DBRS Confirms the Kingdom of the Netherlands at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the Kingdom of the Netherlands’ long-term foreign and local currency issuer rating at AAA with Stable trend. DBRS has also confirmed the short-term foreign and local currency issuer ratings at R-1 (high) with Stable trend.

The ratings are underpinned by the country’s high productivity, elevated savings rate, and very strong external position driven by the longstanding accumulation of large surpluses in trade of goods, mostly the result of a buoyant re-exports sector. In addition, a low level of corporate sector debt supports the rating, as does the country’s high employment rate.

The Stable trend reflects the expectation that the measures included in the Coalition Agreement of November 2012 and in Budgets 2013 and 2014 will result in a significant improvement in the country’s fiscal sustainability position over the medium-term. In addition, the Stable trend reflects DBRS’s view that the country’s strong fiscal framework combined with its long track-record of negotiating coalition governments and policy agreements should support fiscal consolidation going forwards. Finally, DBRS takes comfort in the government’s outlining of a number of measures in Budget 2014 which, if implemented, have the potential to lessen the vulnerability of households’ balance sheets to adverse developments in the country’s housing market.

Pressure on the Stable trend could arise, if the measures aimed at containing the costs associated with the country’s ageing population do not materialize, thereby putting pressure on the sustainability of the public finances over the medium-term. Pressure on the trend could also emerge, if the initiatives intended to reduce the exposure of households to adverse house price dynamics going forward did not bear fruition, thus heightening the potential for negative wealth effects emanating from excessive leverage to continue to put pressure on household consumption and growth over the medium-term.

The rating on the Netherlands is underpinned by the country’s very high national savings rate, which averaged 25.7% of GDP over the 2005-2012 period and which reflects the strong increase in corporate savings. The rating is further supported by the high level of output per hour worked, which was higher than in France, Germany and Demark at end-2012. Strong productivity growth has helped the Netherlands to maintain high levels of income per capita, with positive implications for the country’s tax base. Another source of strength is the country’s current account surplus, which has been high and rising, reaching an estimated 10.1% of GDP in 2012. This surplus has been driven by large trade surpluses, which have risen from 4.8% of GDP in 2000 to 8.1% of GDP in 2012 and which are expected to continue to underpin current account surpluses of around 10% of GDP over the medium-term.

In addition, the government has made considerable progress towards its objective of getting the deficit down to the Maastricht threshold of 3.0% of GDP, with the deficit expected to narrow from 4.1% of GDP in 2012 to 3.2% in 2013. In 2014, the deficit is expected to increase only slightly to 3.3% of GDP, compared to a previous estimate of 3.9% of GDP, as a result of the inclusion in Budget 2014 of additional fiscal consolidation measures worth 1% of GDP. Moreover, on a structural basis, the country is expected to run a structural primary balance of 0.5% of GDP in 2013. Finally, the Netherlands’ rating is supported by the country’s exceptionally strong fiscal institutional framework, which has served as a model for other euro area countries seeking to improve fiscal performance.

Despite these significant strengths, the Dutch economy faces some challenges. In particular, the increase in household debt from 87% of GDP in 2000 to 127.9% of GDP in 2012 could undermine the ability of Dutch consumers to contribute to growth in the years ahead. A weak contribution from household consumption to GDP could, in DBRS’s view, put a strong strain on the economic recovery and on the Government’s ability to reduce its stock of debt from an estimated peak of 76.3% of GDP in 2014.

In DBRS’s view, the prospects of much slower growth of the economy’s potential over the medium term poses an important risk to the country’s debt sustainability in the context of the other challenges that the country faces. This is because a markedly lower permanent rate of growth could materially undermine the government’s ability to stabilize, and eventually reduce down to the 60% threshold, the ratio of debt to GDP in the event of, for example, the materialisation of shocks in relation to the country’s large stock of contingent liabilities. However, at present DBRS takes comfort from the government’s intentions to put in place reforms that will, if successful, boost the country’s growth potential to the higher levels experienced in previous decades.

Notes:
All figures are in euro (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include IMF, OECD, BIS, European Commission, European Central Bank, Statistical Office of the European Communities, Ministry of Finance of the Kingdom of the Netherlands, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For additional information on this rating, please refer to the linking document under Related Research.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Carla Clifton
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 12 May 2011
Most Recent Rating Update: 16 November 2012

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