DBRS Confirms The Netherlands at AAA with a Stable Trend

DBRS, Inc. (DBRS) has today confirmed The Netherlands’ long-term foreign and local currency debt at AAA. The trend on both ratings is Stable. The ratings are underpinned by a strong public sector balance sheet, 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 further stress and the strong capacity shown by The Netherlands to adjust and deliver sustained fiscal consolidation.

Despite the uncertainty surrounding the fiscal plan to meet the 3% of GDP target in 2013 after the fiscal slippage in 2011 caused by the unexpected weakness in the economy, DBRS is reassured by past successes in carrying out extensive adjustments when required. Furthermore, DBRS believes that the capacity to achieve significant medium term fiscal consolidation remains strong. Prime Minister Mark Rutte resigned on 23 April as the parliamentary support coalition could not agree on additional measures to achieve the fiscal deficit objective for 2013. Subsequently, a different coalition of parties agreed on fiscal measures that have the potential to bring down the fiscal deficit to 3% of GDP next year. The implementation of some of these measures may depend on the results of the upcoming September elections.

As a country that is very open commercially and financially, The Netherlands was highly exposed to the 2009 global economic downturn. The Dutch government intervened heavily in the financial sector as there were large write-offs from securitisation activities and exports suffered severely. Furthermore, in the second half of 2011 the economy entered a mild second recession, reducing progress on lowering the fiscal deficit. Although public debt will continue to rise moderately if a more negative growth outlook for 2012 materialises, over the medium-term public debt will likely stabilise well below most Euro area countries.

The largest shock to public finances arose 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. A worse than expected fiscal deficit for 2011 has contributed to a modest rise in gross public debt from 62.9% of GDP in 2010 to 65.6% of GDP in 2011. Although a caretaker government is in place, with elections scheduled for 12 September 2012, additional consolidation measures supported by a coalition of political parties with a parliamentary majority have been submitted to Parliament.

The recovery stalled in 2011 and forecasts point to a mild recession for 2012 with downside risks to the growth outlook. Recent political developments in Greece have called into question the Greek government’s willingness and capacity to comply with the EU-IMF adjustment programme and sustain its membership in the European Monetary Union. Uncertainty over the future of Greece, which may persist for some time given the scale of the macroeconomic adjustment required, could add to downside risks to the growth outlook in Europe, potentially making public debt stabilisation more difficult.

Given the current weakness in the real estate market, a deeper downturn could generate vulnerabilities as Dutch households are highly indebted. Financial liabilities were 133% of GDP in 2010, mostly from residential mortgages. This is only partly attenuated by the presence of household financial assets and of long term savings accounts attached to some mortgages. High mortgage debt appears to have been accumulated as a response to tax incentives. However, with a strong public sector balance sheet, the government could further support the financial sector if needed.

The Netherlands has been a substantial provider of savings to the rest of the world, accounting for 3.9% of worldwide net capital exports. This has been driven by a very high national savings rate, which averaged 25.8% of GDP in the period 2005-2010, and is explained by a high private savings rate of 23.7% 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.

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 on average 70% of GDP for the past five years, inflows of FDI of 75% of GDP, and outflows of Dutch FDI of 121% of GDP. 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 moderate, averaging 0.73% a year and accounting for 26% of real value added growth from 1998 through 2007.

The financial sector still enjoys significant government backing. 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 43.3 billion in 2011. Similarly, contingent government liabilities from guarantees have decreased from EUR 79 billion in 2009 to EUR 33.3 billion in 2011.

Expenditure on pensions, health and old age care is a common concern among economies such as The Netherlands, 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 combined with a second milder downturn will have a detrimental effect on the financing requirements of these programmes. Among the measures included in the April 2012 agreement that seeks to address this gap is the increase in the state pension age from 65 to 67 years.

Gas reserves that have provided significant fiscal revenues at times, which currently stand at about 2% of GDP, 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, public debt fell from a high of 78.5% in 1993 to 45.3% of GDP by 2007. The political and institutional capacity to reach consensus for medium term public debt reduction further support the ratings. Nevertheless, if public debt fails to stabilise, which could occur if the fallout from events in Greece were to have adverse systemic consequences on growth, the ratings could come under downward pressure.

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 CPB Netherlands Bureau for Economic Policy Analysis, CBS Statistics Netherlands, Ministry of Finance, Eurostat, IMF, European Commission, OECD and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

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 under Related Research.