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 despite the economic repercussions of Russia’s invasion of Ukraine and accompanying energy price inflation. After recovering strongly from the COVID-19 shock, the economy has faced rising headwinds in recent months as the increase in energy prices has weighed on business and consumer sentiment and reduced purchasing power particularly of low-income households. Moreover, although the Dutch economy exhibits a much lower dependence on Russian gas supplies than other European economies, a potential prolonged cut-off in Russian gas supplies to EU countries constitutes an important downside risk both for macroeconomic developments and public finances as it would likely dampen production in important trading partner economies, aggravate energy price inflation and necessitate additional government support measures. These risks, however, are balanced by the Netherlands’ large fiscal space for absorbing a temporary increase in budgetary pressures. Fiscal space benefits from moderate government debt levels and a very low interest burden. Furthermore, despite the increase in nominal bond yields over the past months, DBRS Morningstar continues to view the Dutch government’s financing conditions very favourably.
The Netherlands’ AAA ratings are supported by its highly developed and competitive economy, its strong external position and a high institutional quality. 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. Furthermore, contingent liabilities, emanating from state direct and indirect guarantees for domestic companies and the financial sector as well as fiscal burden sharing within the currency union could eventually weigh on public finances.
A prolonged and severe deterioration in the economy’s growth prospects or public finances, damaging the Netherlands’ resilience to shocks, would lead to a downgrade.
Economy Has Recovered Well from COVID-19 But Faces Increased Headwinds due to Russia’s Invasion of Ukraine and Accompanying Energy Price Inflation
The Dutch economy recovered well from the COVID-19 shock with real GDP expanding by 4.9% in 2021 following a contraction of 3.9% in 2020. Moreover, the economic growth rebound has so far been stronger than in most other EU countries. In Q1 2022, the Netherlands’ (seasonally adjusted) real GDP stood 3.2% above its 2019 Q4 value compared to an increase of just 1.4% for the total EU. This comparatively strong growth performance was driven by a partial rebound in private consumption following a marked relaxation of COVID-19 containment measures from spring 2021 onwards. In addition, domestic demand was supported by an increase in government consumption (+5.5%). The Dutch economy also benefitted from an upswing of global and regional trade which bolstered export and re-export activity. Net exports rose by a large 17.8% in 2021 in real terms. On the production side, the largest growth drivers were government and business services, wholesale and retail trade and manufacturing.
The outlook for the economy has been clouded by Russia’s invasion of Ukraine and the accompanying increase in energy prices. The increase in energy prices has aggravated inflationary pressures which in turn weighed on business and consumer sentiment and reduced purchasing power particularly of low-income households. The annual inflation rate (HICP) stood at 9.9% in June 2022 compared to an increase of 8.6% for the total euro area. This gap results from a much sharper increase of energy prices in the Netherlands (+59.9%) than in the euro area (+42.0%) due to a higher reliance on gas. In addition, DBRS Morningstar recognises that this divergence in energy price inflation also partly results from different statistical approaches to measuring household utility costs across euro area countries. When calculating monthly changes in household utility costs, Dutch statistical authorities draw on the price developments for new utility contracts although actual utility costs for most Dutch households do not change on a monthly basis due to longer-dated contracts. This statistical approach leads to a faster pass-through of currently elevated energy prices.
In view of these increased economic headwinds, the Dutch central bank cut its 2022 annual real GDP forecast to 2.8% in June 2022 down from its earlier forecast of 3.6% released in December 2021. The 2023 real GDP growth forecast was revised down to 1.5% from 1.7%. DBRS Morningstar understands that the revised 2022 real GDP growth rate assumes weak current growth dynamics and primarily reflects a large positive carry-over effect. This has been particularly relevant for the first quarter of 2022 which registered a very high year-on-year growth rate of 6.7% due to last year’s low base whereas growth dynamics on a quarter-on-quarter basis weakened (+0.4%). Although the Dutch economy exhibits a much lower dependence on Russian gas supplies than other euro area economies (e.g. Germany), a potential prolonged cut-off in Russian gas supplies to EU countries constitutes an important downside risk for the Dutch economy as it would likely aggravate energy price inflation and weigh on production in important trading partner economies. If such a cut-off in Russian gas supplies in tandem with a weakening of global trade activity were to materialize in Q3 2022, DNB projects real GDP to grow by a mere 0.4% in 2022 and to contract by around 1.5% in 2023. Despite these macroeconomic downside risks, the credit profile continues to be supported by the economy’s highly developed and competitive nature and the economy’s position as a major trading hub in Europe. 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.
