Belgium
Recent Economic Developments

This paper describes economic developments in Belgium during the 1990s. The moderate recovery experienced by Belgium in 1994 slowed in the course of 1995 as foreign demand faltered, and GDP growth for 1995 as a whole is now estimated at 2 percent. Domestic demand was supported by increased investment, but private consumption growth remained anemic as real disposable household income grew little. Since early 1994, the Belgian franc has generally been slightly appreciated relative to its central parity against the deutsche mark.

Abstract

This paper describes economic developments in Belgium during the 1990s. The moderate recovery experienced by Belgium in 1994 slowed in the course of 1995 as foreign demand faltered, and GDP growth for 1995 as a whole is now estimated at 2 percent. Domestic demand was supported by increased investment, but private consumption growth remained anemic as real disposable household income grew little. Since early 1994, the Belgian franc has generally been slightly appreciated relative to its central parity against the deutsche mark.

I. Overview

The economic performance of Belgium has been very satisfactory in many respects (Chart 1). Inflation has been low, the exchange rate strong, the current account surplus one of the highest in the industrial world, and the fiscal deficit on a downward path. However, the labor market continues to be characterized by low participation rates and high unemployment, and the fiscal consolidation underway in recent years has not yet made significant inroads in reducing the very high public debt ratio.

CHART 1
CHART 1

BELGIUM: International Comparisons of Fundamentals

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Sources: IMF, World Economic Outlook; OECD, Economic Outlook; and staff estimates.Countries are: BEL=Belgium, DNK=Denmark, FIN=Finland, FRA=France, DEU=Germany, IRL=Ireland, ITA=Italy, LUX=Luxembourg, NLD=Netherlands, NOR=Norway, PRT=Portugal, ESP=Spain, SWE=Sweden, GBR=United Kingdom.

The moderate recovery experienced by Belgium in 1994 slowed in the course of 1995 as foreign demand faltered, and GDP growth for 1995 as a whole is now estimated at 2 percent. Domestic demand was supported by increased investment, but private consumption growth remained anemic as real disposable household income grew little.

The deficit of the general government has been on a downward path since 1992, despite the difficult economic circumstances. Fiscal measures with a large combined yield were taken by the federal government over this period to raise the ratio of revenue to GDP and contain the real growth of federal and social security spending. Spending by the regions and communities has been more buoyant, but recently these entities have also begun to contribute to fiscal consolidation.

Monetary policy has remained devoted to maintaining the tight link of the Belgian franc to the deutsche mark. Since early 1994, the Belgian franc has generally been slightly appreciated relative to its central parity against the deutsche mark. The tight exchange rate link was successfully defended in early 1995 through temporary increases in official interest rates.

Financial markets in Belgium have undergone a number of changes in recent years following liberalization measures in the early 1990s. Banks have diversified their activities, particularly into off-balance sheet activities, while mutual funds and other forms of collective investment have expanded. Additional legislation took effect at the beginning of 1996 to help lay the groundwork for further improvement in the functioning of financial markets.

II. The Real Sector

1. Aggregate demand and supply

Following a sharp recession in 1993, GDP grew by 2.2 percent in 1994 and is estimated to have grown by 2.0 percent in 1995. 1/ This growth pattern reflects economic developments in other European countries, although the 1993 recession was more pronounced and the 1994 recovery milder in Belgium (Table A1). Exports of goods and services fueled the recovery initially, surging by 8.1 percent in 1994; but the growth of exports moderated to some 6 1/2 percent in 1995 due to a marked faltering of foreign demand in the second half. 2/ With growth in imports of goods and services of 7 percent in 1994 and about 6 1/2 percent in 1995, the contribution of net exports to GDP growth fell from nearly 1 percentage point in 1994 to virtually nil in 1995 (Table A2).

Domestic demand grew slowly in 1994 as private consumption rose by only 1.1 percent and business investment declined for the fourth year in a row. In 1995, investment began to grow as capacity utilization in manufacturing reached its highest level since mid-1990, and business investment increased by 7.0 percent. Public investment declined during 1994-95 as a whole, and its share in GDP remained at a historical low. Private consumption growth, at 1.3 percent, was only slightly higher than in 1994. The cyclical recovery in 1994 was broad-based, with the exception of the agricultural sector, which declined by 8.2 percent (Table A3). Buoyant export markets drove the expansion in the manufacturing sector, which grew by 4.5 percent in 1994 after contracting by almost 3 percent in 1993. Services, both private and public, grew apace with GDP in 1994.

2. Household and corporate income

Disposable income of households virtually stagnated in real terms during 1994 and 1995. In 1994, a sharp rise in direct taxation offset a real increase in labor incomes of more than 1 percent, and in 1995 direct taxation rose further while labor income growth moderated (Table A4). The imposition of a real wage freeze and the lack of sensitivity of employment to the economic recovery contributed to slow growth of labor income. The household saving ratio declined from 21 percent of disposable income in 1993 to 19.4 percent in 1995 as consumption growth, while moderate, outpaced growth of disposable income (Table A4).

