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

DBRS Ratings Limited (DBRS) 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 and public finances are on a sustainable path. Public debt-to-GDP is on a downward trend and bank-related government contingent liabilities have steadily declined.

The ratings are underpinned by the country’s high GDP per capita, robust fiscal framework, proven track-record for fiscal consolidation, and persistent trade surpluses. Dutch GDP per capita is well above the EU average (+39%), reflecting the country’s high employment and productive labour force. The Netherlands’ well-established fiscal framework and ongoing budgetary measures have allowed the country to make progress towards improving its public finances. The implementation of the fiscal compact reinforced the country’s various fiscal supervision mechanisms. Also, the government has implemented significant fiscal consolidation measures worth 7.1% of GDP between 2011 and 2017. Assuming further asset sales and a cyclical recovery, the fiscal measures have put downward pressure on the gross debt-to-GDP ratio, which according to the Bureau for Economic Policy Analysis (CPB) could shrink to 63.5% this year and 62% in 2017.

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 8.6% 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 61% of GDP in 2015. Nonetheless, the large gross and net international investment position exposes the country to valuation risks.

Despite these strengths, the Dutch economy is exposed to several risks. Given the openness and small size of the economy, the country is exposed to external shocks, especially to slowdowns in global trade that could impact the country’s export sector. The Netherlands is particularly exposed to UK’s potential departure from the EU due to its significant linkages with the UK. In the short-term, heightened uncertainty could erode investor and consumer confidence, which has been crucial for the rebound in investment and consumption in the Netherlands. Also, this uncertainty could affect the country through world trade. Thus, the CPB has revised down its growth forecast for 2017 by 0.5 percentage points to 1.6%, with 0.4 percentage points related to the UK referendum result. The CPB estimates that the country stands to lose 1.2% of GDP (EUR 10 billion) by 2030 if the UK were to revert to the minimum rules set by the WTO, although this is not our baseline scenario. Also, a sharp slowdown in emerging markets, geopolitical turmoil or a re-emergence of the European crisis could pose headwinds to the Dutch recovery.

The country’s high level of household debt also poses risks to the economic outlook. While the household debt to disposable income ratio has moderated from 267% in 2Q10 to 250% in 1Q16, 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 exposed to shocks and could dampen domestic demand. Households are more exposed to income and housing-price shocks than interest rate shocks, as they predominantly have fixed-rate mortgages and dwellings make a significant part of their assets. The sizable net wealth of the household sector serves as buffers against potential shocks. Nonetheless, DBRS acknowledges that a material share of household assets are illiquid and net wealth varies significantly across different age cohorts.

Boosting the economy’s potential growth rate is another challenge. The Dutch National Bank (DNB) estimates potential growth will rise from 1.2% per annum in 2014-2017 to 1.4% in 2018-2021, well below the 2.6% rate from 1998-2005. The moderation relative to pre-crisis levels is caused both by the smaller labour contribution to potential employment and labour productivity. Although labour productivity is very high, it has been relatively stagnant since the financial crisis. Labour hoarding partially explained this phenomenon between 2009 and 2011. The increasing segmentation in the labour market, with higher long-term unemployment, increasing share of flexible forms of employment and lower transitional rates, could negatively affect labour productivity trends if not addressed in timely manner.

Finally, DBRS believes that the fragmented Dutch political landscape and the rise of the euro-skeptic Freedom Party (PVV) could increase public policy uncertainty. General elections will take place no later than 15 March 2017. The rise of the PVV and its intention to hold a referendum on the Netherland’s EU membership and its contentious social and economic policy proposals are main sources of concern. Increased uncertainty over public policy could negatively affect business and consumer confidence, undermining the ongoing Dutch economic recovery. However, the current legislation precludes a nationwide vote on existing EU membership, only allowing non-binding referendums on new legislation and treaties. Given the PVV’s divisive policy stances, it may be a challenge to form a coalition government after the parliamentary elections.

RATING DRIVERS
The trend on all ratings could be changed to Negative in the event of a severe deterioration in growth prospects or a major deviation in fiscal consolidation that could significantly shift DBRS’s baseline assumptions for public finances.

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 Netherlands Bureau for Economic Policy Analysis (CPB), the IMF, the OECD, the European Commission, the European Central Bank and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

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 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, Global Sovereign Ratings
Initial Rating Date: 12 May 2011
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Last Rating Date: 26 February 2016

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