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

DBRS Ratings Limited has today confirmed the Kingdom of the Netherlands’ long-term foreign and local currency issuer ratings at AAA and short-term foreign and local currency issuer ratings at R-1 (high). The trends on all ratings are Stable.

The AAA ratings are underpinned by the Netherlands’ highly productive and diversified economy, robust fiscal framework, and persistent trade surpluses. The Stable trends reflect DBRS’s view that the economy is recovering and that public finances are in a sustainable position. General government debt-to-GDP is on a downward trajectory, while bank-related government contingent liabilities have steadily declined. However, the economy faces several challenges on the external and domestic fronts. In the unlikely event that there is a severe deterioration in growth prospects or a major deviation in the fiscal outlook, the trend could be changed to Negative.

The Dutch economy is wealthy and diversified. Dutch GDP per capita is well above the EU average (+38%), reflecting the country’s overall level of productivity and high levels of employment (76.4%, age group 20-64). The country’s role as a main European trade hub has been key in shaping its economic structure as an export-oriented economy.

Public finances in the Netherlands benefit from a well-established fiscal framework. The implementation of the fiscal compact reinforces the country’s various fiscal supervision mechanisms. In the context of this framework, the government implemented a significant budgetary adjustment worth 6.7% of GDP between 2011 and 2016. This has helped put debt ratios on a firm downward trajectory over the near to medium term. According to the Netherlands’ Bureau for Economic Policy Analysis (Centraal Planbureau; CPB), the debt ratio stood at 62.7% in 2016 and is expected to drop to 59.7% in 2017. Furthermore, the Netherlands changed the minimum retirement age, adjusted pension entitlements, and restrained healthcare spending, all of which have significantly improved the long-term sustainability of public finances.

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 8.7% of GDP in 2016. This is also reflected in the Netherlands’ strong net creditor position vis-à-vis the rest of the world — the net international asset position stood at an estimated 78% of GDP in Q3 2016.

Notwithstanding these underlying strengths, the Dutch economy is exposed to several external risks. The openness of the economy to trade is in many ways a strength, but in conjunction with the small size of the economy, suggests that external shocks could have large adverse effects. For example, the United Kingdom’s (UK) decision to leave the European Union (EU) could negatively affect the Netherlands as the UK is its second largest export destination in terms of value added. In the short term, increased uncertainty could dampen investor and consumer confidence. In the longer term, weaker trend growth in the UK could reduce demand for Dutch exports, although the impact will depend on the outcome of negotiations between the UK and the EU. Other external risks include political uncertainties in Europe and rising protectionist sentiment.

On the domestic side, high levels of household debt could pose risks to the economic outlook. Household debt, which stood at 250% of disposable income in Q3 2016, is high compared to other advanced economies. A prolonged period of household deleveraging could act as a headwind to growth. Households are more exposed to income and housing-price shocks than interest rate shocks, as citizens predominantly have fixed-rate mortgages. However, the sizeable net financial wealth of the household sector serves as a buffer against potential shocks.

While strengthening economic conditions have been accompanied by improvements in the labour market, the increasing share of flexible employment raises concerns over labour market segmentation. Firms tend to invest less in temporary employees, which could have adverse implications for labour productivity. Moreover, the rising share of temporary employees, leaves many workers without social security coverage.

The rise of the euro-sceptic Party for Freedom (Partij voor de Vrijheid; PVV), which is currently leading the opinion polls, is a source of concern. According to the last ten polls, the PVV could obtain 20 to 35 seats out of 150 seats in the lower house. Despite leading in the polls, the PVV is unlikely to form the next government, as the main political parties have ruled out sharing a coalition with the PVV. Even if the PVV performs much better than expected, to form a government it would need to compromise on its more extreme proposals. In particular, the PVV has proposed to hold a referendum on the Netherlands’ EU membership. DBRS believes in the event of the country’s exit, this could weaken the growth prospects of the Netherlands as its historic role as a key European trade hub, a key credit strength, could be undermined. At the same time, such an event could severely impair the cohesiveness of the EU bloc, putting pressure on the ratings. However, DBRS considers the Netherlands unlikely to exit the EU in the short term for the following reasons: (1) a government-led consultative referendum would need to be approved by both chambers of parliament; (2) a citizen-led initiative to hold a referendum on existing EU membership is not possible under the Advisory Referendum Act; and (3) according to recent surveys a majority of Dutch people still back EU membership. Despite the low probability of a Dutch exit from the EU in the short term, we could foresee greater medium term risk should the factors influencing the current wave of euro-scepticism in the Euro area not abate.

RATING DRIVERS
In the unlikely event that there is a severe deterioration in growth prospects or a major deviation in the fiscal outlook, the trend could be changed to Negative.

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, United Nations Development Programme (UNDP), I&O Research, De Stemming, TNS NIPO, Peil, Ipsos and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited 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 historical default rates published by the European Securities and Markets Authority (“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
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and
Sovereign Ratings
Initial Rating Date: 12 May 2011
Last Rating Date: 19 August 2016

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