The corporate sector reported strong earnings and improved profitability in 1994-95. In 1995, the gross operating surplus of the corporate sector rose sharply, in part due to moderate growth of labor compensation. Reflecting its cyclical sensitivity, in 1994 manufacturing industry experienced a substantial rebound in its gross operating surplus. Corporations, which had become self-financing in 1993 with a sharp drop in investment, further built up their net financing capacity (from 0.2 percent of GDP in 1994 to 0.9 percent in 1995) even as investment rose in 1995 (Table A5). Corporate profitability (in terms of after-tax profits relative to own capital) rose from 6.2 percent in 1993 to 6.8 percent in 1994. This aggregate figure hides a substantial and persistent difference between large companies on the one hand and small- and medium-sized enterprises (SME) on the other: large firms realized a profitability of 7.5 percent in 1994, whereas SMEs achieved just 2.0 percent.

3. The labor market

The Belgian labor market is mired in a situation of low participation and high unemployment. The structural nature of the labor market problem in Belgium is evidenced by the age distribution of employment, the duration of unemployment, and the gender and skill profiles of the unemployed.

A cross-country comparison of the age distribution of employment in selected European economies is presented in Table 1. Belgium fares reasonably well among the cohort of people 25 to 49 years old (an employment rate of 75.8 percent versus 73.3 percent on average in the “EU12”), but has the lowest employment rate for the two older cohorts.

Table 1.

Employment Rates By Cohort: European Comparison, 1994

(In Percent)

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Source: National Bank of Belgium.

Unemployment in Belgium is concentrated among long-term unemployed: the share of this group in the total rose to over 44 percent in 1995 (Chart 2). Furthermore, unemployment is concentrated among women, whose unemployment rate is about twice that of men. 1/ The unemployment rate varies dramatically by skill level, with the lowest skilled facing the toughest challenges in the work place (Chart 3). In the past twenty years, primary school graduates have experienced a consistently higher unemployment rate (as a percentage of the number of primary school graduates in the job market), and the rate has almost tripled since 1977 to about 23 percent in 1994. Although junior high school graduates have experienced lower unemployment rates, they have been particularly hard hit in the last recession: their unemployment rate jumped from around 8 percent in 1991 to 14 percent in 1994. University graduates, by contrast, have experienced a relatively stable and low unemployment rate of below four percent in the past twenty years.

CHART 2
CHART 2

BELGIUM: Duration of Unemployment

(In Percent of Total Insured Unemployed)

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Source: National Bank of Belgium.
CHART 3
CHART 3

BELGIUM: Unemployment Rates by Education Level

(In Percent)

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Source: OECD, as provided by Kredietbank.

Turning to recent developments, the overall unemployment rate rose sharply in 1993 and 1994, before stabilizing in 1995 at some 13 percent of the labor force (10 percent on an internationally comparable basis) as employment rose following three years of decline (Tables A7 and A8). 2/ On a net basis, 74,000 jobs were lost in the enterprise sector during 1992-94 (2.4 percent of the 1994 employment level), while only some 10,000 (0.3 percent) were created in 1995. In addition, fiscal adjustment led to the shedding during this period of some 22,000 government jobs (0.4 percent of 1994 government employment). While the population of working age has been rising at a rate of about 0.2 percent a year, the poor labor market conditions in 1993-94 led to a stagnation in the labor force; in 1995, a labor force increase of 0.2 percent was registered. For a number of years, the increase in female participation in the labor market has offset the decline in male participation, but little change in participation rates was observed in 1994-95.

Over the past four years, the government has taken several initiatives to reduce unemployment or lower its cost to the government. Employers’ social security contributions for low-skilled and young workers have been reduced, and training programs have been set up for long-term unemployed. In addition, benefit eligibility for part-time unemployment and career breaks has been tightened; the early retirement age has been raised to 56 years in 1992; and regulations to reduce or terminate benefits for long-term unemployed have been expanded and more rigorously implemented. These measures have been successful in reducing unemployment benefit payment in certain cases. Part-time unemployment has declined by over 100 thousand persons to an estimated 74,000 in 1995, and the number participating in early retirement schemes has also declined since 1990, albeit very gradually.

4. Prices and wages

Inflation as measured by the CPI declined from 2.4 percent in 1994 to 1.5 percent in 1995 (Table A10). Price increases moderated across the board: inflation in the large services sector fell from 2.6 to 2.0 percent, and energy prices declined. Rent increases also slowed but continued to outpace overall inflation. In recent years, output prices have risen in line with consumer price inflation on the domestic market, while they have declined on export markets (except in 1994) as a consequence of the appreciation of the Belgian franc (Table A9). However, prices of imported goods and services have generally fallen slightly faster.