Government Is Expected to Incur Moderate Budget Deficits Over the Next Years
Budgetary pressures have increased due to the COVID-19 shock and, more recently, Russia’s invasion of Ukraine and are expected to remain somewhat elevated over the next years due to the government’s ambitious investment agenda. After posting recurring surpluses in the years prior to the pandemic, the general government budget balance registered deficits of 4.4% of GDP in 2020 and 2.5% in 2021 as the COVID-19 pandemic raised budgetary pressures particularly on the expenditure side. Total COVID-19 expenditure measures amounted to 3.6% of GDP in 2021. In terms of the 2021 budgetary outcome, however, DBRS Morningstar notes that the actual budget deficit over the past year was markedly lower than initially expected due to higher-than-projected tax revenues. In December 2021, the Dutch central bank had projected the 2021 general government budget deficit at 4.4% of GDP.
While COVID-19 support measures are set to be reduced this year, the increase in energy prices has raised budgetary pressures. In view of the latter, the Dutch central bank currently projects only a modest narrowing of the government budget deficit to 2.1% of GDP in 2022. In spring 2022, the Dutch government adopted several support measures for households and, to a lesser extent, businesses which aim to alleviate the burden of rising energy prices. These measures included a cut in energy taxes for households and businesses, an increase in the energy allowance for low-income households and decreases in the VAT rate for energy and excise duties on diesel and petrol. The total size of energy-related support measures is estimated at 0.7% of GDP in 2022. DBRS Morningstar notes that these support measures are currently planned to be phased out by the end of this year. Therefore, a potential renewed increase in energy prices constitutes an important downside risk for mid-term budgetary planning as it would likely necessitate additional support measures. Even in the absence of the latter, the general government is likely to incur moderate budget deficits over the next years due to the new coalition government’s ambitious investment agenda particularly with regard to climate transition measures, nitrogen reduction, defence and education. The coalition agreement of the government envisages a net increase in public spending of around 2.0-3.0% of GDP between 2023 and 2025. The Dutch central bank forecasts a government budget deficit of 1.7% of GDP in 2023 and of 1.6% in 2024.
Fiscal Space is Large due to Moderate Debt Levels and Very Low Interest Burden
In DBRS Morningstar’s view, the Netherlands has ample fiscal space to accommodate the projected moderate budgetary deficits over the next years. Fiscal space benefits from moderate government debt levels and a very low interest burden. General government debt amounted to a moderate 52.1% of GDP at end 2021. Taking into account the recent increase in inflationary pressures, the central bank now forecasts the government debt-to-GDP ratio to decrease to 47.8% by the end of 2024. In addition, the government’s latest stability programme projects annual interest expenditure to remain very low at 0.3% of GDP over the next four years. DBRS Morningstar notes that the government has extended debt maturities in recent years in order to lock in historically low rates. The average maturity of the central government debt amounted to 8.3 years in March 2022 up from 6.0 years in December 2017. Furthermore, the increase in nominal yields on Dutch government bonds in recent months has been less pronounced than for other euro area governments. Overall, DBRS Morningstar continues to view the Dutch government’s financing conditions very favourably. Potential risks for public finances emanate from contingent liabilities, for example state guarantees for companies affected by COVID. The total stock of public guarantees amounted to 24.6% of GDP at end 2021. In addition, the government is exposed to indirect guarantees amounting to 33.4% of GDP at end 2021, most of which relate to the government’s role as an indirect guarantor for guarantee obligations by the Homeownership Guarantee Fund. At end 2021, around 28% of all outstanding mortgage loans were covered by a guarantee of the Homeownership Guarantee Fund.
Financial Sector Has Weathered COVID-19 Shock Well But Risks Might Emerge From Elevated Housing Prices
The Dutch banking sector has so far weathered well the impact of COVID-19. Despite the contraction of real GDP in 2020, asset quality metrics have improved over the past two years, which partially can be attributed to substantial government support measures to affected households and businesses. The non-performing loan (NPL) ratio amounted to a low 1.3% in March 2022, compared to 1.9% in December 2019. Going forward, the economic repercussions of Russia’s invasion of Ukraine and the phasing-out of COVID-19 support measures such the NOW wage subsidy scheme in April 2022 might lead to a deterioration in asset quality metrics in the future. DBRS Morningstar, however, expects any potential detrimental impact to be manageable as the size of banking sector exposures to affected sectors is moderate. Furthermore, DBRS Morningstar regards the banking sector’s good-to-moderate capital position as sufficient to absorb some weakening in asset quality. The Tier 1 capital adequacy ratio averaged 17.6% in March 2022, down from 18.9% in December 2019. The sector’s profitability remains moderate with the average return on assets amounting 0.7% in financial year 2021.
