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

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 CREDIT RATING CONSIDERATIONS
The confirmation of the Stable trend reflects DBRS Morningstar’s view that the credit fundamentals of the Netherlands are solid. Economic growth has weakened in recent months on the back of softening private consumption and external demand but is projected to rebound gradually. The Netherlands Bureau for Economic Policy Analysis (CPB) forecasts real GDP growth at 1.4% in 2024, up from 0.7% in 2023, driven by a catch-up in real wages. The general government budget deficit is forecast to widen to a moderate 1.6% of GDP in 2023 from 0.1% in 2022, reflecting rising spending pressures and lower tax and gas revenues. In terms of the medium-term fiscal outlook, DBRS Morningstar notes that the early resignation of the coalition government in July 2023 and the scheduling of a snap election in November 2023 have raised policy uncertainty, as it is currently unclear whether the new government will push ahead with the planned step-up in investment spending. While the latter would likely lead to a further moderate widening of the budget deficit, the Netherlands has ample fiscal space to accommodate a potential moderate deterioration in fiscal balances over the next few years without putting pressure on the AAA ratings. Government debt is at a moderate level and debt servicing costs are very low.

The Netherlands’ AAA ratings are supported by its highly productive 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.

CREDIT RATING DRIVERS
The ratings could be downgraded if there is a prolonged and severe deterioration in the economy’s growth prospects or public finances, thereby damaging the Netherlands’ resilience to shocks.

CREDIT RATING RATIONALE

Economic Growth Has Weakened in Recent Months but Is Forecast to Recover Gradually

After growing strongly over the past two years, economic growth has weakened during the first half of 2023. Real GDP contracted by 0.4% in Q1 2023 on a quarter-on-quarter basis and by 0.3% in Q2 2023, driven by weakening private consumption as still high inflationary pressures, particularly for food and services weighed on households’ purchasing power. In addition, external demand for Dutch exports softened on the back of weakening growth dynamics in most trading partner economies. The slowdown was particularly pronounced for wholesale and retail trade and, to a lesser extent, manufacturing. Looking ahead, economic growth is projected to recover gradually. The Netherlands Bureau for Economic Policy Analysis (CPB) forecasts a real GDP growth rate of 0.7% in 2023 and 1.4% in 2024, underpinned by a recovery of private consumption related to a gradual catch-up of real wages amid still tight labour markets. Furthermore, a strengthening in external demand next year is projected to support export activity, whereas investment activity is expected to be subdued due to the recent increase in interest rates.

In general, the credit profile continues to be supported by the economy’s highly developed and competitive nature and its position as a major trading hub in Europe. Moreover, the economy has shown a high degree of resilience to COVID-19 and the energy shock, as economic activity in most industrial and service activities rebounded strongly over the past two years. In Q2 2023, the Netherlands’ real GDP stood 6.2% above its 2019 Q4 level compared to an increase of just 2.7% for the entire Euro area. These credit strengths counterbalance the challenges associated with the economy’s exposure to external shocks given its high degree of trade openness and its relatively small size.

Early Resignation of Government Has Raised Policy Uncertainty but Overall Direction of Government Policy Is Unlikely to Change

Policy uncertainty has increased following the collapse of the four-party coalition government in July 2023 and is likely to stay elevated until a new coalition government has been formed. In DBRS Morningstar’s view, predicting the outcome of the snap election in November 2023 is hampered by the currently rather fluid nature of the domestic political landscape, which has been shaken up by the emergence of new political parties and leadership changes in different established parties. Furthermore, DBRS Morningstar expects some degree of political uncertainty to persist beyond the upcoming election as the formation of a new coalition government is complicated by large programmatic differences across political parties and the fragmented nature of the political landscape. Therefore, the future path of government policy on certain contentious topics such as nitrogen reduction and the housing market is currently uncertain. However, DBRS Morningstar does not expect the new government to alter the overall direction of policy particularly with regard to fiscal and foreign affairs. In general, the Netherlands’ rating is underpinned by a high institutional quality. The country is a strong performer on the World Bank’s Worldwide Governance Indicators, as it is characterised by strong rule of law, low levels of corruption and stable economic and political institutions.

Government Budget Deficit Is Projected to Widen in 2023 but the Medium-Term Fiscal Outlook Is Somewhat Unclear

Fiscal balances are projected to deteriorate moderately in the current fiscal year. CPB forecasts the general government budget deficit to widen to 1.6% of GDP in 2023 from 0.1% in 2022, driven by lower public gas revenues and as the economic slowdown is likely to weigh on tax revenues. Furthermore, budgetary pressures have been raised by the adoption of temporary energy support measures. However, DBRS Morningstar notes that the fiscal cost of energy support measures is likely to be substantially lower than initially projected given the marked decrease of energy prices in recent months. This applies particularly to the temporary cap on energy prices for households and SMEs (electricity, gas, district heating), the fiscal cost of which had been estimated at 0.9% of GDP in late 2022.

