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 is undergoing a moderate recovery, public finances are on a sustainable path with debt-to-GDP on a downward trend, and government contingent liabilities, especially those related to the banking sector, have steadily declined. The trend could be changed to Negative if a significant deviation from the fiscal consolidation path or a severe deterioration in growth prospects place public debt ratios on a persistent upward trajectory.

The ratings are underpinned by the country’s high GDP per capita, robust fiscal framework, persistent trade surpluses, and high household savings. Income per capita in the Netherlands is one of the highest in the euro area, supported by the country’s high employment rate and high productivity level. In addition, DBRS expects this trend in income per capita to endure as the economic recovery gathers pace, underpinned by the strengthening of domestic demand, with real GDP expected to grow 1.9% and 2% in 2015 and 2016 respectively. Nonetheless, risks to the growth outlook are skewed to the downside due the increasing uncertainty coming from the external backdrop and the potential materialization of shocks.

The Netherlands’ well-established fiscal framework and ongoing budgetary measures have allowed the country to make progress towards improving its public finances. Even after including the tax-stimulus package to take place in 2016, the government has carried out budgetary consolidation measures amounting to around 7.1% of GDP between 2011 and 2017. The deficit narrowed from an average of 4.9% of GDP between 2009 and 2011 to 2.2% of GDP in 2015 and is expected to improve further to 1.5% of GDP in 2016 as the economic recovery strengthens. Improving fiscal outcomes along with the cyclical recovery have put public debt ratios on a downward trajectory. Debt-to-GDP is projected to fall to 66.2% this year and could fall further if an extra 20% of the shares in ABN Amro are sold in 2016.

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. The current account surplus reached an estimated 10.6% of GDP in 2015. This is also reflected in the Netherlands’ strong net creditor position vis-à-vis the rest of the world – the net international asset position amounted to 70% of GDP in 2015-Q3. Notwithstanding the benefits 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 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. A sharp deceleration in China or a broader slowdown across emerging markets could significantly impair the country’s recovery. 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, the intensification of geopolitical conflicts or a re-emergence of the Euro crisis could dampen growth among the Netherlands’ primary trading partners.

The country’s high level of household debt also poses risks to the economic outlook. While household debt to disposable income ratio has moderated, dropping from 268% in 2010Q2 to 239% in 2015Q3, it remains high. A prolonged period of household deleveraging could act as a headwind to growth. In addition, the high levels of indebtedness and high loan-to-value ratios (LTVs) leave the household sector’s balance sheet vulnerable to shocks and could dampen domestic demand. Households are more exposed to income and house prices shocks rather than interests rate ones as they predominantly have fixed-rate mortgages.

High external debt, at 548% of GDP in 2015-Q3, is also a source of vulnerability for the ratings. The reliance on external funding exposes the country to sudden swings in market sentiment. The elevated external debt is to a large extent explained by structural factors. Intercompany debt reached 185 % of GDP in 2015-Q3 driven by country’s many multinationals. In particular, the usage by foreign multinationals of special financial institutions (SFIs), accounted for approximately 43% of the total external debt. Also, the banking sector has relied on the foreign wholesale market to bridge the gap between domestic deposits and lending. Borrowing from abroad by the country’s financial institutions remains elevated at 164% of GDP in 2015-Q3.

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.

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
Initial Rating Date: 12 May 2011
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Last Rating Date: 4 September 2015

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