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

DBRS Ratings Limited 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.

KEY RATING CONSIDERATIONS

The confirmation of the Stable trend reflects the Netherlands’ solid credit fundamentals amid strong economic performance. Economic growth is projected to remain above the Euro area average at close to 3% this year, after gathering momentum in 2017. Pro-cyclical fiscal measures are providing a boost to the economy, while a strong labour market and a booming housing market are supporting confidence. Despite the expansionary fiscal policy stance, the government debt-to-GDP ratio is expected to continue to fall. Moreover, vulnerabilities stemming from the private sector, associated with high household debt relative to income and rapidly rising house prices, seem contained. The authorities have adopted measures over the past few years to improve the resilience of households and banks.

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 RATIONALE

The Dutch Economy Is Growing Above Potential and The External Sector Remains Robust

The performance of the Dutch economy has strengthened. From an average of 1.9% between 2014 and 2016, real GDP grew by 3.0% in 2017. The Netherlands Bureau for Economic Policy Analysis (CPB) is forecasting the Dutch economy to grow by 2.9% in 2018 and 2.7% in 2019. Growth is then projected to moderate closer to its potential of around 1.7% in 2020-2021. While external demand is expected to continue contributing to growth, domestic demand is set to be the main driver over the next two years, as lower taxes and higher public investment provide a boost to disposable incomes and spending. A buoyant housing market also appears to be reinforcing the upswing of the economy.

Downside risks to the economic outlook are largely related to a slowdown in global trade or key trading partners. De Nederlandsche Bank (DNB) has estimated that under an escalating trade conflict scenario, Dutch economic growth could be lower by 0.2 percentage points in 2018, 0.8 in 2019 and 0.5 in 2020 relative to their baseline scenario. The Netherlands is also exposed to the United Kingdom’s departure from the European Union, as the UK is the Netherlands’ third-largest export destination in terms of value, accounting for 9% of Dutch total goods exports. The CPB has estimated that the GDP loss in the long-term could be 1.2% under a WTO scenario and 0.9% under a free-trade agreement scenario for Brexit.

Moreover, notwithstanding improved labour market conditions, with unemployment falling to low levels, the relatively high share of flexible employment has raised concerns over the segmentation in the labour market. Protective employment legislation, rigid non-wage benefits for permanent contracts, and tax exemptions for the self-employed seem to be behind this development. If intensified, segmentation could discourage investment in human capital and affect labour productivity growth prospects in the longer term.

Nevertheless, the Netherlands’ economy continues to benefit from high levels of employment, productivity, and education. The Netherlands’ advanced, wealthy, and productive economy supports its ratings. GDP per capita, at US$53,635 in PPP terms in 2017, is one of the highest levels in Europe, almost 20% above the Euro area average. The level of private sector savings is also sizeable, with households’ pension savings and insurance products accounting for just over 50% of total household assets – among the highest of OECD countries. Aggregate high incomes and savings provide the Dutch economy with an important degree of resilience.

The Netherlands’ external position is also very strong, reflecting its trade competitiveness. A robust trade performance and high net savings in the private sector have helped maintain the current account in surplus since the early 1980s. The surplus has averaged 8.7% of GDP over the past five years, in part supporting the Netherlands’ large net external creditor position, on average at 49.2% of GDP since 2013. The strong external position provides the country with a significant buffer to absorb external shocks and underpins its ratings.

Risks to Financial Stability Are Contained

In the private sector, household debt relative to income, while falling, remains one of the highest of OECD countries. High household debt was 220% of disposable income in 2017. At the same time, the aggregate net worth of Dutch households is the highest among OECD countries at almost 700% of net disposable income. Nevertheless, high household debt could exacerbate an economic downturn in case of negative shocks. In particular, households with low incomes and many first-time homebuyers are exposed to income shocks and declines in house prices. Vulnerability to increases in interest rate seems limited, as residential mortgages are largely fixed-rate. Debt partly reflects tax incentives and is largely in the form of mortgages (for further details, please see DBRS commentary entitled “Danish and Dutch Households: Indebted, Wealthy, and Vulnerable to Rising Interest Rates?”, available at www.dbrs.com).

Meanwhile, house prices continue to rise. Since 2013 nationwide house prices have risen by 26%, strengthening household balance sheets. Higher prices are contributing to the reduction of mortgages with negative equity that resulted from the 2008-2013 house price correction (now down to around 10% of total mortgages from almost one third in 2014). Prices, however, have risen at a stronger pace in the main Dutch cities, suggesting that pressures on the housing market could build up. Housing investment has not kept up with housing demand. If persistent, strong growth in house prices could increase the risk of a correction. A house price correction and an economic downturn could reinforce each other.

