Kingdom of the Netherlands—Netherlands: Selected Issues and Analytical Notes
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International Monetary Fund
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Publication Date:
21 Jun 2011
eISBN:
9781455286645
Language:
English
Keywords:
ISCR; CR; Netherlands; Netherlands' export; spillovers to the Netherlands; vis-à-vis EU member country; default scenario; percent GDP; Fiscal consolidation; Financial sector; Exports; EU trade
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Important issues of the Netherlands are discussed. Openness to trade has benefited the Netherlands before the crisis and has supported the recent recovery process. However, both financial openness and trade linkages have also been a transmission channel for the financial crisis. Synchronized fiscal tightening across Europe has important spillover effects for GDP growth. The improvement on the supply side of credit has contributed to a normalization of the credit market. However, the recent increase in the financial stress index indicates that the situation is still fragile.

Abstract

Important issues of the Netherlands are discussed. Openness to trade has benefited the Netherlands before the crisis and has supported the recent recovery process. However, both financial openness and trade linkages have also been a transmission channel for the financial crisis. Synchronized fiscal tightening across Europe has important spillover effects for GDP growth. The improvement on the supply side of credit has contributed to a normalization of the credit market. However, the recent increase in the financial stress index indicates that the situation is still fragile.

Analytical Note 2: International Trade, Fiscal and Financial Spillovers1

A. Risks from Regional Export Concentration and Global Fiscal Consolidation

1. The Netherlands is highly open to trade and maintains a sizeable trade surplus. Trade to GDP is projected to exceed the pre crisis level and stand well above 145 percent in 2010 while the trade surplus is expected to reach nearly 8 percent of GDP. The goods surplus is generated primarily vis-à-vis EU member countries, while extra-EU trade contributes negatively to the overall surplus, mostly driven by trade with Asia and the U.S.

uA02fig01

Export market

(in percent of total exports)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A002

Source: IMF Direction of Trade Statistics

2. Regional concentration of exports makes the Netherlands exposed to a correction in deficit countries and highly indebted developed countries. More than 77 percent of Dutch exports go to other European countries. Only some 15 percent go to emerging markets and developing countries, with less than 3 percent of total exports to Asia.2 Netherlands’ exports are thus more vulnerable to faltering demand in European countries and advanced economies then many other euro area member countries.

Table 2-1.

Trade by Regions and Countries – 2009

article image
Source: IMF Direction of Trade Statistics.

3. Fiscal consolidation in the Netherlands and in trading partner countries will be significant. The structural primary balance position of the Netherlands is projected to improve in 2011 by 1½ percent of GDP and an extra ¾ percent of GDP in 2012. Additionally, several of Netherlands’ main trading partners are expected to reduce fiscal spending over the same horizon by a similar order of magnitude. The latter could imply a marked reduction of demand for Dutch exports. Since exports account historically and in the current recovery for a significant part of GDP growth, reduced demand potentially translates into non negligible effects on overall GDP growth.

4. GDP growth could slow notably due to fiscal consolidation. We simulate for 2010-12 the domestic effect of Dutch fiscal consolidation and the spillovers from global fiscal consolidation to the Netherlands using a model based on the national accounting framework.3 The model computes the contribution of fiscal changes in the Netherlands and its main trading partners to output growth, allowing for carry-over effects from fiscal changes in the previous period to current GDP growth. The simulation results indicate that the domestic effect of fiscal consolidation in the Netherlands reduces output by -0.5 percent in 2011 and -0.6 percent in 2012 (Table 2-2). While the effect in 2011 is driven by reduced spending in 2011, the effect in 2012 stems more from the carry-over effects from the 2011 consolidation (-0.5 percent) as opposed to the contribution from the additional consolidation in 2012 (-0.1 percent).

Table 2-2.

Fiscal Contribution to Growth1/

(In percentage points)

article image
Source: IMF staff estimates.

Financial sector support recorded above-the-line was excluded for the calculation of growth impact for Ireland (2.5 percent of GDP in 2009 and 5.3 percent of GDP in 2010) and the U.S. (2.5 percent of GDP in 2009, 0.4 percent of GDP in 2010, and 0.1 percent of GDP in 2011 and 2012). Financial sector support is not expected to have a significant impact on demand. For Russia only non-oil revenues are assumed to have an impact on growth.

5. Spillover effects from main trading partners are likely to reduce GDP notably by 2012. The negative contribution to GDP from trading partners’ consolidation efforts is expected to be nil in 2011, due to a still positive impact from Germany, but -0.4 percent in 2012. Thus the negative contribution of spillovers in 2012 accounts for 40 percent of the total negative effect of global fiscal consolidation of -1 percent. The extent of spillover in the Netherlands is well above the PPP weighted average of the 20 countries in the sample for which spillovers account for 18 percent of the overall growth impact of fiscal consolidation. Fiscal consolidation in Germany and France accounts for 33 percent of the spillovers to the Netherlands, the U.S. and the U.K. for 45 percent, Italy for 7 percent, Spain for 4 percent, Greece, Ireland and Portugal for 4 percent, and the remaining 7 percent is attributable to the other countries in the sample.

uA02fig02

Fiscal contribution to growth

(in percent)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A002

Source: IMF staff calculations.