In the framework of the Law to Safeguard Competitiveness, 1/ the government introduced a new index, the so-called health index, which has been used from January 1994 as the basis for the indexation of salaries and rents. In contrast to the regular CPI, the basket for this index does not include a variety of (highly-taxed) items such as tobacco products, alcohol, and fuel. In addition, the health index excludes a tax on energy, and started at a lower base than the regular CPI. 2/ Apart from this lower base, the health index and the regular CPI are evolving in a very similar manner.

Growth in labor compensation per employee in the enterprise sector slowed markedly during 1993-95, as wage growth moderated and employers’ social security contributions for certain categories of workers began to be replaced with alternative taxation that did not directly burden labor (Table 2). This wage moderation reflected several factors: declining inflation and the 1994 change in indexation; the marked slowing in real wage increases negotiated under collective bargaining agreements, following the rapid growth of compensation in 1991-92; and the 1995-96 real wage freeze imposed by the government.

Table 2.

Labor Compensation

(Percent change)

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Source: National Bank of Belgium.

Estimates.

Compensation per employee in the government sector rose relatively rapidly during 1993-95 as general upward revisions in the salary scales for civil servants were granted. These revisions were intended to reverse to some extent the gap with private sector salaries resulting from prolonged civil servant salary moderation in the 1980s. No significant further revisions are planned. 3/

III. The Public Finances

Fiscal consolidation efforts undertaken by successive governments since the early 1980’s have reduced the general government deficit from 13 percent of GDP in 1981 to 4.5 percent in 1995 (Chart 4), and a further decline to 3 percent of GDP in 1996 is planned. For the period as a whole, the adjustment occurred on the spending side, with a fall in primary (i.e., noninterest) expenditure by 10 percentage points of GDP and no change in the revenue ratio. However, during the 1990s, revenue and primary expenditure ratios rose slightly. The high deficits have driven up the public debt, which peaked in 1993 at 138 percent of GDP. 1/

CHART 4
CHART 4

BELGIUM: Fiscal Indicators

(In Percent of GDP)

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Sources: National Bank of Belgium and staff estimates.

This section provides a summary of recent fiscal developments, discusses 1995 government revenue and expenditure in some detail, summarizes the fiscal consequences of the devolution of powers to the regions and communities, and outlines the main features of the 1996 budget.

1. Overview

Fiscal consolidation efforts slipped in the early 1990s, but were taken up with renewed vigor in 1992, and an EMU convergence plan was presented that aimed at achieving a general government deficit of 3 percent of GDP by 1996. Due to cyclical fiscal deterioration, the planned deficit path leading to this deficit target was twice revised upward, 1/ but the goal of a deficit of 3 percent of GDP by 1996 was never changed and became a cornerstone of the government’s financial policies.

The general government deficit has been on a downward trend since 1992, despite the sharp 1993 recession, and fell to 4.5 percent in 1995 (Table 3). Revenue measures led to a rise during 1993 and 1994 in the ratio of revenue to GDP by two percentage points, but the ratio declined by nearly one percentage point in 1995. Expenditure restraint limited the rise in spending to less than 1 percentage point of GDP in 1993, and produced a subsequent decline in the ratio of primary spending to GDP. Interest payments, most of which are the responsibility of the federal government as its share of total public debt is almost 90 percent, dropped sharply in 1995 due to lower interest rates on the debt. 1/

Table 3.

General government revenue and expenditure

(In percent of GDP)

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Sources: Tables A11, A12, A13, A14, and A15.

Estimates.

Detail adds up to more than the total because social security contributions by government entities (of around 1/2 percent of GDP annually) are not included in the total.

Excluding transfers to social security, regions and communities, and local authorities.

Excluding transfers to local authorities.

Fiscal measures affecting the federal government and social security taken during 1992-94--including in the “global plan” in late 1993--amounted to more than 5 1/2 percent of GDP by 1994 (Table 4). 2/ Revenue measures were wide-ranging, and included suspension of income taxation brackets (from the beginning of 1993), imposition of an income and withholding tax surcharge of 0.3 percent (July 1993), and rises in the withholding tax on interest income from 10 (i.e., 10.3) to 13 (i.e., 13.39) percent and in the normal VAT rate from 19.5 to 20.5 percent (at the beginning of 1994). Expenditure-reducing measures accounted for rather less than one-third of the adjustments, and included reductions in public health care outlays and--from 1993--a nominal freeze of the defense department budget and of subsidies to the post office and railroad. 3/

Table 4.

Effect of Deficit-Reducing Measures, 1992-94.

(In percent of GDP)

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Source: Data provided by the authorities (estimates as of October 1994); and staff estimates.

The introduction of tax-based “alternative” financing of social security expenditure is apparent from changes in the sources of social security revenue (Table A13). Transfers (excluding earmarked taxes) from the federal government declined by 0.5 percentage points of GDP between 1993 and 1995, as they were largely frozen in nominal terms. Social security contributions fell by 0.8 percentage points of GDP as employers’ contributions were lowered to narrow the high wedge of taxes and social charges in the labor market. 1/ To compensate for these revenue losses, certain direct and indirect taxes were increased and earmarked for social security, for example under provisions of the global plan; these earmarked revenues amounted to 1.3 percent of GDP in 1995, compared to 0.1 percent in 1992.