In terms of the medium-term fiscal outlook, it is currently unclear to what extent the new government will push ahead with the outgoing government’s ambitious investment agenda (e.g. climate change, education, defence). The coalition agreement of the outgoing government envisaged a net increase in public spending of around 2.5% of GDP in 2024 and 2025. Taking into account current medium-term budgetary plans, CPB forecasts the general government budget deficit to widen to 2.4% of GDP in 2024 and 2.6% in 2025. Apart from higher public investment, the increase in the deficit is also driven by less discretionary spending such as rising government outlays on pensions and health which can partly be ascribed to population aging.

Fiscal Space Is Large Due to Moderate Debt Levels And Very Low Interest Burden

Fiscal space benefits from a moderate government debt level. General government debt amounted to 50.1% of GDP at the end of 2022. Despite the projected widening of the government budget deficit, CPB forecasts the debt-to-GDP ratio to decline modestly to 48.3% in 2025 as debt dynamics benefit from elevated nominal GDP growth. Moreover, debt affordability is supported by a still very low interest burden, which is forecast to increase gradually to 0.9% of GDP in 2025 from 0.5% in 2022. The pass-through of the recent increase in higher nominal borrowing rates has been attenuated by the extension of debt maturities over the past years. The average maturity of the central government debt was 8.9 years in June 2023 up from 6.0 years in December 2017. Potential fiscal risks emanate from contingent liabilities, including state guarantees for companies affected by COVID-19. The government estimates the total stock of public guarantees at 23.4% of GDP in 2022. In addition, the government is exposed to indirect guarantees which amounted to 29.7% of GDP in 2022 and mostly relate to the government’s role as an indirect guarantor for the Homeownership Guarantee Fund.

Financial Condition of Banking Sector Is Good but Pockets of Vulnerability Might Emerge From the Recent Increase In Interest Rates

DBRS Morningstar regards the financial condition of the domestic banking sector as good. The non-performing loan (NPL) ratio amounted to a low 1.6% in June 2023. Furthermore, banks have strong capital buffers which provide them with an important cushion against some potential weakening in asset quality. The average Tier 1 capital adequacy ratio stood at 18.5% in June 2023. The sharp increase in interest rates since summer 2022 impacts banks in different ways. While higher interest rates have raised banks’ net interest income, they are likely to strain the repayment capacity of some borrowers. This applies particularly to banks’ exposure to non-financial corporates (28% of domestic private credit in July 2023) due to a broad-based increase in lending rates. The average lending rate of outstanding bank loans towards non-financial corporates has risen markedly from 1.8% in July 2022 to 3.7% in July 2023.

In contrast, interest rates on outstanding mortgages loans, which accounted for 54% of domestic private credit in July 2023, have increased at a much slower pace due to the fixed-rate nature of most mortgages. Furthermore, the repayment capacity of Dutch mortgage borrowers is supported by the strong condition of the domestic labour market. At the same time, pockets of vulnerability might emerge particularly from housing loans that were granted at the end of the recent housing boom. Over the past few years, the financial capacity of homebuyers has been increasingly strained by the sharp upswing in housing prices, as prices have increased at a much faster pace than incomes.

External Strength Is Bolstered By the 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 structural current account surplus. The CPB forecasts the surplus at 9.1% of GDP in 2023 compared to 9.2% in 2022. The main driver of the current account surplus is a very high goods trade surplus, which reflects not only the highly competitive nature 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 CPB, 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. In March 2023, the Netherlands’ net international investment position amounted to 68.8% 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 aadjustment for the ‘Balance of Payments’ building block assessment.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors 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 (4 July 2023) at https://www.dbrsmorningstar.com/research/416784/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 at: https://www.dbrsmorningstar.com/research/420677.

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in Euros 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 (29 August 2022) https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for these credit ratings include the Government of the Netherlands, Ministry of Finance (Stability Programme, April 2023), Dutch State Treasury Agency (Monthly Report State Debt (various issues); Outlook 2023), De Nederlandsche Bank (DNB; Economic Developments and Outlook, June 2023; Financial Stability Report, Spring 2023; Press Release “Netherlands’ current account surplus revised upwards”, 23 June 2023), CPB Netherlands Bureau for Economic Policy Analysis (Macro Economic Outlook 2024, August 2023; 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), PBL Netherlands Environmental Assessment Agency (Climate and Energy Outlook 2022, December 2022), European Commission (European Economic Forecast, Summer 2023), Statistical Office of the European Communities, European Central Bank (ECB), European Environment Agency, IMF (2022 Article IV Consultation with the Netherlands, March 2023; Selected Issues, March 2023; World Economic Outlook April 2023; International Financial Statistics), OECD (Housing Prices), ESRB (Risk Dashboard, June 2023), International Energy Agency, Social Progress Index, World Bank, BIS, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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 credit 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 credit 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://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/420676.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Yesenn El-Radhi, Vice President, Sovereign Ratings,
Rating Committee Chair: Michael Heydt, Senior Vice President, Credit Ratings,
Initial Rating Date: May 12, 2011
Last Rating Date: March 17, 2023

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