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

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Kingdom of the Netherlands’ Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, Morningstar DBRS 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 Morningstar DBRS’ view that the credit fundamentals of the Netherlands are solid notwithstanding the increase in policy uncertainty. The results of the November 2023 parliamentary elections have raised uncertainty about the composition of a new government and the direction of policies. The formation of a stable government is complicated by political fragmentation and substantial programmatic differences between the far-right PVV party, the surprise winner of the elections, and the other parties needed for either forming a coalition government or tolerating a PVV-led minority government. While uncertainty about the future direction of policy is unlikely to subside soon, the Netherlands continues to benefit from strong economic and political institutions. Moreover, Morningstar DBRS does not anticipate major changes in most policy areas as any accompanying legal changes would need to be approved by a majority in parliament. While the fiscal priorities of a new government are unclear, the Netherlands has ample fiscal space to accommodate a potential moderate deterioration in fiscal balances over the next few years. 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 credit 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

Parliamentary Elections in November 2023 Have Raised Policy Uncertainty

Policy uncertainty in the Netherlands has increased as the results of the November 2023 elections have complicated the formation of a stable government coalition. While the far-right Freedom Party (PVV) emerged as a surprise winner of the elections and received the most seats in parliament, it appears unlikely that it will succeed in forming a multi-party coalition government with a clear parliamentary majority. In February 2024, the centre-right NSC party dropped out of coalition talks with the PVV, the pro-farmer BBB and the centre-right VVD but left open the possibility of tolerating a PVV-led minority government. In Morningstar DBRS’ view, the potential formation of such a minority government – a looser form of cooperation than a formal coalition – will partially leave unresolved policy differences between the PVV and centre-right parties, particularly on important subjects like foreign affairs, fiscal policy and labour migration. Despite the increase in policy uncertainty, Morningstar DBRS does not anticipate sharp policy reversals in most policy areas as any accompanying legal changes are unlikely to be approved by a majority in the parliament. 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.

Economic Growth Weakened in 2023 and Is Forecast to Strengthen Only Gradually

Economic growth decelerated significantly over the past year after rebounding strongly from the COVID-19 shock. Real GDP expanded by a mere 0.1% in 2023 down from a growth rate of 4.3% in 2022, driven by a marked softening in private consumption, as still high inflationary pressures, particularly for food and services, weighed on households’ purchasing power. In addition, weak growth in most trading partner economies weighed down external demand for Dutch export and re-export activity. On the supply side, the weakening in growth was particularly pronounced in wholesale and retail trade and, to a lesser extent, professional services. Total throughput volumes in the Port of Rotterdam declined by 6.0% year-on-year during the first nine months of 2023. Looking ahead, the Dutch central bank (DNB) forecasts real GDP growth to strengthen only gradually to 0.3% in 2024 and to 1.0% in 2025 as private consumption and external demand for Dutch exports are projected to remain subdued, particularly in 2024. Moreover, while public investment is expected to increase, business and housing investment are likely to be weighed down by high interest rates. Downside risks to the economic outlook include increased risks of economic policy changes, particularly affecting the labour market, and prolonged disruption in trade in the Red Sea.

In general, the credit profile continues to be supported by the Netherlands’ highly developed and competitive economy and its position as a major trading hub in Europe. Moreover, the economy has shown a high degree of resilience to recent shocks, including COVID-19 and the energy shock. In Q4 2023, the Netherlands’ real GDP stood 6.1% above its 2019 Q4 level, compared to an increase of just 3.0% 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.

Budgetary Outcomes in 2023 Better Than Expected but Future Path of Fiscal Policy is Unclear

Fiscal accounts in 2023 developed more favourably than expected at the time of our previous review, notwithstanding subdued economic growth. While, in September 2023, the Netherlands Bureau for Economic Policy Analysis (CPB) was forecasting the general government budget deficit to widen to 1.5% of GDP in 2023 from 0.1% in 2022, preliminary figures show a surplus of 0.1% of GDP in September 2023 on a four-quarter rolling basis. This better-than-expected outcome can primarily be attributed to rising surpluses in the social security system and an upswing of nominal tax revenues, driven by rising income taxes on the back of a still strong labour market. Total general government revenues rose by 8.9% on a year-on-year basis, exceeding the increase in total expenditure by 7.9%.