2. Developments in 1995

The 1995 budget did not contain notable measures, and developments during the year thus reflected previously taken measures and various special factors. In 1995, general government revenue declined relative to GDP, as tax revenue fell by 0.3 percentage points and nontax revenue by 0.5 points. Shrinking shares in GDP of labor income and of private consumption, both of which are relatively highly taxed, accounted for an underlying deterioration in the tax revenue ratio of 0.4 percent of GDP (Chart 5). Increases in the average rate of taxation of labor income--due to the effect of continuing measures such as the suspension of indexation of income tax brackets--and in corporate taxation provided partial compensation, as did a 1993 delay in tax assessments by local authorities that was made up in 1994-95 (Table A15). Nontax revenues fell because the previous year had seen exceptional revenues from privatization and the sale of a lottery concession (each accounting for 0.2 percent of GDP). 2/

CHART 5
CHART 5

BELGIUM: Taxation Trends

(In Percent)

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Source: Data provided by the authorities.1/ In percent of GOP.

On the expenditure side, the moderate growth of real primary expenditures of general government observed in the last few years was maintained in 1995 (Table 5). The introduction of the health index had favorably influenced expenditures on wages and transfers in the previous year. Moreover, other factors helped hold down spending increases in 1995--including a modest reduction in the number of unemployment beneficiaries on account of an improved economy, and a tightening of the eligibility criterion for graduates; a reduction in transfers to the European Union; and a moderation of investment growth by local authorities related to the electoral cycle. Meanwhile, health care spending accelerated after impressively low growth rates in the previous two years, illustrating the difficulties in controlling outlays in this sector--despite various reforms and the existence of a spending norm that aims at keeping the real growth rate of public health care spending below 1.5 percent.

Table 5.

Real Growth in Primary Expenditure, 1993-95 1/

(In percent)

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Sources: Data provided by the authorities; and staff estimates.

Deflated with the price deflator for private consumption.

Estimates.

Excluding transfers to social security, regions and communities, and local authorities.

Excluding transfers to local authorities.

3. Regions and communities

The fiscal measures discussed above comprised actions taken by the federal government with regard to its own and social security finances. However, an important element of the Belgian fiscal situation is the devolution of powers to regions and communities from the beginning of 1989, which has put these entities on an equal footing with the federal government. Their primary spending relative to GDP is nearly as large as that of the federal government (Table 3). However, they have little independent taxation power: about 95 percent of their revenues are transfers from the federal government, primarily earmarked shares of personal income taxation and the VAT (Table A14). The variables used in the calculation of the transfers (such as economic growth and population increase) are objective parameters, and the calculation method is fixed until 1999. The total transfers to the regions and communities are generous, as they have increased since 1989 by more than 1 percentage point of GDP (Table A14), although their powers and responsibilities were set in 1989. 1/ Comparing the growth in spending by components of the general government, it is striking that federal government and social security spending in the last few years have remained well below the potential growth rate of the economy (which is some 2 percent), 1/ whereas regions and communities and local government have increased their spending more rapidly.

While the federal government has committed to general government deficit and debt targets in the context of the 1991 Maastricht Treaty, it cannot impose expenditure or deficit norms on the regions and communities. Since 1992, the Conseil Supérieur de Finance (CSF) 2/ has been responsible for suggesting burden-sharing solutions for deficit reduction between the federal government (which also manages social security) and the different regions and communities (which in turn supervise the local authorities). This has contributed to a stabilization in the primary expenditure and deficit of the regions and communities, relative to GDP, during 1993-95. For 1995-96, specific agreement was reached in July 1994 between the different entities on the maximum permissible deficits for each of them in 1995 and 1996. It appears that in 1995 the regions and communities and local authorities combined did not exceed their agreed deficit.

4. The 1996 Budget

The 1996 federal budget aims to achieve a general government deficit of 3 percent of GDP. It was crafted on the basis of an economic growth assumption of 2.2 percent and in the context of the deficit commitments of regions and communities and local authorities. Its measures are spread over a range of revenue and expenditure items, and result in a sharp drop in real growth of general government primary expenditure to about 0.5 percent in 1996.

Revenue measures in the 1996 budget amount to some 0.9 percent of GDP and include the sale of mobile phone licenses and buildings, 3/ an increase in the normal VAT rate from 20.5 percent to 21 percent, continued suspension of the indexation of income tax brackets, an increase in the tax on diesel car registration, a surcharge on workers’ social security contributions, and a rise in the withholding tax on interest income from 13.39 to 15 percent. Expenditure measures total more than 0.5 percent of GDP, and consist of reductions in subsidies to public enterprises and in departmental operating costs, cut-backs in health care (by some 0.2 percent of GDP), continued nominal freezes of defense spending, subsidies to the railroad and post office, and a tighter application of unemployment benefits (including cancellation in certain cases of lengthy unemployment). The package includes one-off measures amounting to about 0.5 percent of GDP.

