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

DBRS Ratings Limited has confirmed the Kingdom of the Netherlands’ Long-Term Foreign and Local Currency – Issuer Ratings at AAA and its Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

The AAA ratings are underpinned by the Netherlands’ highly productive and diversified economy, robust fiscal framework, and strong external accounts. However, the economy faces both external and internal challenges, given its openness to trade, highly leveraged households, and labour market segmentation concerns. The Stable trends reflect DBRS’s view that the economy is steadily expanding and that public finances are in a sustainable position. Although a new government has not yet been formed, the absence of urgent vulnerabilities to be addressed in the short term, together with stable institutions, mitigate the associated uncertainty. The output gap is gradually narrowing and is expected to close by 2019 on the back of a broad-based expansion. For the first time since 2008, the general government recorded a budget surplus in 2016. The debt-to-GDP ratio is on a downward trajectory, while bank-related contingent liabilities to the government have steadily declined.

The Netherlands’ developed and diversified economy is a key strength. Dutch GDP per capita is well above the European Union (EU) average (+42%), reflecting the country’s overall level of productivity and high levels of employment (75.1%, age group 20-64). Following a period of protracted weakness, GDP expanded at an average rate of 2% in the past three years, supported mainly by domestic demand. A positive feedback loop generated between rising house prices, a stronger labour market and higher confidence levels have uplifted investment and consumption. Looking ahead, the Dutch economy is expected to continue its solid growth pace.

The Netherlands’ credible fiscal framework underpins the government’s sound fiscal management and supports the ratings. 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. 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’ strong external accounts support the ratings. The country has historically benefited from a very robust exporting sector. Its role as a main European trade hub has been key in shaping its economic structure as an export-oriented economy. The strong trade performance has helped keep the Dutch current account in surplus since 1981. The current account surplus reached an estimated 8.5% of GDP in 2016. This is also reflected in the Netherlands’ strong net creditor position, with the net international investment asset position reaching 69% of GDP in 2016. A strong external position provides the country with significant buffers to absorb external shocks.

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 significant adverse effects. The Netherlands is particularly exposed to worse-than-expected consequences from the United Kingdom’s (UK) departure from the EU, given its strong trade linkages with the UK and the rest of the EU. The UK is the Netherlands’ second-largest export destination in terms of value added. Similarly, an intensification of protectionist measures, hurting global growth and global trade, could have a disproportionate impact on the Dutch economy. Furthermore, a sharp slowdown in emerging markets or a re-emergence of the European crisis could pose headwinds to growth.

On the domestic side, high levels of household debt could pose risks to the economic outlook. Household debt, which stood at 242.3% of disposable income (Q1 2017), is high compared with other advanced economies. The portion of mortgage loans with high loan-to-value and loan-to-income ratios also remain significant, which could translate into higher credit losses. Other vulnerabilities include the still high stock of interest-only mortgages and the share of mortgages with negative equity. Despite these vulnerabilities, credit losses have been moderate throughout the economic downturn and remain low, with non-performing loans at 2.4% in Q1 2017. On the other hand, a prolonged period of household deleveraging could weigh on growth. Furthermore, highly leveraged households could exacerbate the economic fluctuations. In response to a negative shock, households may cut spending heavily and amplify the economic downturn. Households are more exposed to income and housing-price shocks than interest rate shocks, as mortgage holders predominantly have fixed-rate mortgages.

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. This may discourage the incentive to invest in human capital and on-the-job training, and thereby lower labour productivity growth in the medium term. Moreover, the presence of institutional differences in employment protection between permanent and fixed-term contracts could hamper labour market transitions. Finally, a rising share of flexible and self-employed workers could affect the financial support base of social security schemes.

RATING DRIVERS
In the unlikely event that a severe deterioration in growth prospects occurs or a major deviation in the fiscal outlook takes place, 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 Government of the Netherlands, the Dutch central bank (De Nederlandsche Bank), the Ministry of Finance (Ministerie van Financiën), the Dutch State Treasury Agency (DSTA), the Dutch National Statistical Office (Centraal Bureau voor de Statistiek), the Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau), the International Monetary Fund, the United Nations Development Programme, the Organisation for Economic Co-operation and Development, the European Commission, the European Central Bank, Eurostat, 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 and US 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: 17 February 2017

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