DBRS Assigns AAA Rating to The Netherlands

DBRS Inc. (DBRS) has today assigned initial ratings to The Netherlands’ long-term foreign and local currency debt of AAA. The trend on both ratings is Stable. As a country that is very open commercially and financially, The Netherlands was highly exposed to the recent global economic downturn. The Dutch government intervened heavily in the financial sector as there were large write-offs from securitization activities and exports suffered severely. Nevertheless, the economy has shown resilience to these large shocks as the recovery is underway and unemployment has remained low. Although public debt may continue to rise moderately, it will likely stabilize below the Euro zone median.

The ratings are underpinned by a strong public sector balance sheet, with public debt that will likely stabilize below 67% of GDP, a very high savings rate, a high level of productivity and a moderate medium-term growth outlook for a mature economy. The Stable trend is supported by the capacity of the public sector balance sheet to weather stress and the strong commitment to fiscal consolidation shown by the government. The largest shock to public finances has come from the bailout of the banking sector in 2008, which accounted for a rise in public debt of 13.6% of GDP, or EUR 81 billion. However, there is a credible fiscal consolidation plan in place that will likely stabilize public debt levels by 2012 and materially reduce public debt over the medium- to long-term.

Still, this has been a severe recession for The Netherlands as GDP fell by 3.9% in 2009, in line with the Euro zone average of 4.1%. Moreover, Dutch households are among the most highly indebted in advanced economies, with liabilities of 130% of GDP in 2009, mostly from residential mortgages. However, with the return of growth, a comparatively low unemployment rate and fiscal deficits that averaged a relatively favorable 5.4% of GDP in 2009 and 2010, fiscal consolidation can proceed at a moderate pace without compromising the recovery. The recovery appears well underway but output has yet to recover its peak of 2008.

The Netherlands has been a substantial provider of savings to the rest of the world, accounting for 3.8% of worldwide net capital exports. This has been driven by a very high national savings rate, which averaged 27.3% of GDP in the period 1999-2007, and is explained by a high private savings rate of 24.5% of GDP. This has supported a high investment rate domestically and the acquisition of foreign assets, and shields the country from the effects of a disruption in external finance.

High private savings also mitigate some of the risks that arise from high household debt, which stands at 130% of GDP. It is mostly mortgage related and appears to be a response to tax incentives. The home ownership rate is relatively low in The Netherlands, at 57.2% in 2008, which highlights the high loan-to-value ratio prevalent in mortgage finance. However, mortgage lenders have not suffered materially, which points to a solid household balance sheet.

Another significant strength is the presence of a clear, multi-year fiscal consolidation plan, with public debt likely to stabilize below 67% of GDP. The fiscal consolidation plan in place is highly credible, sustained by a parliamentary support agreement with detailed priorities that span through 2015. For this reason, DBRS believes it is likely that over the medium- to long-term The Netherlands may be successful in materially reducing public debt.

The Netherlands is one of the most open economies to trade and foreign direct investment (FDI) flows, with exports and re-exports of goods and services exceeding 70% of GDP for the past five years, inflows of FDI of 81% of GDP, and outflows of Dutch FDI of 115% of GDP in 2009. It is a highly productive economy, with output per hour worked on par with the United States and slightly above France and Germany. Productivity growth has been good, averaging 0.73% a year and accounting for 26% of real value added growth from 1998 through 2007.

Despite the consolidation of the recovery, the financial sector still enjoys significant government support. This support resulted in a rise in public liabilities of 13.6% of GDP in 2008 from loans and capital participations, and contingent liabilities of 13.9% of GDP in 2009 from guarantees. There have been some repayments to the Dutch state and government assets from its interventions have fallen from an initial EUR 81 billion in 2008 to EUR 50 billon in 2010. Similarly, contingent government liabilities from guarantees have decreased from EUR 79 billion in 2009 to EUR 39 billion in 2010.

Expenditure on pensions, health and old age care is a common concern among economies that are advanced in their demographic transition as fertility rates drop and life expectancies rise. It is likely that the deep and long lasting recession will have a detrimental effect on the financing requirements of these programs, in spite of the ongoing recovery. Among the measures, included in the parliamentary support agreement that seeks to address this gap, is the increase in the state pension age from 65 to 66 years, starting in 2020. It is likely that further adjustments may be required.

Gas reserves have provided at times significant fiscal revenues, which stand today at about 1.7% of GDP and will likely need to be replaced as a revenue source as they are depleted. However, in the past, The Netherlands has shown substantial capacity for fiscal adjustment. Through a persistent control of expenditures, debt fell from a high of 78.5% in 1993 to 45.3% of GDP by 2007. The political and institutional capacity to forge consensus for public debt reduction and the parliamentary support agreement further support the ratings.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the Dutch Ministry of Finance, the De Nederlandsche Bank, CPB Netherlands Bureau for Economic Policy Analysis, CBS Statistics Netherlands, Eurostat, OECD, BIS and IMF. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is the first DBRS rating on the Kingdom of The Netherlands.

This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party, and is based solely on publicly available information.

Lead Analyst: Pedro Auger
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 12 May 2011
Most Recent Rating Update: 12 May 2011

For additional information on this rating, please refer to the linking document below.