B. Financial Sector Linkages

6. International financial exposures of Dutch banks are also concentrated with respect to advanced economies and some major countries. While the share of claims on European counterparts reaches 55.1 percent, Belgium, Germany, and, the U.K. account for more than half of these claims (Table 2-3). Exposures to Southern European countries and Ireland are a combined 13.2 percent of total claims abroad. The U.S. constitutes the highest individual exposure with a share of 18.7 percent of total claims abroad. However, the consolidated foreign claims of Dutch banks relative to GDP have fallen from 315 percent in 2007 before the crisis to 160 percent in mid-2010 and the share of loans to non-residents has fallen significantly from slightly above percent in 2007 Q3 to below 50 percent of total loans as of 2010 Q2.4

Table 2-3.

Dutch Bank Claims Abroad

(As of end-June 2010)

article image
Source: BIS.
uA02fig03

Consolidated foreign claims

(in percent of GDP, as of end-June 2010)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A002

Source: BIS, IMF staff calculations

7. Despite a lower overall exposure, losses to Dutch lenders could be sizeable in the event of a defaulting counterpart. We conduct a network analysis to simulate the direct and indirect effects of a foreign default on Dutch claims abroad.5 The lower default scenario indicates already sizeable losses to Dutch lenders even if only one of the major financial partners defaults on a fraction of their liabilities. The effect is magnified due to Netherlands’ financial openness which increases the sensitivity to indirect effects via third countries. A default on 10 percent of international claims by the U.S., the U.K., Germany or Spain could generate a loss of between 0.9 to 3.1 percent of GDP. The impact on credit availability is particularly high in the case of a default on claims vis-a-vis the U.K. and the U.S. In a more pessimistic scenario of a default on 20 percent of international claims abroad, the impact on the availability of credit rise less than proportionally, while the loss in percent of GDP rises in line with the increase in the default ratio. Since, tier 1 capital is sufficiently high in the Netherlands, deleveraging is only required in the extreme event of a default on 20 percent of international claims by both the U.S., and the U.K. The analysis indicates that the Netherlands has a higher exposure to Spain than to Italy. However, exposure to the U.S. remains the most important source of potential financial disruptions. The decrease in total claims abroad since the onset of the financial crisis has brought the potential loss from a default somewhat down. Nevertheless, exposure relative to GDP remains relatively high by international standards.

Table 2-4.

Spillovers to the Netherlands from International Banking Exposures

article image
Source: RES/MFU Bank Contagion Module based on BIS, ECB, and IFS data.

Magnitude denotes the percent of on-balance sheet claims that default.

Deleveraging need is the amount (in percent of Tier I capital) that needs to be raised through asset sales in response to the shock in order to meet a Tier I capital asset ratio of 6 percent, expressed in percent of total assets.

Greece, Ireland, and Portugal.

8. Possible contagion from a shock in the Netherlands is relevant for several European countries. With the exception of Portugal and Belgium which are exposed to the Netherlands with respectively more than 7 and 6 percent of total assets, Dutch assets generally account for less than 5 percent of any major economies’ total claims abroad. This high exposure of Portugal and Belgium explains the relative strong impact on the two countries of a Dutch default amounting to 50 percent of its foreign liabilities. For the United Kingdom and Switzerland it is the indirect exposure driven by the high ratio of claims abroad to GDP in these two countries that makes them more vulnerable.

Figure 2-1.
Figure 2-1.

Spillover from the Netherlands Through International Banking Exposures

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A002

© IMF 2010. Own estimates using World Bank, IMF and BIS sources.

C. Conclusion

9. The Netherlands is very open to trade and finance, but trade flows and financial claims are not geographically diversified. Openness to trade has benefited the Netherlands before the crisis and has supported the recent recovery process. However, both financial openness and trade linkages have also been a transmission channel for the financial crisis. The concentration of trade makes the Netherlands particular susceptible to developments in few developed countries.

10. Synchronized fiscal tightening across Europe has important spillover effects for GDP growth. The Netherlands benefited from positive spillovers due to fiscal expansions in most countries in 2009–10. The swing to fiscal tightening in 2011–12 potentially reduces Dutch GDP growth by a fraction similar in size to the reduction caused by the domestic consolidation plans. A more ambitious consolidation path in major trading partners could thus pose a downside risk to GDP growth in the next two years.

Table 2-5.

Dutch Bank Liabilities Abroad

(As of end-June 2010)

article image
Source: BIS.

