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

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

The ratings are underpinned by the country’s high income per capita and productivity, its elevated savings rate, and the Netherlands’ very strong external position driven by the longstanding accumulation of trade surpluses. A low level of corporate sector debt, which fell from 125.1% of GDP in 2005 to 117.7% of GDP in 2013 also supports the rating; as does the high household net wealth, a high employment rate and a strong and tested fiscal framework.

The stable trend reflects the expectation that the Government will keep to its fiscal consolidation programme and put the country’s debt on a firm downward trajectory over the medium-term. DBRS believes that the country’s robust fiscal framework combined with its long track-record of negotiating coalition governments and policy agreements between various political parties should support fiscal consolidation going forwards. Finally, DBRS takes comfort in the government’s outlining of a number of measures in recent years, which have the potential to lessen the vulnerability of household balance sheets to adverse developments in the housing market.

The Stable trend could come under downward pressure if the country fails to continue to implement measures which will ensure 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 do not come to fruition. This could increase the potential for negative wealth effects lower household consumption and growth over the medium-term. The Coalition government’s waning popularity and the growing support for other parties, including those who appear to favour an exit from the Euro, could add to the headwinds facing the economy and impair public sector and household debt dynamics.

The ratings on the Netherlands are underpinned by the country’s high savings rate, which averaged 26.4% of GDP over 2005-2013 period and reflects a strong increase in corporate savings. The ratings are further supported by the high level of output per hour worked, which was higher than in France and Germany in 2013. Strong productivity growth has helped the Netherlands to maintain high levels of income per capita, with favourable 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 10.4% of GDP in 2013. This is increasingly driven by large surpluses in the trade in goods, which increased from 4.8% of GDP in 2000 to 8.3% of GDP in 2013.

The government’s progress towards its objective of reducing the deficit to the 3.0% of GDP and below also supports the rating. The deficit is expected to have narrowed from 4.1% of GDP in 2012 to an estimated 2.5% of GDP in 2013 and is expected to stay around the 3.0%of GDP mark in 2014. On a structural basis, the country is expected to run a balance in 2014 before achieving a 0.5% of GDP surplus in 2015. Also supporting the rating is the repayment of over three quarters of the assistance provided by the Dutch State to the financial sector during the crisis. These repayments, which have so far amounted to 14.2% of GDP, out of an estimated total intervention worth 18.7% of GDP, have markedly reduced the effect on the country’s debt of the interventions in the financial sector.

Despite its significant strengths and the recent positive developments, the Dutch economy faces some challenges. In particular, the increase in household debt from 87% of GDP in 2000 to 139.4% of GDP in 2013 could undermine the ability of Dutch consumers to contribute to growth in the years ahead. If the unemployment rate stays at its current relatively high level of 8.8%, consumption and investment could also come under pressure.

DBRS sees the Government’s drive to put in place reforms to boost the country’s growth potential and introduce measures to curtail the costs associated with an ageing population, as supportive of the rating. The government’s initiatives to improve the functioning of the housing market and attenuate the pace of debt accumulation by households together with its commitment to reduce the amount of guarantees (both explicit and implicit) it gives to the banking sector, provide some reassurance that the main challenges are being addressed in a pro-active manner.

The debt to GDP is expected to peak at 75% in 2014 and to decline thereafter to 70% by 2019. A sustained reduction in public debt is important not only to improve debt repayment capacity, but also to provide more room to absorb potential contingent liabilities shocks associated with the highly leveraged household sector and large banking sector. A further risk for the ratings over the medium-term emanates from the prospects of a markedly lower potential growth rate. Lower growth would call into question the Netherlands’ ability to effectively absorb the costs associated with its ageing population and to reduce government debt to below the 60% Maastricht Treaty threshold over the medium-term.

Waning popular support for the governing coalition could also result in a resurgence of political instability and call into question the ability of the current government to last the full-term. DBRS sees an election before the end of the current Parliament as a low probability risk though. In any case, were the country to have to hold a general election before 2017, its strong institutional framework should allow for sufficient policy continuity to ensure that the debt to GDP ratio continues on a downward trajectory.

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.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

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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