Dutch budget special september 2015 final

Marketing Communication

Fixed Income Watch Dutch Budget Special

Group Economics Macro & Financial Markets Research Joost Beaumont, Kim Liu, Aline Schuiling aline.schuiling@nl.abnamro.com

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

15 September 2015        

Following years of austerity, fiscal policy will be eased next year, … … giving an extra impulse to the economy, which already is in a cyclical upswing GDP growth has become broad-based and is expected to rise to 2.5% in 2016… … with consumption, business investment and residential investment all growing robustly... … compensating for the weakness in China and emerging markets more widely The minor adjustment to the budget deficit is unlikely to have an impact on Dutch funding needs No information is given on the impact on the cash deficit of the scheduled sale of ABN AMRO in Q4 If the sale goes ahead, we expect a significant decline of money market issuance in 2015Q4

Budget Day

GDP growth gathering pace …

The Dutch government published the 2016 Budget today. The

After two years of contraction, the economy expanded by 1%

main feature of the budget is that fiscal policy will be eased by

last year. In the first half of this year, GDP grew by an average

around EUR 5bn next year, which is equal to around 0.7% of

of 2¼% yoy. Growth has also become more broadly based

GDP. Still, the budget deficit is expected to decline to 1.5%

than before. Apart from exports, which continued to increase in

GDP, down from 2.2% GDP this year. This is largely thanks to

the recent lean years, investment and subsequently

the ongoing economic recovery. GDP growth is expected to

consumption have also been driving GDP growth for some

rise to 2.5% next year, up from 2.3% this year. As a result, the

time now.

Dutch debt-to-GDP ratio, which will decline for the first time since 2007 this year, should continue to decrease in 2016.

A glance at the various sectors confirms this picture of a broad-based recovery: all market sectors are posting positive

Overall, the Dutch economy is growing faster than its trend

figures, and have been doing so since last year. Construction,

growth rate of 1.5%, as well as faster than the eurozone

still the weakest sector only a few years ago, actually will see

economy this year and next. In this note, we will discuss the

production surge by some 4½% this year. As such, we think

outlook for the Dutch economy, the main policy measures, as

that the strength of domestic demand and exports to the EU

well as the impact on the government’s funding needs.

and the US will more than compensate for the slowdown in China and emerging markets more generally.

GDP growth Netherlands versus eurozone … despite downward impact from gas extraction

% y-o-y

Economic growth is currently being depressed by the reduced

4

E

gas extraction in Groningen. Last year, this dampened growth

3

by around ½% point (compared to former gas production

2

levels). And growth is expected to be tempered by a further

1

½% point this year. Changes in gas production have also

0

created considerable volatility in qoq growth rates. The

-1

slowdown in GDP growth in Q2 of this year (0.1% versus 0.6%

-2

2010

2011

2012

2013

Eurozone

2014

2015

2016

Netherlands

in Q1) was totally due to lower gas extraction, which reduced growth by 0.5 percentage points in Q2.

Housing market no longer a drag

Source: Thomson Reuters Datastream

The housing market is doing better than expected. This applies both to new-build housing as well as renovations. New-build

Insights.abnamro.nl/en

Bloomberg: ABNM

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Euro Rates Weekly - Dutch Budget Special - 15 September 2015

home sales jumped sharply, advancing 47% in the first seven

austerity in previous few years - allows it to loosen the fiscal

months compared to same period of 2014. Existing property

reins next year. This is no big surprise considering that new

sales are also still rising: +21% yoy. Finally, the number of

general elections are due in early 2017.

issued new-build permits doubled in the second quarter The government’s main policy measures are:

compared to a year earlier.

 However, certain criteria for the housing market have been

Lower the tariff of the second and third tax bracket by around 2%;

tightened as of July. This may have prompted many buyers to



Increase the earned-income tax credit;

bring forward home purchases. House prices also remain on a



Lengthening of the highest tax bracket, implying that

slow, but steady, upward trajectory. Average prices have

the highest tax rate will only be effective at a higher

climbed by 2½% yoy in the first seven months. We think that

income;

the average price increase may even be slightly higher this



Increase civil servant salaries (EUR 1.3bn) ;

year, at around 3%. A comparable increase is foreseen for



Raise expenditure on defense, child-related benefits,

2016.

and housing benefits.

