IMF Executive Board Concludes 2011 Article IV Consultation with the Kingdom of the Netherlands–NetherlandsPublic Information Notice (PIN) No. 11/79
June 22, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with the Kingdom of the Netherlands is also available.
On June 10, 2011 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kingdom of the Netherlands—Netherlands.1
The Netherlands emerged from a deep recession in mid-2009, but the recovery is still frail. The slump was caused by adverse trade and financial spillovers from the global crisis, which also forced large public intervention in the financial sector. Conversely, the subsequent upturn has been stimulated by strong exports. Despite a somewhat slower pace of recovery in the second half of the year, GDP grew 1¾ percent in 2010. Unemployment has risen only modestly, in part because of labor hoarding, and has been slightly declining since mid-2010. With output still well below potential, inflation has remained subdued until recently, though it is now picking up, also because of rising oil prices. Several indicators suggest that external competitiveness is adequate.
Banking system soundness has improved significantly, though fragilities remain in the financial sector. Banks’ regulatory capital adequacy has risen markedly since 2008, largely reflecting government intervention, but equity relative to (unweighted) assets is still comparatively low, with regulatory capital reflecting the low risk-weighting of mortgages. Nonperforming loans remain manageable at less than 3 percent of total loans. Bank profitability, though still weak, has recovered slightly. However, the coverage ratio for many pension funds is under pressure, owing to extended longevity and persistent low interest rates. The insurance industry is also under strain. A well-designed strategy of gradual exit from the extraordinary public support is being implemented, amid continued restructuring of the financial sector.
The housing and mortgage markets are relatively stable, although vulnerabilities to household balance sheets are rising. House prices steadied from mid-2009 to mid-2010, but seem to have resumed a slow downward drift since then. Affordability-based indicators of house price sustainability remain elevated, albeit having stabilized and slightly improved from two years ago. On the other hand, econometric models do not indicate that house prices are misaligned with fundamentals. However, household debt has grown substantially in relation to disposable income, to over 270 percent in 2010, among the highest in advanced economies. In addition, the loan-to-value (LTV) ratio of new mortgages has continued to rise from its already unusually elevated levels, and exceeded 120 percent in 2010 according to some measures.
The fiscal position deteriorated sharply in 2009, but is already improving. The general government balance weakened considerably in 2009, reaching a deficit of 5½ percent of GDP, on account of substantial stimulus measures and free operation of automatic stabilizers to help stem the impact of the global crisis. However, unexpectedly strong tax receipts in 2010 helped reduce the deficit slightly to 5¼ percent of GDP. Public debt has risen to almost 64 percent of GDP at end-2010, owing also to financial sector assistance not reflected in the deficit. Together with the impact of long-run aging pressures, the fiscal sustainability gap is estimated at about 7½ percent of GDP. Strong consolidation plans are being implemented with a view to substantially reduce the deficit by 2015.
Executive Board Assessment
Executive Directors welcomed the ongoing export-led recovery and noted that remaining slack is dampening inflationary pressures from international commodity prices. Notwithstanding encouraging near-term prospects, Directors considered that the risks to the economic outlook remain skewed to the downside. Over the longer term, fiscal risks could also mount as supply-side dislocations created by the global financial crisis and population aging weigh on potential growth.
Directors supported the authorities’ ambitious and frontloaded fiscal consolidation plans, intended to reconstitute policy space and prepare for future increases in age-related spending. Many Directors, however, stressed that fiscal adjustment should be implemented more flexibly than currently allowed by the authorities’ fiscal framework, if adverse external shocks slowed significantly the pace of economic activity. In particular, automatic stabilizers should be allowed to operate freely to shore up domestic demand and discretionary support should be considered.
Directors observed that measures that reduce the impact of population aging on public expenditures or broaden the tax base must be key elements of the authorities’ adjustment strategy. Concerning expenditures, Directors agreed that efforts should be addressed at increasing the effective retirement age and restraining growth in costs of health and long-term care.
Directors noted that the soundness of the financial sector has improved, but fragilities remain. They welcomed the results of stress tests in the context of the FSAP update, which show resilience of bank capital and liquidity buffers under extreme scenarios. Nonetheless, Directors saw merit in further strengthening capital or liquidity buffers given high leverage ratios and the upcoming shift to tighter capital standards under Basel III.
Directors agreed that the buildup of vulnerabilities in the housing market warrants close attention in light of the heavy exposure of the financial system to that market, although a few Directors noted the risk-mitigating factors. They encouraged the authorities to consider a further tightening of prudential regulation and granting the Netherlands Central Bank the authority to impose additional restrictions, if necessary.
Directors considered that additional improvements are needed in the areas of rule-making authority and legal protection of supervisors; adequacy of data reporting requirements; resource constraints; and the crisis resolution framework. Directors remarked that efforts should also focus on strengthening the supervision of large international financial institutions.
Directors agreed that low interest rates and rising longevity have put pressure on the coverage ratios of many pension funds. A reform of the pension system is thus needed. In this regard, Directors welcomed the recent agreement between the authorities and social partners, and stressed the need for a transparent communication of any risk-sharing modifications to the current system to induce fitting changes in saving behavior.
Directors agreed that structural reforms continue to be key to lifting the Netherlands’s long-term growth prospects. In particular, further reforms of the tax and benefit systems are needed to boost labor participation of women and older workers and facilitate job search.