Appendix: A Simple Framework to Measure the Effect of Global Consolidation on Growth

The simulation results are based on the representation of the national accounts and behavioral assumptions for government spending, taxes, consumption, investment, exports and imports. Starting from the national accounting identity we know that:

Y t , j = C t , j + I t , j + G t , j + X t , j − M t , j ( 1 )

where Yt,j is the real output, It,j is real investment, Gt,j is the real government spending, Xt,j is are real exports and Mt,j are real imports of country j in time t denominated in a common currency. The individual components of output are respectively given by:

C t , j = C 0 + c 1 ( Y t , j − T t , j ) M t , j = μ j Y t , j I t , j = I 0 + d 1 Y t , j − d 2 r t , j . G t , j = G t , j 0 + ρ G G t − 1 , j 0 + g 1 Y t , j ( 2 ) X t , j = Σ i ≠ j i = 1 I ω ij μ i Y t , i T t , j = T t , j 0 + ρ T T t − 1 , j 0 + t 1 Y t , j

where μi is the marginal propensity to import of a trading partner i,1 Yi is the output of a trading partner i, and ωij is the weight of imports from country j in total imports of country i. Government expenditures and revenues have a cyclical part and a discretionary element. We also allow past fiscal measures to have carry over effects into the current period. Substituting the definitions (1.2) in (1.1) yields

Y t , j = ex t , j + m j G t , j 0 + ρ G m j G t − 1 j 0 − m j c 1 T t , j 0 − ρ T m j c 1 T t − 1 , j 0 + m j Σ i ≠ j i = 1 I ω ij μ i Y t , i ( 3 )

Where ext,j = C0 + I0 - d2rt,j and mj = (1 - c1 - d1 - g1 + t1 + μj)-1 is the expenditure multiplier. Taking the first difference and dividing by real output in t-1 yields the growth rate as a function of the fiscal change:

Δ Y t , j Y t − 1 , j = m j ( Δ G t , j 0 Y t − 1 , j + ρ G Δ G t − 1 , j 0 Y t − 1 , j ) − m j c 1 ( Δ T t , j 0 Y t − 1 , j − ρ T Δ T t − 1 , j 0 Y t − 1 , j ) + m j Σ i ≠ j i = 1 I ω ij μ i Δ Y i Y t − 1 , i Y t − 1 , i Y t − 1 , j ( 4 )

Equation (1.4) is a system of I linear equations that can be written in matrix notation and solved for the change in expenditures and revenues according to:

Y ˜ t = W [ A 1 G ¯ t − A 2 T ¯ t ] ( 5 )

Here W = (I- B)-1 is a I-by-I identity matrix, B is a I-by-I matrix, Ỹ is I-by-1 vector of real GDP growth rates, A1 and A2 are diagonal I-by-I matrices and Ḡt and T¯ are I-by-1 vectors. It is possible to derive country i’s contribution to country j’s GDP growth by evaluating:

y ˜ t , ji = w ji [ a 1 ji g ¯ t i − a 2 ji t ¯ t i ] ( 6 )

For the purpose of our simulation we set I=20 and the sample of countries includes: Austria, Belgium, China, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, Portugal, Russia, Spain, Sweden, Switzerland, United Kingdom, and United States. This sample of countries accounts for 83 percent of Dutch exports. We measure the fiscal impulse by the change in the cyclical adjusted revenues and expenditures relative to GDP. Multipliers are taken from OECD (2009) and generally adjusted upwards by a factor of 20% to reflect the current environment of low interest rates and exchange rate stability for the Netherlands vis-à-vis most of its trading partners.2

References

  • IMF, 2010, “Recovery, Risk and Rebalancing,” IMF World Economic Outlook, Oct 2010 (Washington: International Monetary Fund).

  • Ivanova, Anna, and Sebastian Weber, forthcoming, “Do Fiscal Spillovers Matter”, IMF Working Paper (Washington: International Monetary Fund).

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  • OECD, 2009, “The effectiveness and scope of fiscal stimulus”, OECD Economic Outlook Interim Report (March).

  • Tressel, Thierry, 2010, “Financial Contagion through Bank Deleveraging: Stylized Facts and Simulations Applied to the Financial Crisis,” IMF Working Paper 10/236 (Washington: International Monetary Fund).

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1

Prepared by Sebastian Weber.

2

However, it should be noted that a large fraction of Dutch exports are re-exports, and the latter are more concentrated in Europe, Dutch exports excluding re-exports are thus less European centered, but still exhibit a small exposure to Developing Asia, although exports to China have been growing in recent years.

3

The procedure builds on Ivanova and Weber (forthcoming). A short description is provided in the Appendix.

4

In line with the high openness to trade, the exposure is also explained by significant trade-related lending.

5

See for a detailed treatment Tressel (2010).

1

In the calculations the import elasticity was assumed to be equal to 1 for all countries, which implies that the marginal propensity to import μi is equal to the ratio of imports to GDP for each country.

2

According to IMF (2010) the multipliers in the current economic environment are potentially up to twice the normal multipliers.

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Cover IMF Staff Country Reports
Kingdom of Netherlands: Netherlands: Selected Issues and Analytical Notes
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 143
Publisher:
International Monetary Fund
ISBN:
9781455286645
ISSN:
1934-7685
Pages:
144
DOI:
https://doi.org/10.5089/9781455286645.002

Export market

(in percent of total exports)

Fiscal contribution to growth

(in percent)

Consolidated foreign claims

(in percent of GDP, as of end-June 2010)
Figure 2-1.

Spillover from the Netherlands Through International Banking Exposures