DBRS Ratings GmbH (DBRS Morningstar) confirmed the Kingdom of the Netherlands’ Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, DBRS Morningstar confirmed the Kingdom of the Netherlands’ 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 DBRS Morningstar’s view that the credit fundamentals of the Netherlands remain solid, notwithstanding the economic shock brought about by the global Coronavirus Disease (COVID-19) pandemic and its impact on the country’s fiscal position. Despite a sharp contraction in 2020, but much less pronounced than the European Union (EU) average, the Dutch economy showed its resiliency and its capacity to recover relatively swiftly. Dutch GDP has already exceeded its 2019 Q4 level in Q3 2021. As the government responded to the crisis with a sizable support package, the budget position has deteriorated substantially in 2020 and 2021 and the government debt-to-GDP ratio has increased sharply. The wind-down of COVID-19 support measures will trigger a strong improvement of the fiscal performance from this year, and the Kingdom is likely to incur modest fiscal deficits in the coming years, as illustrated in the new coalition agreement presented on 15 December 2021. This agreement includes new fiscal measures to notably support education, housing and childcare and EUR 60 billion dedicated to multi-year green funds. Nevertheless, the debt ratio is projected to remain close to 60% in the coming years and well below the average for the euro area. In view of the latter and the government’s very favourable financing conditions, fiscal space is expected to remain large which constitutes an important cushion against future risks.
The ratings remain supported by the Netherlands’ advanced, wealthy, and productive economy, its strong external position and its robust institutional framework. These credit strengths counterbalance the challenges associated with the economy’s exposure to external shocks given its high degree of trade openness and the economy’s relatively small size.
A prolonged and severe deterioration in growth prospects or public finances, damaging the Netherlands’ resilience to shocks, would lead to a downgrade.
After A Sharp Contraction in 2020, the Dutch Economy Showed its Resilience and the Recovery Remains on Track Despite the Resurgence of COVID-19 Cases
Disruptions in external trade and pandemic-related restrictive measures caused the Dutch economy to contract by 3.8% in 2020. Nevertheless, thanks to its strong economic fundamentals, its high level of digitalization and the effective government support package, the country showed a high degree of resilience compared to its EU peers: EU GDP contracted by 5.9% in 2020. In Q3 2021, Dutch GDP already reached its 2019 Q4 level. In its September 2021 projections, the Netherlands Bureau for Economic Policy Analysis (CPB) forecast a continued recovery going forward, with the Dutch economy growing by 3.9% in 2021 and by 3.5% in 2022.
Although the adaptative capacity of the Dutch economy limits downside risks, the economic outlook remains subject to uncertainty. It depends on the evolution of the pandemic and the recovery in global trade, with lingering supply chain issues. On the national health front, the Netherlands’ pace of vaccine inoculation stands comparatively well: as of January 8 2022, 71% of the population was fully vaccinated, versus 70% in the EU. Nevertheless, COVID-19 case counts in the Netherlands as elsewhere in Europe increased again from mid-October 2021 with the advance of the omicron variant and the Dutch government decided to introduce new restrictive measures in November 2021 which were further tightened from mid-December 2021. Coupled with the development of potential new COVID-19 variants, this could lead to downside risks to the pace of economic recovery. Moreover, as an open economy and a major European trade hub, the Netherlands is exposed to a weaker-than-expected recovery in global trade or in the economies of key European trading partners, including Germany and the United Kingdom (UK). The UK is one of the Netherlands’ top four export destinations in terms of value, and thus potential trade disruptions with the UK, as the new trade arrangements are implemented, also pose downside risks to the Netherlands’ economic outlook.
The Dutch government’s fiscal wage support measures contributed to maintaining the unemployment rate at a very low 2.7% in November 2021 versus 3% at the beginning of 2020 prior to the COVID-19 outbreak. This occurred despite the duality of the Dutch labor market in which around 40% of workers are on flexible contracts or are self-employed. Despite the wind-down of government support measures, latest CPB projections envisage the unemployment rate to only increase slightly to 3.5% in 2022 as many sectors remain subject to labor shortages.
The Netherlands’ economy continues to benefit from high levels of employment, education, and productivity. GDP per capita is one of the highest in Europe, almost 20% above the euro area average. The level of private sector savings is also sizeable. Households’ pension savings and insurance products account for just over 50% of total household assets and households’ financial assets account for around EUR 187,000 per capita, 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, Largely Reflecting its Trade Competitiveness
A robust trade performance and high net savings in the private sector have helped maintain the current account in surplus for decades. The surplus has averaged 9% of GDP over 2017-2021, which has contributed to the Netherlands’ large net external creditor position, exceeding 100% of GDP since 2020. The strong external position provides the country with a significant buffer to absorb external shocks and supports its capacity for external adjustment. This underpins DBRS Morningstar’s positive qualitative assessment for the ‘Balance of Payments’ building block.
The Netherlands’ Extraordinary Support Measures Temporarily Weighed on Its Fiscal Position in the Last Two Years but Improvement is Expected from this year
The Netherlands’ comfortable fiscal space and prudent fiscal policy in previous years allowed it to implement substantial direct support packages to affected businesses and households, which accounted for around 5% of GDP each year in 2020 and 2021. These measures include wage cost subsidy schemes (the Temporary Emergency Measure to Preserve Employment, NOW, and the Temporary Support Scheme for Self-employed Persons, TOZO) and tax measures, particularly deferrals. As a consequence, the deficit, which deteriorated to 4.2% of GDP in 2020 following four years of general government surpluses, is expected to widen further in 2021 to 5.4% of GDP according to the September 2021 CPB’s forecast. It is projected to decline to 2.3% in 2022, but could be slightly higher due to the new coalition agreement’s fiscal measures which were not included in the CPB’s latest projections. At this stage, DBRS Morningstar takes the view that the international tax reform as envisioned by the OECD/G20 would have a limited fiscal impact on the Netherlands.
