2013 -4.0; 2014 1.6; 2015 2.6
  - Total domestic demand: 2012 -2.4; 2013 -2.0; 2014 -0.1; 2015 0.7
  - Exports of goods and nonfactor services: 2012 3.3; 2013 2.0; 2014 3.5; 2015 3.5
  - Imports of goods and nonfactor services: 2012 2.8; 2013 0.8; 2014 2.9; 2015 3.1
  - Net foreign balance (contribution to GDP growth) 2012 0.6; 2013 1.0; 2014 0.8; 2015 0.7
  - Output gap (in percent of potential output): 2012 -3.0; 2013 -4.4; 2014 -4.4; 2015 -3.9
- Prices, wages, and employment:
  - Consumer price index (HICP): 2012 2.8; 2013 2.6; 2014 0.5; 2015 0.7
  - GDP deflator: 2012 1.3; 2013 1.1; 2014 0.5; 2015 0.5
  - Hourly compensation (manufacturing): 2012 1.8; 2013 1.6; 2014 1.5; 2015 1.5
  - Unit labor costs (manufacturing): 2012 4.1; 2013 1.6; 2014 -0.2; 2015 0.7
  - Unemployment rate (in percent): 2012 5.3; 2013 6.7; 2014 7.2; 2015 6.9
  - NAIRU: 2012 4.8; 2013 4.9; 2014 5.0; 2015 5.0
- External trade:
  - Merchandise balance (percent of GDP): 2012 6.9; 2013 7.8; 2014 8.2; 2015 8.5
  - Current account balance (percent of GDP): 2012 8.9; 2013 10.2; 2014 9.8; 2015 9.4
- General government accounts (percent of GDP):
  - Revenue: 2012 43.4; 2013 44.4; 2014 43.8; 2015 43.2
  - Expenditure: 2012 47.2; 2013 46.7; 2014 46.2; 2015 45.3
  - Net lending/borrowing: 2012 -3.7; 2013 -2.3; 2014 -2.4; 2015 -2.2
  - Primary balance: 2012 -2.0; 2013 -0.7; 2014 -0.8; 2015 -0.6
  - Structural balance (in percent of potential GDP): 2012 -1.8; 2013 0.5; 2014 0.4; 2015 0.4
  - Structural primary balance: 2012 -0.1; 2013 2.1; 2014 1.9; 2015 1.9
  - General government gross debt: 2012 66.5; 2013 68.6; 2014 69.3; 2015 69.8

### Authorities’ statement — key points from Netherlands representatives
- Authorities more positive than staff on fundamentals; medium-term outlook supported by government reform agenda.
- Observations:
  - Recovery fragile but ongoing; growth mostly driven by exports; investments and consumption increasing; in 2015 domestic demand expected to contribute substantially to GDP growth.
  - Unemployment declining faster than expected; employment rising.
  - Public finances improved significantly.
  - Housing market showing recovery in prices and transactions.
  - Positive ECB comprehensive assessment outcome for Dutch banks confirms stronger capital base.
- On household debt and policy responses:
  - Acknowledge relatively large mortgage debts and negative net equity for many households, but contest term "debt overhang" as potentially too strong.
  - Note substantial household assets (pensions; saving accounts linked to mortgages) yielding overall positive net wealth at macro level.
  - Point to NHG backing for more than half of underwater mortgages and low delinquency rates.
  - Disposable income expected to rise by 2% in 2014 and 1% in 2015, which should help offset deleveraging effects on consumption.
  - Government measures to support households with negative net equity:
    - Mortgage interest deductibility (MID) remains possible for residual debt.
    - Residual debt can be financed under the NHG insurance scheme.
    - Temporary exemption from the gift tax facilitates intergenerational transfers.
  - If nominal house prices rise by 2 percent annually from 2014, prices would return to pre-crisis level in ten years and three quarters of underwater mortgages would be “above water”.
- On LTV ratios and macroprudential timing:
  - Agree gradual LTV reduction is important, but further reduction below 100 percent depends on housing market developments and requires careful cost-benefit analysis.
  - Warn that reducing LTVs too quickly may hamper housing market recovery and require substantial savings from younger households, dragging on consumption.
  - New MID regime for new mortgages phased in will contribute to lowering LTV ratios after 2018.
- On social housing and rental market:
  - Scale back public support for SHCs via separation of SGEI from non-SGEI activities; targeted rent subsidies to support lower income groups during reforms.
  - Emphasis on developing private rental sector for a more balanced housing market.
- On pension reform:
  - Reforms should be part of a broader overhaul, accounting for transition costs and intergenerational fairness.
  - Caution that reducing contributions for younger generations could increase relative cost of older employees, especially as retirement age is lifted.
  - New financial assessment framework (FTK) entering next year expected to reduce procyclicality by producing more stable premiums and pay-outs.
  - Government to present vision on future of pension system before summer 2015.
- On fiscal stance:
  - Government remains committed to European budgetary rules under the Stability and Growth Pact.
  - More room for trend-based fiscal policy given favorable 2015 public finance developments and EMU balance moving away from -3 percent.
- On SME financing:
  - Loan rejection rate for SMEs relatively high because applicants tend to be weaker micro firms; weak demand more important than supply constraints.
  - Support improvements in sharing positive credit information while respecting privacy.
- Preference that future Article IV consultations revert to a more traditional, holistic format.

*Source: IMF staff report and Executive Board/authorities statements as provided in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14327.pdf_