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 confirmation of the Stable trend reflects the Netherlands’ solid credit fundamentals amid strengthened economic and fiscal performances. Economic growth gathered momentum in 2017 and is expected to remain steady in the near term, projected at 3.1% in 2018. The government debt-to-GDP ratio also fell below 60% last year. Moreover, a new four-party coalition government was formed in October 2017, dissipating uncertainty following elections in March, and enabling the government to set the economic programme for the next four years.

The ratings are supported by the Netherlands’ wealthy, productive and diversified economy, robust institutional framework, and strong external accounts. The country has one of the highest GDP per capita levels in Europe, providing it with an important degree of resilience. Its public institutions are highly effective, which together with a robust fiscal framework, support the sustainability of public finances. The Netherlands is also a net external creditor, reflecting the large current account surpluses it has posted for decades. This provides the country with significant buffers to absorb external shocks.

The Netherlands also faces challenges, given its exposure to external shocks, leveraged households, and increased labour market segmentation. Its export-oriented economy, together with its relatively small size, suggests that external shocks could have significant adverse effects. Likewise, high levels of household debt, while declining, could exacerbate the economic fluctuations in case of negative shocks to incomes or house prices. Moreover, labour market segmentation, if intensified for a protracted period, could have an adverse impact on productivity and growth prospects.

THE DUTCH ECONOMY AND ITS EXTERNAL SECTOR REMAIN ROBUST
The performance of the Dutch economy has strengthened. From an average of 2% between 2014 and 2016, real GDP grew by an estimated 3.2% in 2017, supported by both domestic and external demand. Unemployment has also fallen to very low levels. Notwithstanding improved labour market conditions, the higher share of flexible employment has raised concerns over segmentation in the labour market. Highly protective employment legislation, rigid social benefits for permanent contracts, and tax exemptions for the self-employed seem to be behind the trend. If persistent, segmentation could discourage investment in human capital and affect labour productivity in the longer term. Nevertheless, the Netherlands’ advanced economy continues to benefit from high levels of employment, productivity, and education. All this is reflected in a high GDP per capita, which at US$53,582 in PPP terms in 2017, is just over 20% above the Euro area average. The level of private sector savings also remains high.

Despite some downside risks, growth prospects for the Dutch economy look favourable. Growth is forecast to remain above 3% in 2018, partly boosted by pro-cyclical fiscal measures recently adopted, before moderating in 2019-2021. Given the openness of the Dutch economy, downside risks to the economic outlook are largely related to a potential slowdown in global trade. The Netherlands is exposed to a worse-than-expected outcome from the United Kingdom’s departure from the European Union. The UK is the Netherlands’ third-largest export destination in terms of value, accounting for 9% of Dutch total goods exports.

Reflecting the Netherlands' trade competitiveness and its robust exporting sector, its external position is very strong. The Netherlands' 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 current account in surplus since 1981. The surplus has averaged 8.8% of GDP over the past five years, supporting the Netherlands’ large net external asset position, on average at 53.2% of GDP since 2013.

POLICY MEASURES HAVE BEEN AGREED WITH THE FORMATION OF A NEW GOVERNMENT
On the political front, the Netherlands benefits from effective public institutions, counterbalancing a somewhat fragmented political landscape. No single political party won a majority in the March 2017 parliamentary elections. But after several months of negotiations, the leaders of four parties (VVD, CDA, D66 and the Christian Union) presented their coalition agreement in October 2017 and a new government took office. The centre-right coalition agreed on a reform to the tax system aimed at reducing the overall tax burden for households and firms, and an increase on investment expenditure related to education, defence and security, and infrastructure. Labour market reform measures have also been agreed to tackle segmentation in the labour market.

Despite the expansionary fiscal policy stance, DBRS expects the government to maintain a sound fiscal position. Public finances are indeed projected to continue improving over the medium term. The budget recorded its second consecutive surplus in 2017 since 2008, estimated at 0.5% of GDP. A small fiscal surplus is forecast for this year. From 2019 onwards, both the headline and structural fiscal surpluses are projected to increase gradually, with strong economic growth supporting higher tax revenues and lower expenditure on unemployment benefits.