IV. Monetary and Exchange Rate Policy and Financial Markets

1. Monetary and exchange rate policy

Monetary policy in Belgium has not changed since mid-1990. The National Bank of Belgium (NBB) has consistently acted to defend the close link of the Belgian franc with the deutsche mark adopted at that time and--except for a period of a few months following the disturbances in European exchange markets in the second half of 1993--it has succeeded in doing so. The stabilization of the exchange rate has permitted Belgium’s interest differentials with Germany to be among the lowest in Europe (Chart 6).

CHART 6
CHART 6

BELGIUM: Interest Rate Differentials vs. Germany

(Selected European Countries; In Percent)

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Source: IMF, International Financial Statistics (Average 1995).Countries are: AUT=Austria, BEL=Belgium, DNK=Denmark, FIN=Finland, FRA=France, IRL=Ireland, ITA=Italy, NLD=Netherlands, PRT=Portugal, ESP=Spain, SWE=Sweden, CHE=Switzerland, GBR=United Kingdom.

The Belgian authorities, while ready to increase short-term interest rates whenever the Belgian franc is under pressure, have used their arsenal of market-oriented monetary instruments to limit day-to-day fluctuations of interest rates in periods of calm (see SM/93/253 for a description of the main instruments). In particular, in the face of upward pressures on the Belgian franc, the NBB has often preferred to resort to sterilized intervention in the exchange market rather than allowing a negative interest rate differential with Germany to arise. This intervention has at times been executed in close coordination with domestic market operations by the Treasury (i.e., by having the latter buying back Government paper denominated in foreign currencies, while auctioning Belgian franc paper).

In the months after the widening of the ERM bands in August 1993, the Belgian franc continued to depreciate against the deutsche mark until the adoption of the “global plan” by the Government in November 1993. Thereafter, with fiscal policy clarified and the German repo rate falling, the Belgian franc moved toward its informal narrow band of about +/ 0.3 percent vis-à-vis the deutsche mark. It has remained within this range since February 1994, with the exception of a short period in March 1995 (Chart 7).

CHART 7
CHART 7

BELGIUM: Exchange and Interest Rate Developments

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Sources: IMF, Treasurer’s Department and The WEFA Group. (1/29/96)1/ 7 Day repo rate as well as overnight advance rate available to primary dealers of state debt (volume limited).

The short-term interest differential with Germany stayed below 100 basis points throughout 1994, and was eliminated during part of the fourth quarter. It jumped to 200 basis points in March 1995 when sharp appreciation of the deutsche mark vis-à-vis the US dollar put strong pressure on several European currencies. 1/ The NBB promptly raised official interest rates, which stopped the weakening of the Belgian franc and permitted the currency to quickly move back to a rate that was appreciated relative to the central rate vis-à-vis the deutsche mark. As the dollar strengthened in the stammer of 1995, and the new government reiterated its policies of fiscal austerity, the short-term interest rate differential almost disappeared.

3. Financial Markets

The financial reform undertaken in the early 1990s has borne fruit in a number of respects. 1/ Modernization of public debt management has brought large savings to the government, 2/ banks have diversified their supply of services in order to sustain profitability, and financial markets in general have become more efficient. Nevertheless, new challenges such as the planned European Monetary Union (EMU) are likely to imply further significant adjustments for financial institutions. New reforms became effective on January 1, 1996, and banks may need to increasingly draw on their technological expertise and international connections, as veil as move toward consolidation. Recent reforms have also aimed at lowering the relatively high transaction costs on the stock exchange, which are considered to have limited the expansion of risk capital.

This section discusses in turn developments in the banking sector, public debt management, financial markets, and related legislation.

a. Commercial banks

Belgian banks have been profitable and have conservative balance sheet ratios. The average income-to-capital ratio exceeded 9 percent in 1994 and the average risk-adjusted-capital-to-asset ratio rose to 12 percent (thus being well above the minimum dictated by international standards). 3/ Nevertheless, future profitability may be depressed by the introduction of a single currency in the European Union and the accompanying reduction in foreign exchange operations and the domestic currency franchise. According to preliminary calculations based on the volume of fees generated by foreign exchange operations with EMU-candidate currencies, the NBB estimates that EMU could lower banks’ pre-tax income by some 15 to 25 percent. Cost reductions, including reductions in the ratio of staff costs to income (which is among the highest in Europe), and rationalization of the geographic distribution of branches, could offset some of these losses of income. 1/

Despite a few recent mergers and acquisitions, Belgium still has a large number of banks--more than 140, seventy percent of which are domestically owned. The branch-to-inhabitant ratio is also very high (1 per 1,000, or three times more than the average in neighboring countries), in part because of the importance attached by banks to keeping close links with customers. Further consolidation is likely to affect both small and large banks. 2/ For instance, the seven largest banks, although accounting for 70 percent of banking assets, are roughly of the same size (the first one is less than twice as large as the fifth) and generally smaller than leading banks in Germany, France, and the Netherlands.