Given the potential risks to financial stability and the economy posed by high household debt and rising house prices, and as part of the government’s tax reform, the authorities have agreed to accelerate the reduction in mortgage interest deductibility from 2020. A measure in place since 2013 also requires the amortisation of debt to benefit from tax deductibility on interest expenses. This requirement has contributed to the reduction in interest-only mortgages, which now account for 52% of total mortgages. The limit on the loan-to-value ratio was reduced in recent years, although to a still high level of 100% in 2018. Moreover, mortgage lending remains moderate and the banking sector is in a healthy position. Dutch banks are profitable and well-capitalised.

The New Coalition Government Is Implementing Expansionary Fiscal Policy

The Netherlands benefits from effective public institutions and consensus-driven policies, which more than offsets a somewhat fragmented political landscape. No single political party won a majority in the March 2017 parliamentary elections. But a new government took office in October 2017, after four parties (VVD, CDA, D66 and the Christian Union) presented the Coalition Agreement following months of negotiations. The centre-right coalition agreed on a reform of the tax system aimed at reducing the overall tax burden on households and firms, and to increase investment in education, defence, and infrastructure. Energy taxes and the lower VAT rate are also set to increase. Moreover, labour market reform measures have been agreed, although not yet approved, to tackle dualism in the labour market.

Despite the expansionary fiscal policy stance, DBRS expects the government to maintain a sound fiscal position. The fiscal surplus was higher than expected in 2017, at 1.1% of GDP. While the budget position is set to deteriorate over the next few years, the structural balance is projected to remain within the -0.5% medium-term objective. Strong growth is supporting tax revenues and lower expenditure on unemployment benefits. Moreover, the fiscal cost from the planned reduction of natural gas extraction is expected to be offset by additional measures.

The government debt-to-GDP ratio is also moderate and on a downward trajectory. It declined to 56.0% 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 2019. Moreover, the Dutch Treasury continues to extend debt maturities. The declining debt ratio and a favourable debt profile support the government’s shock absorption capacity.

The long-term sustainability of public finances looks secure. Over the past decade, the Netherlands raised the minimum retirement age, adjusted pension entitlements, and restrained healthcare spending. These measures have helped lessen ageing-related spending pressures. The new government has agreed to progress with additional reforms to the pension system. The country’s effective public institutions, together with a robust fiscal framework, support the sustainability of public finances. Overall, the Netherlands’ robust institutional framework supports its ratings.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the AAA – AA (high) range. The main points discussed during the Rating Committee include: economic and fiscal policies, economic performance, risks to the economic outlook, labour market, household debt, housing market, and banking sector.

KEY INDICATORS

Fiscal Balance (% GDP): 1.1 (2017); 0.7 (2018F); 0.9 (2019F)
Gross Debt (% GDP): 56.0 (2017); 52.1 (2018F); 48.4 (2019F)
Nominal GDP (EUR billions): 737.6 (2017); 767.7 (2018F); 804.3 (2019F)
GDP per Capita (EUR): 43,180 (2017); 44,591 (2018F); 46,512 (2019F)
Real GDP growth (%): 3.0 (2017); 2.9 (2018F); 2.7 (2019F)
Consumer Price Inflation (%): 0.1 (2017); 1.6 (2018F); 2.3 (2019F)
Domestic Credit (% GDP): 290.9 (2017); 290.8 (Q1 2018)
Current Account (% GDP): 10.5 (2017); 9.0 (2018F)
International Investment Position (% GDP): 59.6 (2017); 60.5 (Q1 2018)
Gross External Debt (% GDP): 531.5 (2017); 539.8 (2018F)
Governance Indicator (percentile rank): 96.2 (2016)
Human Development Index: 0.9 (2015)

Notes:

All figures are in EUR unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Forecasts based on the Netherlands Bureau for Economic Policy Analysis (CPB) forecasts. 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, Ministry of Finance (Ministerie van Financiën), Dutch State Treasury Agency (DSTA), Netherlands Central Bank (De Nederlandsche Bank DNB), Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau CPB), Dutch National Statistical Office (Centraal Bureau voor de Statistiek CBS), European Commission, European Central Bank (ECB), Eurostat, 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: 9 February 2018

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