DBRS Morningstar views the real estate market as the most important risk factor for financial stability due to elevated housing prices and high debt stocks of Dutch households. Mortgages accounted for around 54% of domestic private sector credit at end 2021. Housing prices have risen markedly over the past years, clearly exceeding the increases in rents and incomes. According to the OECD, the price-to-rent and the price-to-income ratios for residential mortgages in the Netherlands rose by a comparatively large 48% and 36%, respectively between December 2015 and September 2021. Moreover, household debt, albeit declining, remains high from a cross-country perspective. Household debt in the Netherlands amounted to 101% of GDP at end 2021 compared to an average of 60% for euro area countries. At the same time, the aggregate net worth of Dutch households is also comparatively high at 253% of GDP at end 2021 compared with the euro area average of 170%. The vulnerabilities of mortgage debtors to increases in interest rates is limited as residential mortgages are largely fixed rate. However, DBRS Morningstar notes that around a quarter of mortgages mature over the next five years. In view of elevated housing prices and a recent moderate pick-up in mortgage loan growth, the Dutch central bank announced an increase in the countercyclical capital buffer for banks to 1% in May 2022 which is to be implemented until May 2023.
External Strength is Bolstered by Large Structural Current Account Surplus and High Net External Creditor Position
DBRS Morningstar assesses the external strength of the Dutch economy as strong. The economy’s external position benefits from a large and structural current account surplus which rose to a very high 9.0% of GDP in 2021, up from 7.1% in 2020 on the back of higher service exports and lower net outflows in the primary and secondary balances. Going forward, the European Commission forecasts the current account surplus at 8.7% of GDP in 2022. The principal driver of the current account surplus is a very high goods trade surplus which stood at 7.3% of GDP in 2021. This very large surplus reflects not only a high international competitiveness of Dutch manufacturing industries but also the Netherlands’ role as a global trading hub and associated re-export activity particularly in the Port of Rotterdam. According to estimates by the Netherlands Bureau of Economic Policy Analysis, re-exports account for around 50% of the surplus in the goods trade balance. While the gross value added of single re-exports is small due to a high import content, the huge scale of re-export activity renders the net contribution to the trade balance large. Furthermore, the external position is strengthened by the economy’s large net external asset position. At end 2021, the Netherlands’ net international investment position amounted to a high 93.8% of GDP. 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.
High Institutional Quality is a Key Strength of the Rating
The Netherlands’ rating is underpinned by a high institutional quality. The country is a strong performer on the World Bank’s Governance Indicators as it is characterised by a high rule of law, low levels of corruption and stable economic and political institutions. These strengths clearly offset a somewhat fragmented political landscape. The latter partially results from a very low electoral threshold of 0.7% for parliamentary elections. The March 2021 general election led to the election of 20 different political parties to the Dutch parliament and was followed by lengthy coalition negotiations with the new coalition government sworn in only in January 2022. Although the new coalition government consists of the same four parties as the preceding government, the new coalition agreement signals a change of direction in certain policy areas. In particular, the government seeks to raise government investment in different fields (e.g. climate transition, nitrogen reduction, education, defence). Despite this change of direction in certain policy areas, DBRS Morningstar assesses overall policy continuity as high, particularly with regard to fiscal and foreign affairs.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/399637.
EURO AREA RISK CATEGORY: LOW
All figures are in 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 (9 July 2021)
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The sources of information used for this rating include the Government of the Netherlands, Ministry of Finance (Stability Programme April 2022), Dutch State Treasury Agency (Monthly Report State Debt (various issues); Outlook 2022), De Nederlandsche Bank (DNB; Economic Developments and Outlook, December 2021 & June 2022; Financial Stability Report, Spring 2022; Statistics portal), CPB Netherlands Bureau for Economic Policy Analysis (Central Economic Plan, March 2022; A fresh look at the Dutch current account surplus and its driving forces, September 2019), Statistics Netherlands (CBS), Government of the Netherlands (2021-2025 Coalition Agreement), European Commission (2022 Spring Forecasts), Statistical Office of the European Communities, European Central Bank (ECB), IMF (World Economic Outlook April 2022), IMF (International Financial Statistics), OECD (Housing Prices), Climate Action Tracker, BP (Statistical Review of World Energy), Social Progress Index, World Economic Forum Global Competitiveness Index, World Bank, BIS, Our World In Data, 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/399635.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Yesenn El-Radhi, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Initial Rating Date: 12 May 2011
Last Rating Date: 14 January 2022
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