In recent years, banks have increasingly diversified their activities. Off-balance sheet operations have expanded rapidly in response to the loss of the implicit subsidy from placing government debt and falling intermediation margins in loans to the public (the share of banks’ income from credit operations dwindled from 81 percent in 1990 to 67 percent in 1993). Off-balance sheet positions in gross terms currently represent about nine times the value of balance sheet assets, or about 25 times GDP. Because off-balance sheet positions on a net basis correspond to a small fraction of gross figures, the authorities consider that systemic risk is appropriately limited. 3/

Off-balance sheet positions comprise mainly forward and futures operations on exchange and interest rates and the custody of securities. In particular, notional positions on derivative instruments amount to some BF 1.2 trillion (interest-based and currency-based instruments correspond to 85 percent of this amount, stock-based instruments to the remaining amount). 1/ 2/ Trade on interest-rate based instruments is divided almost equally between forward-rate agreements traded over the counter (OTC) and futures contracts traded on exchanges. Around one third of interest rate trades are based on Belgian-franc underlying assets, and DM-based instruments correspond to 10 to 15 percent of trades. Ninety-six percent of exchange-based operations are forward swaps, almost all of them OTC trades.

The expansion of mutual funds and collective investment units issuing shares in Belgium has been rapid since the early 1990s--managed assets tripled in 1989-93 and exceeded BF 1,900 billion in 1994. 3/ Expansion has in part been driven by changes in tax legislation and fluctuations in interest rates. For instance, the reduction in the withholding tax in 1990, together with high interest rates, favored the expansion of money market funds, and the share of short-term assets in mutual funds’ total assets increased four-fold during 1987-92. 4/ Another factor is that mutual funds generate large fees to banks but do not impact on their capital requirements. 5/ Bond-based mutual funds (e.g., collective investment units) continue to be popular, despite the fall in bond prices experienced in 1994, which affected their market value (although not their final return at maturity). Historically, the share of domestic and foreign bonds held by mutual funds has been stable around 50 to 55 percent of total assets under management.

b. Public debt management

In addition to the introduction of an auction system in 1991, the market for Belgian government paper has been influenced by two major factors. First, the management of issues has been very active. During the period of exchange rate uncertainty the government issued a substantial volume of assets denominated in foreign currencies, while in the face of falling long-term interest rates in 1993-94, the government called or otherwise refinanced more than half of the outstanding long-term public debt in Belgian francs. Under the latter program, predominantly fixed-rate paper (mainly OLOs) substituted for expensive floating interest rate instruments and standard bonds issued in the previous years. 1/ Interest rates on the new bonds were on average 2 percentage points lower than on maturing or recalled paper. Furthermore, average debt maturity was extended by some 14 months compared to the average maturity in late 1991 (Table 6), and the Treasury was able to span almost the entire yield curve.

Table 6.

Composition of the Public Debt (end-year)

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Source: Ministry of Finance.

Estimates.

The second factor influencing the market for government paper has been the increasing recourse to direct placements with individuals. The share of “Philippe” bonds (aimed at institutional investors as well as individuals) has more than doubled since late 1993 and currently corresponds to one sixth of total public debt. “Philippe” bonds have been offered in different formats, ranging from “zeroes” to 9-year bonds with two 3-year put options. Because the latter turned out to be difficult to price, the government is planning to add a line of “plain vanilla bonds” (Bons de 1’état) with maturities of 3 and 6 years, aimed exclusively at individuals. These bonds will compete with similar securities issued by banks (Bons de Caisse) and will have shorter maturities than OLOs. The reduction in average debt maturity entailed by the projected introduction of Bons de 1’état is to be compensated by further issues of 10- and 30-year bonds (as well as zeroes) and by a decline in the amount of outstanding T-bills. The recent introduction of special “X/N” security accounts aimed at simplifying settlements between parties with different tax status is also expected to improve placements with individuals. 2/

Foreign holdings of public debt have fallen since 1993, but Belgian bonds continue to be priced mainly on a yield differential basis vis-à-vis Bunds, especially in the case of more liquid maturities. The amount of OLOs held outside the Belgium-Luxembourg Economic Union (BLEU) fell from BF 400 billion in 1993 to BF 260 billion in 1994, or about 5 percent of total 0L0 holdings. Trading in OLOs on the secondary market averaged BF 160-218 billion per day in 1994 (compared to BF 11 billion in 1991). Repurchase agreements (with daily positions averaging some BF 100 billion) account for a large part of this increase, as well as for the increase in trade in Treasury certificates (which ranged from BF 54 to 86 billion per day in 1994 and BF 45 to 60 billion in 1993). Although OLOs are generally not callable, the Treasury has some flexibility regarding the repurchase or exchange of bonds before maturity, in order to avoid straining market liquidity; recently the period for refinancing an issue was extended to one year before maturity, thus permitting a smoother roll-over of the debt.

