DBRS Confirms 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 ratings at AAA and the short-term foreign and local currency issuer ratings at R-1 (high). All ratings have a Stable trend.

The Stable trend reflects DBRS’s view that the economy has now entered a recovery path, public debt to GDP has peaked, and government contingent liabilities, especially those related to the banking sector have steadily declined. Developments which could put the trend under downward pressure include persistent deterioration in public and private debt ratios and a sharp rise in contingent liabilities.

The Netherlands’ ratings are underpinned by the country’s high GDP per capita, it’s robust fiscal framework, a strong and persistent trade surplus and high household savings. Income per capita in the Netherlands, whilst a little lower than its pre-crisis peak, remains one of the highest in the euro area, supported by the country’s high employment rate and past productivity growth. In addition, DBRS expects this trend in income per capita to endure as the economy recovers, with an expected pick-up in GDP growth from 0.8% in 2014 to 1.5% in 2015 and 2016.

The government’s progress towards its objective of reducing the deficit to 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 2.8% of GDP in 2014, and is expected to decline to 2.2% of GDP in 2015. Moreover, the country’s public debt, previously a key concern, has benefited from the shift to the new European System of Accounts (ESA2010) methodology which puts the peak in public debt at 70% of GDP against a previous peak of 75%.

The risks to financial stability and ultimately the government’s balance sheet and debt to GDP ratio, from a potential deterioration in the asset quality of the country’s households, have also diminished. This reflects a number of developments. On the one hand, risks relating to potential deterioration in the quality of housing-related assets due to the high share (at 30%) of households facing negative equity has now abated, reflecting the bottoming out of the decline in house prices and their ongoing recovery, together with the emergent decline in the unemployment rate. In addition, the new institutional framework for resolving failed banks as part of the euro area wide banking union, and the better capitalization of the country’s banks, reduce the likelihood that financial sector-related liabilities will migrate to the sovereign balance sheet. All seven Dutch banks scrutinized in the ECB’s Comprehensive Assessment passed the review.

The Netherlands’ ratings are also supported by the country’s strong trade performance which has helped keep the Dutch current account in surplus for the last 30 years. Moreover, in recent years, the current account surplus has increased further to reach an estimated 10.9% in 2014. As such, the Netherlands exhibits a strong net creditor position vis-à-vis the rest of the world, manifested in a robust net international investment position (50.2% of GDP at end 2014Q3). Notwithstanding the benefits to the Netherlands of a large trade surplus, large current account imbalances across the euro area may be destabilizing for monetary union, and therefore to the Netherlands. High household savings, are also a supportive feature of the Dutch economy and provide some offset to the high level of household debt, although DBRS acknowledges that as savings are kept in large part in the form of pensions, a material share of these savings constitute fairly illiquid assets.

Despite these strengths, the Dutch economy is exposed to some risks. Given the openness and small size of the economy, uncertainty stemming from the geopolitical conflict in Ukraine and from the negotiations between Greece and its euro area partners, could dampen growth in the Netherlands’ main export markets and impact negatively on the country’s growth prospects. While the direct impact of a further escalation of the conflict in Ukraine may only have a temporary direct effect, with less than 2% of Dutch exports going to Russia, the economy is vulnerable to a deceleration of global trade that could dampen export sector performance.

The country’s high level of household debt also poses risks to the economic outlook. After a long period of strong house price inflation, relatively low interest rates, favorable lending conditions and a tax system which tends to favor home ownership and the use of interest-only mortgages; household debt grew rapidly to reach 127.8% of GDP by end 2013. The Netherland’s highly leveraged households could impact negatively on the economic outlook over the medium-term as the more buoyant growth in real disposable income, facilitated by the low-inflation environment, is used to pay off debt or accumulate savings.

High external debt is also a source of vulnerability for the ratings. Dutch external debt is high and rising, reaching to 525.3% of GDP in 2014Q3 from 516.1% in 2013Q3. High external debt reflects to a large extent the funding model of the country’s banks, which is characterized by high dependence on wholesale market funding to bridge the gap between domestic deposits and banks’ lending activities. Also contributing to the high levels of external debt are elevated levels of intercompany debt, which accounted for 160.7% of GDP at end 2014Q3. Finally, weak medium-term growth prospects, partly the result of a shrinking labour supply, could magnify the negative impact of the increasing costs of an ageing population on public finances. Dutch potential output has been trending down since the 1990s and is now estimated at around 1% per annum.

Notes:
All figures are in Euros (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 the Dutch central bank (i.e. de Nederlandsche Bank), the Ministry of Finance, the Dutch State Treasury Agency (DSTA), the Dutch National Statistical Office (Statistics Netherlands), the Dutch Electoral Council, the Netherlands Bureau for Economic Policy Analysis (CPB), the IMF, the OECD, the European Commission, the European Central Bank (ECB)’s Statistical Data Warehouse 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 credit 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, while reviews are generally resolved within 90 days. 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: Javier Rouillet, Assistant Vice President (AVP)
Initial Rating Date: 11 November 2011
Rating Committee Chair: Roger Lister, Chief Credit Officer
Last Rating Date: 26 September 2014

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