DBRS Confirms 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 sustained 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 economic recovery gathers pace with real GDP expected to grow 2% and 2.4% in 2015 and 2016 respectively. This is due to the combination of the improving external environment and a strengthening recovery of domestic consumption and business and residential investments.

The Netherlands’ well-established fiscal framework and ongoing budgetary measures have allowed the country to make progress towards improving its public finances. The government has carried out budgetary consolidation measures amounting to EUR 51 billion (approximately 8% of GDP) between 2012 and 2017. The fiscal deficit has narrowed from an average of 4.7% of GDP between 2009 and 2012 to 2.4% of GDP in 2014 and is expected to improve further to 2.1% of GDP in 2015 and 1.5% in 2016 as the economic recovery strengthens. Moreover, the country’s public debt, previously a key concern, is expected to have peaked in 2014 at 67.9% of GDP and to drop towards 65.3% of GDP in 2016 largely driven by lower deficits and GDP growth. Moreover, the projections include the technical assumption that a total of 25% and 20% of equity in ABN Amro will be sold in 2015 and 2016, respectively. Noteworthy, the government’s indebtedness metrics benefited from the shift to the new European System of Accounts (ESA2010) methodology in 2014, mostly driven by the upward revision to the country’s GDP figure, which puts the peak in public debt at 67.9% of GDP against a previous peak of 75%.

The Netherlands’ ratings are also supported by the country’s strong trade performance which has helped keep the Dutch current account in surplus since 1981. Moreover, in recent years, the current account surplus has increased further to reach an estimated 10.6% in 2014. As such, the Netherlands exhibits a strong net creditor position vis-à-vis the rest of the world, reflected in a robust net international investment position (63.6% of GDP in 2014). 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, the country is vulnerable to external shocks, especially to slowdowns in global trade levels that could impact the country’s export sector. While Dutch exports to China only amount to 1.6% of the total, a more severe economic deceleration in China could impact negatively the Netherlands’ main trading partners and materially reduce the export sector growth prospects. Also, 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.

The country’s high level of household debt also poses risks to the economic outlook. While household debt to disposable income ratio has moderated recently, dropping from 267.7% in 2010Q2 to 243.2% in 2015Q1, it remains high. This 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. In addition, the high levels of indebtedness and high loan-to-value ratios (LTVs) leave the household sector’s balance sheet vulnerable to shocks (i.e., interest rate or price shocks) and could dampen domestic demand under an adverse scenario.

High external debt is also a source of vulnerability for the ratings having reached 516% of GDP in 2014, up from 504% in 2013. The country’s elevated external debt reflects to a large extent the funding model of the country’s banks which is characterised by a relatively high dependence on foreign wholesale market funding to bridge the gap between domestic deposits and lending. Also contributing to the high levels of external debt are the country’s many multinationals with intercompany debt accounting for a further 155% of GDP at end 2014. 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 1.25% 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 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.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Javier Rouillet, Assistant Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 11 November 2011
Most Recent Rating Update: 6 March 2015

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