c. Stock exchange and other markets

The Brussels Stock Exchange accounts for over 90 percent of security trading in Belgium. 1/ The secondary market created in 1985 has attracted less than a dozen companies, and has not offset the fall from 182 in 1990 to some 150 currently in the number of domestic companies listed in the official market (the number of foreign listings is roughly equivalent). One of the major problems with the stock exchange is that a small number of listed companies account for the vast majority of trades--the top ten companies account for more than half of market capitalization and daily turnover. Another problem is that transaction costs, including taxes, are relatively high. Envisaged reforms include direct access to the market by banks.

The market for non-government fixed-income securities has been stable; the commercial paper market, for instance, grew quickly in the early 1990s, but stabilized in recent years, with total outstanding issues amounting to about BF 140 billion.

The insurance sector, which has already experienced some of the consequences of European integration, has undergone a significant restructuring. Consolidation has taken place, and in line with recent experience in other European countries, profits have been weak.

d. Legislative developments

By the end of 1995, Belgian was among the few countries that had succeeded in transposing the major financial directives of the EU into national law. In December 1994, regulations were adopted to conform with the European Directive on guarantee schemes for deposits with credit institutions, providing inter alia protection for deposits of up to ECU 15,000. The April 6, 1995, “Law on the Secondary Markets, Legal Status and Supervision of Investment Firms, Intermediaries, and Investment Advisers” transposed EU directives on capital adequacy and investment services into a framework law.

This last law became effective January 1, 1996 and is referred to as the “second big bang.” It:

• establishes new capital requirements for investment firms;

• retains the Caisse d’Intervention as responsible for daily supervision of investment firms and the Banking and Finance Commission as responsible for authorizations and sanctions;

• grants domestic and foreign credit institutions direct access to the stock exchange;

• increases the scope for market self-regulation in the case of the stock exchange, by creating an independent Management Committee responsible for managing the exchange (following general policies established by a Board of Directors) and deciding on matters such as listing and transparency of trades; and

• allows the rules governing financial prospectuses and other regulatory matters to be modified by royal decrees, thus facilitating the implementation of the legislative framework over time.

Controls against money laundering were recently beefed up in line with a European Directive (91/308). Adjustments within the framework of the 1990 legislation and concerning legal aspects of securitization and disclosure rules for Eurobonds issued in Belgium were also implemented (laws of July 6, 1994 and April 13, 1995, respectively).

V. The External Sector

The external current account surplus of the BLEU has remained high in recent years at around 5 1/2 percent of GDP, and the trade balance has also been in substantial surplus (about 3 percent of GDP). In this section, aspects of this performance are analyzed, and the capital account of the balance of payments is discussed.

1. Current account developments

Exports of goods have increased sharply since 1994, largely reflecting the recovery of economic activity in other European economies (Table A21). Relative export prices have fallen in the 1990s, but the real effective exchange rate has appreciated (Table A16, Chart 8). The terms of trade deteriorated in 1994 by 0.4 percent, after three years of improvement totalling 3.2 percent; the deterioration was related to strong increases in import prices of intermediate goods. Owing to these increases, and to higher domestic demand in Belgium, import penetration (i.e., the ratio between imports and total expenditure) rose by 0.5 percentage points in 1994. Nevertheless, it remained 3 percentage points below the 1989 peak of 42.4 percent.

CHART 8
CHART 8

BELGIUM: Effective Exchange Rates 1/

(1990=100)

Citation: IMF Staff Country Reports 1996, 025; 10.5089/9781451803051.002.A001

Source: IMF, International Financial Statistics.1/ An increase indicates an appreciation.

Exports of goods to non-European countries accounted for 24 percent of total exports in 1993-94. This represented a jump of 15 percentage points compared to the 1992 share, and appears to reflect an increase in the volume of exports to newly industrialized Asian countries, together with steadier prices of exports to other non-EU countries (such as Japan). 1/

The balance of non-factor services continued to strengthen in 1993-94, largely due to a surge in financial services (Table A20). 2/ The balance of factor incomes has increased significantly since 1993, reflecting the high saving rate in Belgium as well as sizeable capital outflows.

After stabilizing in 1991-93, official transfers increased 15 percent in 1994, reflecting higher contributions to the EU dictated by an increase in the weight given to individual countries’ consumption and GDP in assessing intra-European transfers. Overseas Development Aid fell from around 0.40 percent of GNP in 1991-93 to 0.32 percent in 1994 (Table A12), a level well short of the United Nations target of 0.70 percent.