The Government Debt Ratio Should Remain Very Close to 60% of GDP
The government debt ratio increased sharply in 2020 to 54.3% of GDP versus 47.6% in 2019. According to the CPB, it will likely have reached 57.5% in 2021. Based on the new coalition agreement forecasts, it should remain very close to 60% by 2025. Corporate loan guarantees pose some downside risk to the government’s balance sheet, but they were used at a much lesser extent in the Netherlands compared to European peers. Despite a higher level of debt, the government continues to benefit from very favourable financing conditions thanks also to the expansionary monetary policy of the European Central Bank, with debt servicing expenditures expected to equal less than half a percent of GDP each year over the forecast period. Moreover, the Dutch Treasury has extended debt maturities in recent years and it is aiming to increase the average debt maturity to a minimum of eight years. A favourable debt profile supports the shock absorption capacity of public finances.
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. For the longer term, the government adopted the Pension Agreement in 2019 with the aim of achieving a more robust pension system. In July 2020, the Dutch government and social partners reached consensus on the implementation of the Pension Agreement. The country’s effective public institutions, together with a robust fiscal framework, support the sustainability of public finances and overall economic policies.
The Dutch Financial Sector Remains Resilient but the Real Estate Market Overheating Risk is Still Increasing
Dutch banks entered the crisis with good capital, funding and liquidity positions which they have kept so far. According to European Banking Authority (EBA) data, the average CET1 capital ratio stood at 17.0% in Q3 2021 versus 16.6% in Q2 2020. Despite COVID-19 economic impacts, the non-performing loan (NPL) ratio remains low and declined slightly to 1.7% in Q2 2021 from 2.0% in Q2 2020. Dutch banks’ exposure to COVID-19’s most affected economic sectors is moderate at around 15-20% of the their corporate loan portfolio according to the Dutch National Bank (DNB), which limits the associated risks. Nevertheless, uncertainties remain as extensive government support packages are removed.
DBRS Morningstar considers the real estate market as a potential risk factor for financial stability due to high mortgage debt stocks of Dutch households and fast growing housing prices. Dutch household debt relative to disposable income, while continuing to fall, remains one of the highest of OECD countries at 209% as of Q2 2021 and is largely in the form of mortgages. The aggregate net worth of Dutch households, however, is also 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, flexible jobs and many first-time homebuyers are exposed to income shocks and declines in house prices. Vulnerability to increases in interest rates seems limited, as residential mortgages are largely fixed-rate. Nevertheless, real estate residential prices have continued to increase in 2020 by almost 9% and have reached a very high 20% on a YoY basis as of November 2021. In this context, the DNB has decided to introduce a floor for the risk weighting of mortgage loans which entered into effect on 1 January 2022.
DBRS Morningstar also considers that the COVID-19 pandemic has increased risks for Dutch banks’ commercial real estate (CRE) lending portfolios. The share of CRE lending in total bank loans outstanding is higher in the Netherlands than the Euro area average. Nevertheless, CRE exposure and loan-to-values are generally lower than during the global financial crisis and DBRS Morningstar views the risks related to those exposures as manageable for the banks. Please see the DBRS Morningstar Commentary “Dutch Banks’ CRE Exposure – Risks Contained” for more information.
Public Institutions in the Netherlands are Effective
The Netherlands benefits from effective public institutions and consensus-driven policies, and is a strong performer on the World Bank’s Governance Indicators. These strengths more than offset a somewhat fragmented political landscape. No single political party won a majority in the March 2021 general elections. The Prime Minister’s VVD party secured 34 seats out of 150 at the House of Representatives, one more seat compared with the 2017 general elections, while the pro-European Union liberal D66 party became the second-largest party in the House, winning 24 seats, five more than in 2017. The new coalition government, installed on January 10, 2022, is supported by the same four parties as in the former government and is again led by Mark Rutte as Prime Minister. The new coalition agreement has a strong focus on education, housing, social policies as well as climate and energy policies. Although higher spending is anticipated especially on those key public policies, DBRS Morningstar expects the Netherlands to maintain a prudent fiscal stance in the coming years and to hold general government debt close to 60% of GDP.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments at https://www.dbrsmorningstar.com/research/390744.
EURO AREA RISK CATEGORY: LOW
All figures are in euro (EUR) unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
The principal methodology is the Global Methodology for Rating Sovereign Governments, https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments (July 9, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (February 3, 2021).
The sources of information used for this rating include the Government of the Netherlands, Ministry of Finance (2022 Draft Budgetary Plan), Dutch State Treasury Agency (DSTA, 2022 Outlook), Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau CPB, September 2021 Projections), CPB Trade effects of Brexit for the Netherlands June 2016, Netherlands Central Bank (De Nederlandsche Bank DNB), Dutch National Statistical Office (Centraal Bureau voor de Statistiek CBS), CBS Dutch Trade in Facts and Figures 2021, European Commission (EC, Autumn 2021 Economic Forecast), New Coalition Agreement (Omzien naar elkaar, vooruitkijken naar de toekomst; Coalitieakkoord 2021-2025), European Central Bank (ECB), European Banking Authority (EBA), Eurostat, Organisation for Economic Co-operation and Development (OECD), IMF, World Bank, UNDP, BIS, Our World in Data, the Social Progress Imperative (2021 Social Progress Index) and the 2019 and 2020 Global Competitiveness Reports from the World Economic Forum, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO
DBRS Morningstar 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 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/390745.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Mehdi Fadli, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James; Managing Director, Co-Head Global Sovereign Ratings
Initial Rating Date: May 12, 2011
Last Rating Date: July 16, 2021
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