Key figures of the Dutch economy

Budget deficit and debt 2013

2014

2015

2016

will decline from 2.2% this year to 1.5% in 2016. The

% changes

GDP

Despite the budgetary stimulus of EUR 5bn, the budget deficit government debt ratio is expected to fall for the first time since

-0.4

1.0

2.3

2.5

Private consumption

-1.4

0.0

1.7

1.9

Government consumption

0.2

0.3

-0.1

0.6

Investment

-4.5

3.5

7.6

4.4

Exports

2.4

4.0

4.5

5.0

Imports

1.1

4.0

4.5

6.0

with our expectations. Nonetheless, the new projections could

Consumer prices (CPI)

2.5

1.0

0.8

1.5

still lead to small changes in the cash deficit, which is used to

Consumer prices (HICP)

2.6

0.3

0.4

1.4

determine the actual funding needs for 2015. However, if the

Wages

1.3

1.1

1.3

1.7

budget deficit will lead to a change in the cash deficit, we do

Levels Unemployment (% labour force)

2007 this year. Next year, it is expected to continue to decline, reaching 66.2% of GDP. New budget plans will not change the 2015 funding need…

The slightly revised budget deficit for 2015 is broadly in line

not expect any material alterations. If there are minor changes, we expect that the issuance of money market instruments will

7.3

7.4

6.9

6.4

Current account balance (% GDP)

11.0

10.8

11.1

10.6

be revised accordingly, exactly as the current policy of the

Budget balance (% GDP)

-2.4

-2.4

-2.2

-1.5

DSTA stipulates.

Government debt (% GDP)

67.6

67.9

67.2

66.2

Revised figures are in italics.

Forecasts: ABN AMRO Group Economics

… but the sale of ABN AMRO could lower T-bill issuance Later this week, the DSTA will update its Q4 funding schedule and this update will incorporate the impact of the new budget projections on the cash deficit. However, the main factor that

Government policy to support economic growth in 2016

could influence the Q4 borrowing need is the first tranche of

The key element of the government’s 2016 Budget is that

the privatization (25%) of ABN AMRO. In today’s budget

taxes will be cut by EUR 5bn (equal to 0.7% of GDP).

update, no details were given about the timing and the size of

Consumption in particular will receive a boost from the lower

this transaction.

tax burden, as it will boost purchasing power. The growth in expenditures could run up to almost 2% next year. The last

We expect that also in the upcoming Q4 update, the DSTA will

time we saw a similar figure was in 2007. We think that private

not give any specific information on this matter. However, if the

consumption will also be supported by a further gradual labour

first tranche will see the light of day in Q4, we expect that the

market recovery and a rise in real wages.

issuance of money market instruments will be lowered significantly. As always, at the end of this year, the DSTA will

Main measures taken in the budget

announce its 2016 borrowing requirement and funding plan.

According to the Dutch government, the significant

This update could include the second tranche of the

improvement of government finances - mainly thanks to

privatization of ABN AMRO, which is scheduled for 2016.

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Euro Rates Weekly - Dutch Budget Special - 15 September 2015

Our expectations for the Q4 funding plan Regardless of any small changes to the issuance of money market instruments, we expect that the government’s call on the capital markets will be left unchanged at EUR 48bn. Year to date, the DSTA has already raised 76% of its target. Next week, the DSTA will reopen the already scheduled sale of its 3y benchmark (DSL April 2018) for EUR 2.5 – 3.5bn.

For Q4, the DSTA has penciled in four remaining bond auctions. Taking into account the original funding plan, which was published in December 2014, and the funding activities up to now, we expect the following bonds to be sold in 2015Q4: 

Final reopening of the 3y benchmark (DSL April 2018) for around EUR 2.5bn.



Two re-openings of the 10y benchmark (DSL July 2025) for a combined total of around EUR 4bn.



One off-the-run auction for around EUR 3bn.

Housing market supported by more relaxed rules in financial gifts The government also announced some further measures to support the housing market. It will implement more relaxed rules around the taxation of financial gifts in case the recipient uses the proceeds to buy a home or to reduce mortgage debt.

Starting in 2017 (!), it should be possible to give up to EUR 100,000 tax free to a person between 18 and 40. This measure roughly equals the temporary more generous tax treatment of gifts that ended at the start of this year.

This measure will only be effective as of 1 January 2017, but it will also apply retro-actively in 2015 and 2016. This year, and in 2016, the maximum amount of tax free financial gifts is EUR 53K (under the same conditions as stated above), but this can be raised to EUR 100K from 2017. In the end, the government wants to make sure that everyone will have had the opportunity to receive a tax free gift of EUR 100K to buy a home or reduce mortgage debt.

We think that the measure will support the housing market (which has already gained momentum), although the conditions on the receiver’s age could limit the impact somewhat. The new measure is also likely to result in higher mortgage prepayments, increasing prepayment risk in Dutch RMBS transactions. However, it seems that this is mainly relevant from 2017 onward.

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Euro Rates Weekly - Dutch Budget Special - 15 September 2015

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Euro Rates Weekly - Dutch Budget Special - 15 September 2015

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