IMF Executive Board Concludes 2013 Article IV Consultation with BelgiumPublic Information Notice (PIN) No. 13/55
May 17, 2013
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 2013 Article IV Consultation with Belgium is also available.
On May 10, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.1
The economy has entered a second year of near zero growth amid persistent vulnerabilities. The economy showed considerable resilience through 2011 both in terms of output and employment, reflecting the effects of large automatic stabilizers and job subsidies, as well as the strong financial position of the non-financial private sector which prevented a severe retrenchment of private investment and consumption. However, the rebound stalled in 2012 as rising unemployment and the weak outlook in Europe took a toll on consumption and investment: domestic demand contracted by 0.6 percent, and real GDP by 0.2 percent. Since 2011, Belgium has also fallen behind its main economic partners (Germany, France, and the Netherlands) in terms of export performance, as unit labor costs (ULCs) have grown faster, pushed by sticky inflation and wage indexation. To help restore competitiveness, a real wage freeze is in force for 2013 and 2014. The revision of the composition of the price index, in line with an updated consumption basket, is expected to moderate measured inflation by an estimated 0.4 percentage points in 2013-14.
After a prolonged period of political negotiations, the broad coalition government that came into office in December 2011 was able to take decisive action which contributed to a marked improvement of financial market conditions for Belgium. Specifically, the government undertook significant fiscal consolidation, introduced ambitious reforms to pensions and unemployment insurance, and decided on a further devolution of powers to the regions and communities. Consolidation efforts reduced the structural fiscal deficit by 0.6 percent of GDP in 2012. However, the headline deficit rose from 3.7 percent of GDP in 2011 to 3.9 percent in 2012, reflecting cyclical factors and a further recapitalization of the Dexia Group in late 2012. Notwithstanding these efforts, the trend growth of primary government spending remains elevated due to widespread indexation of public spending, occasional real increases in social transfers on top of that, and rising operational expenses and employment at the level of subnational governments.
Demographic and productivity trends pose a significant challenge to Belgium’s potential growth prospects. The interactions of the pension and unemployment benefit systems, as well as various schemes to promote partial employment have created unemployment traps and encouraged early departure from the labor force. As a result, the employment rate has been structurally low (67 percent of working age population in 2011). The government undertook important reforms in 2012 to increase incentives to work, with the objective of raising the employment rate to 73 percent by 2020. At the same time, total factor productivity growth has also slowed significantly over the past decade, undermining real wage growth prospects.
Financial sector repair has continued to reduce risks to financial stability. As a result of decisive policy actions and divestment of cross-border operations, the banking system has become smaller, less complex, and less leveraged. In the process, foreign ownership of banks has increased to 65 percent of assets, and government ownership to 16 percent of assets (i.e., Belfius, the nationalized and rebranded banking arm of Dexia). A large and stable deposit base and the strategic re-orientation towards the domestic market helped support domestic credit supply, while non-performing loans have remained low so far. Supervisory action, deleveraging, and improved risk management pushed banks to stronger capital positions, with aggregate Tier 1 capital ratio rising to 15.3 percent in September 2012. The largest part of legacy assets has been removed from the balance sheet of banks, although KBC (the largest Belgian private bank) and Belfius still retain some structured products (in runoff mode). Liquidity has improved and domestic banks have made progress in repaying ECB Long-term Refinancing Operation (LTRO) support since the beginning of the year.
Executive Board Assessment
Executive Directors welcomed the efforts undertaken by the government to consolidate public finances and the result in improvement in market confidence. Notwithstanding these efforts, the external environment remains unfavorable and the growth outlook continues to be weak. Directors called for sustained strong policies to mitigate vulnerabilities in the fiscal position, competitiveness, and the financial sector.
Directors emphasized that the weak macroeconomic environment, high public debt, and contingent liabilities put a premium on maintaining a steady pace of structural fiscal adjustment. They agreed that anchoring fiscal adjustment to a structural deficit target would have several benefits, including more predictable policies, a reduced reliance on one-off revenue measures, and the ability of automatic stabilizers to operate. In this context, most Directors broadly welcomed the government’s revised 2013 budget and considered the targeted pace of structural adjustment to be appropriate. A number of Directors suggested that an accelerated pace of fiscal adjustment would help strengthen credibility and anchor expectations. Directors saw benefits in a clear rule-based multi-year fiscal policy framework, which would ensure adequate burden-sharing across all levels of government and consistency with overall fiscal targets.
Directors agreed that structural reforms should be accelerated to enhance productivity, restore cost competitiveness, and boost labor supply, which would contribute to enhancing growth prospects. They emphasized that further pension and social policy reforms, consistent with fiscal consolidation objectives, are needed to raise the effective age of retirement and employment rates. Directors noted that wage and price indexations reduce the economy’s ability to adjust to cost misalignments. They recommended the authorities phase out price indexation and strengthen the link between domestic wage developments and those in partner countries, while providing flexibility to correct for past deviations.
Directors welcomed the important actions taken to preserve financial stability, and encouraged the authorities to maintain the momentum to address remaining vulnerabilities. Directors recommended that banks’ capital buffers be further strengthened in line with Basel III requirements and noted that pressures on profits call for a regular review of the viability of banks’ business models. They underscored the need to strengthen the national resolution and deposit insurance frameworks and to sustain positive changes to supervisory practices. Finally, Directors considered that the incomplete banking union in Europe has hampered the efficient intermediation of the liquidity surplus of Belgian banks, but the tax advantage granted to savings account may have exacerbated the problem. Directors recommended that taxation of financial income should be rebalanced in favor of long-term saving regardless of the underlying financial instruments.