The budgetary outlook is clouded by uncertainty on the fiscal priorities of the yet to be formed government. CPB forecasts the budget deficit to widen to 2.4% of GDP in 2024 and 2.6% in 2025. However, these forecasts have been prepared on an unchanged policy basis and, hence, take into account the ambitious investment agenda (e.g. climate change, education, defence) of the outgoing government which foresaw a step-up in investment spending in 2024 and 2025. It is currently unclear to what extent these investment plans will be followed through by a future government. Furthermore, there is uncertainty as to whether some policy reforms proposed by the PVV will be implemented. In terms of fiscal policy, the most important policy proposals are the elimination of mandatory personal healthcare contributions, a reduction of the state retirement age back to 65 years, an exemption of groceries from VAT and the provision of free public transport for the elderly. In general, budgetary pressures are projected to increase gradually over the next years reflecting higher interest expenditure and rising ageing-related expenditure particularly pensions and healthcare.

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

The Netherlands has ample fiscal space to accommodate a potential temporary deterioration in fiscal balances given its moderate government debt levels and a still very low interest burden. General government debt amounted to 45.9% of GDP in September 2023 which is below the debt levels in most other Euro area countries. Under an unchanged policy scenario, CPB forecasts general government debt to increase to a still moderate 48.3% in 2025. 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 8.6 years in December 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 Higher Interest Rates

Morningstar DBRS regards the financial condition of the domestic banking sector as good. Banks benefit from strong capital buffers and good profitability, which has been boosted by higher net interest income. Furthermore, the stock of non-performing loans (NPL) is low with the average NPL ratio standing at 1.6% in September 2023. Looking ahead, pockets of vulnerability for asset quality might arise from the increase in interest rates and the accompanying decrease in real estate prices, particularly for commercial real estate. The sharp increase in interest rates is likely to strain the repayment capacity of some borrowers. This applies particularly to banks’ exposure to non-financial corporates (29% of total domestic and foreign credit in June 2023). Moreover, asset quality risks for banks’ exposure to commercial real estate borrowers both in the Netherlands (5.1%) and abroad (3.8%) have been raised by the declines in commercial real estate prices and transactions volumes. Asset quality risks from household mortgages (37.6%), a large part of which relates to Dutch households, are partly mitigated by the still strong condition of the labour market and long interest rate fixation periods of most mortgages in the Netherlands.

External Strength Is Bolstered By the Large Structural Current Account Surplus and High Net External Creditor Position

Morningstar DBRS assesses the external strength of the Dutch economy as strong. The economy’s external position benefits from a structural current account surplus. DNB estimates the surplus at 11.1% of GDP in 2023 and forecasts it to decrease modestly to a still very high 10.6% in 2024. The main driver of the current account surplus is a very high goods trade surplus, which reflects not only the highly competitive 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 September 2023, the Netherlands’ net international investment position amounted to 68.2% 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 Morningstar DBRS’ positive qualitative adjustment for the ‘Balance of Payments’ building block assessment.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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/428737.

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 (06 October 2023) https://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Government of the Netherlands, Ministry of Finance (2024 Draft Budget, September 2023; Stability Programme, April 2023), Dutch State Treasury Agency (Monthly Report State Debt (various issues); Outlook 2024), De Nederlandsche Bank (DNB; Autumn Projections, December 2023; Financial Stability Report, Autumn 2023), CPB Netherlands Bureau for Economic Policy Analysis (Macro Economic Outlook 2024, September 2023; A fresh look at the Dutch current account surplus and its driving forces, September 2019), Statistics Netherlands (CBS), European Commission (European Economic Forecast, Autumn 2023), Statistical Office of the European Communities, European Central Bank (ECB), European Environment Agency, IMF (The Netherlands: Staff Concluding Statement of the 2024 Article IV Mission, 9 February 2024; World Economic Outlook October 2023; International Financial Statistics), OECD (Housing Prices), International Energy Agency, Social Progress Index, World Bank, BIS, Haver Analytics. Morningstar DBRS 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

Morningstar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’s outlooks and ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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/428735.

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

Lead Analyst: Yesenn El-Radhi, Vice President, Credit Ratings, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Credit Ratings, Global Sovereign Ratings
Initial Rating Date: May 12, 2011
Last Rating Date: September 15, 2023

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