The general government debt-to-GDP ratio is also moderate and on a downward trajectory. It is estimated to have declined to 56.6% in 2017, below the EU’s benchmark of 60% for the first time since 2010. Nominal GDP growth, privatisation proceeds, improving primary balances, and lower funding costs have contributed to the reduction of debt since 2015. The debt ratio is projected to fall below 50% by 2020, with debt projections incorporating the completion of the re-privatisation of financial institutions still partially owned by the state. The Dutch Treasury has also extended government debt maturities in recent years. The declining debt ratio and a favourable debt profile support the government’s shock absorption capacity.

RISKS TO FINANCIAL STABILITY ARE CONTAINED
In the private sector, high levels of household debt, while falling, could pose some risks. Household debt, at 240% of disposable income in Q3 2017, exposes households to shocks, particularly income and housing-price shocks rather than interest rate shocks, as mortgages are largely fixed-rate. A prolonged period of deleveraging might weigh on growth. Nevertheless, the financial net worth of households is among the highest of OECD countries at over 450% of disposable income.

House prices have continued to rise. House price increases have been stronger in the province of Noord-Holland. Prices in this region increased by 10.7% in 2017, compared to 7.6% nationwide, suggesting that pressures on the housing market could build up. Housing investment has not kept up with housing demand, which has been fuelled by low interest rates and a buoyant economic environment. Given the potential risks to financial stability posed by high household debt and rising house prices, and as part of the government’s tax reform, the authorities will accelerate the reduction in interest payment deductibility on mortgages.

The banking sector is in a healthy position, enabling it to face some challenges. Mortgages with high loan-to-value ratios remain significant, which could translate into high credit losses. Moreover, more than half of total mortgages are interest-only mortgages and the share of mortgages with negative equity remains significant. Despite these vulnerabilities, credit losses were limited during the house price correction in 2008-2013 and non-performing loans remain low. Mortgage lending also remains moderate, and banks are well-capitalised.

RATING DRIVERS

In light of the Netherlands’ credit strengths and solid economic performance, downward pressure on the ratings seems unlikely. Nevertheless, a severe deterioration in growth prospects or public finances, damaging the Netherlands’ resilience to shocks, could lead to a Negative trend on the ratings.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the AAA – AA (high) range. The main points discussed at the Rating Committee include: economic policies, external position, housing sector, banking sector, household debt.

KEY INDICATORS

Fiscal Balance (% GDP): 0.4 (2016); 0.5 (2017E); 0.5 (2018F)
Gross Debt (% GDP): 61.8 (2016); 56.6 (2017E); 53.1 (2018F)
Nominal GDP (USD billions): 702.5 (2016); 733.1 (2017E); 763.9 (2018F)
GDP per capita (USD thousands): 41,373 (2016); 42,862 (2017E); 44,478 (2018F)
Real GDP growth (%): 2.2 (2016); 3.2 (2017E); 3.1 (2018F)
Consumer Price Inflation (%, eop): 0.1 (2016); 1.3 (2017E); 1.4 (2018F)
Domestic credit (% GDP): 249.7 (2016); 242.4 (Q3-2017)
Current Account (% GDP): 8.5 (2016); 8.6 (2017E); 8.3 (2018F)
International Investment Position (% GDP): 66.7 (2016); 63.5 (Q3-2017)
Gross External Debt (% GDP): 550.0 (2016); 537.1 (Q3-2017)
Governance Indicator (percentile rank): 96.2 (2016)
Human Development Index: 0.92 (2016)

Notes:
All figures are in EUR unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The sources of information used for this rating include the Government of the Netherlands, the Ministry of Finance (Ministerie van Financiën), the Dutch State Treasury Agency (DSTA), the Dutch Central Bank (De Nederlandsche Bank), the Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau), the Dutch National Statistical Office (Centraal Bureau voor de Statistiek), the European Commission, the European Central Bank (ECB), Eurostat, the Organisation for Economic Co-operation and Development (OECD), IMF, World Bank, UNDP, 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: Adriana Alvarado, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group Initial Rating Date: 12 May 2011
Last Rating Date: 11 August 2017

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