2. Capital flows

A sharp fall in direct investment abroad by residents--from BF 345 billion in 1992 to BF 45 billion in 1994--explains the improvement in the BLEU balance of investments in 1993-94. Fluctuations in this account reflect changes in both international economic activity and incentives for intra-firm loans (i.e., loans between subsidiaries in different countries, often channelled through so-called “coordination” centers in Belgium). For instance, the contraction of loans by BLEU’s firms to foreign affiliates in 1994 has been attributed to developments in the real estate market and changes in tax laws in some European countries.

Purchases of foreign assets by residents increased markedly in 1993-94, being concentrated mainly in fixed-income securities (BF 437 billion) and stocks (BF 50 billion). Outflows in 1993 were dictated mainly by fears of continued depreciation of the Belgian franc, associated with the widening of the exchange rate bands in August 1993. Outflows in 1994 were due largely to changes in international long-term interest rates, as well as to opportunities offered by privatizations in Europe and high returns in “exotic” markets. The increase in US interest rates that started in early 1994 appears to be the main reason for the BF 206 billion downward adjustment in the portfolio of Belgian government bonds held by foreigners.

Around the ERM crisis of August 1993, a large outflow of short-term capital was recorded, with forward sales of Belgian francs playing a prominent role. With the gradual appreciation of the Belgian franc in the latter part of 1993, outflows decreased. Inflows started to dominate when the currency reached its central parity vis-à-vis the deutsche mark in early 1994, and inflows from non-residents more than offset continued outflows by residents. The disappearance of the short-term interest rate differential vis-à-vis Germany by the end of the year was one factor behind the low outflows recorded in the fourth quarter of 1994.

STATISTICAL APPENDIX

Table A1.

Belgium: Macroeconomic Performance in Comparison with European Partner Countries 1/

(Changes in percent)

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Sources: IMF, World Economic Outlook: OECD, Analytical Database; and staff estimates.

Members of the European Union.

Staff estimates.

Consumer price index.

Standardized OECD rate.

In percent of GDP. For Belgium, refers to position of BLEU.

National accounts basis, in percent of GNP/GDP, excluding net lending.

Table A2.

Belgium: Aggregate Demand in Constant Prices 1/

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Sources: Data supplied by the National Bank of Belgium; and staff estimates.

1985 prices.

Estimates.

Excluding factor incomes.

Contribution to growth.

Table A3.

Belgium: Growth of Output by Sector 1/

(Shares and changes in percent)

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Sources: National Bank of Belgium, Annual Report 1994: and data provided by the authorities.

Measured in value added at constant prices.

Trade, transport and communication, financial services, insurance and other services rendered to enterprises; and medical professions, home rental, domestic and other services rendered to individuals.

Table A4.

Belgium: Household Income and Spending 1/

(Changes in percent; current prices)

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Sources: Data provided by the authorities; and staff estimates.

SEC national accounts definition.

Estimates.

Percent of gross disposable income.

Table A5.

Belgium: Corporate Income and Spending 1/

(In percent of GDP)

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Source: Data supplied by the authorities.

SEC national accounts definitions.

Staff estimates.

Table A6.

Belgium: Sectoral Breakdown of Fixed Investment

(In percent; 1985 prices)

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Source: Data provided by the authorities.

Includes public sector investment.

Table A7.

Belgium: Labor Force and Employment

(Changes in thousands) 1/

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Source: National Bank of Belgium, Annual Report 1994: data provided by the authorities; and staff estimates.

As of June 30 of each year.

Estimates.

Includes also older unemployed who no longer register as unemployed and beneficiaries of career interruption and unemployment interruption schemes.

Including public sector employment programs such as the cadre special temporaire (CST), the troisieme circuit de travail (TCT), and the subsidized employment of the local authorities, etc. Excluding public enterprises.

Net labor force (excluding early and tempory withdrawals) as percent of working age population.

Table A8.

Belgium: Incidence and Structure of Unemployment

(Period averages)

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Sources: Ministry of Labor and Employment, Evolution du marche du travail; Ministry of Finance, Note de Conjoncture; and data provided by the authorities.

Estimates.

Excludes early retirement, older unemployed who are no longer registered as unemployed, and beneficiaries of career interruption and unemployment interruption schemes.

As a percentage of the insured unemployed.

Table A9.

Belgium: Indicators of Costs and Prices in the Enterprise Sector

(Changes in percent; National Accounts basis)

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Source: Data provided by the authorities.

Estimates.

Table A10.

Belgium: Price Developments

(Changes in percent from preceding year)

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Sources: Data supplied by National Bank of Belgium; IMF, International Financial Statistics; and OECD, Main Economic Indicators.

Estimates.

Table A11.

Revenue, Expenditure, and Debt of General Government

(Percent of GDP)

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Source: Data provided by the authorities.

Estimates.

Table A12.

Revenue and Expenditure of Federal Government

(Percent of GDP)

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Source: Data provided by the authorities; and OECD (1995), Development Cooperation.

Estimates.

Including military pensions.

Table A13.

Revenue and Expenditure of Social Security

(Percent of GDP)

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Source: Data provided by the authorities.

Estimates.

Earmarked.