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. The Dutch economy stagnated over the past year but cyclical headwinds are projected to ease gradually. The Dutch central bank (DNB) forecasts real GDP growth to increase from 0.2% in 2023 to 0.5% in 2024 and to accelerate to 1.3% in 2025 as a catch-up in real wages is projected to bolster private consumption. Moreover, export and investment activity are forecast to recover from next year onwards, aided by strengthening external demand from trading partner economies and a likely easing in monetary policy. At the same time, budgetary pressures of the Dutch government were comparatively low over the past year. The general government budget deficit stood at 0.4% of GDP in 2023 compared with an average fiscal deficit of 3.6% in the Euro area. Looking ahead, however, the fiscal deficit is expected to rise over the next years, driven by rising ageing-related expenditure and a planned step-up in fiscal support measures for households by the new government coalition. Taking into account the May 2024 coalition agreement, the Netherlands Bureau for Economic Policy Analysis (CPB) forecasts the fiscal deficit at 2.8% of GDP in 2025 and 3.3% in 2026. Nevertheless, the Netherlands has ample fiscal space to accommodate a 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

Economic Growth Is Forecast to Strengthen Gradually

The Dutch economy faced cyclical headwinds over the past year but economic growth is forecast to rebound gradually. Real GDP expanded by a mere 0.2% in 2023, down from 4.4% 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. Moreover, weaker external demand from trading partner economies weighed on export activity and tighter financial conditions dampened housing investment. Economic growth developments during the first half of 2024 have been volatile. While real GDP contracted by 0.3% on a quarter-on-quarter basis in Q1 2024, preliminary estimates point to a strong growth rate of 1.0% during Q2 2024. This strong growth, however, was partially driven by base effects as export activity rebounded from a slump in the preceding quarter. On an annual basis, the DNB projects economic activity to strengthen at a gradual pace with real GDP forecast to grow by 0.5% in 2024 and by 1.3% in 2025. The main growth driver is private consumption which, notwithstanding the recent easing in Q2 2024, is projected to strengthen gradually as a catch-up in real wages is likely to bolster households' purchasing power. Exports and private investment are projected to recover only from 2025 onwards based on the expectations that economic activity in the Euro area will strengthen and monetary policy will ease. Downside risks to the economic outlook include economic policy changes, particularly affecting the labour market, and a potential escalation of geopolitical risks.

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 the COVID shock as exemplified by a strong growth rebound up until summer 2022. In Q2 2024, the Netherlands' real GDP stood 7.6% above its 2019 Q4 level, compared to an increase of just 4.0% 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 Pressures Were Lower-Than-Expected in 2023 But Are Likely to Rise over the Next Years

The general government budget deficit amounted to 0.4% of GDP in 2023. Fiscal performance of the Dutch government over the past year was better than expected at the time of our previous review. The Draft Budget 2024 which had been published in September 2023 estimated the general government budget deficit at 1.5% of GDP in 2023. The favourable fiscal performance of the Dutch government can largely be ascribed to higher-than-expected corporate income tax revenues. Moreover, actual general government expenditure was lower than budgeted particularly at the subnational level. Fiscal developments in 2024 are likely to be impacted by the change in government. While the Spring Memorandum 2024 puts the general government budget deficit at 2.5% of GDP in 2024, these projections seem unlikely to materialize as the projections were prepared by the former government on an unchanged policy basis and the new government has announced several fiscal policy changes.

The new government has laid out its fiscal agenda in the May 2024 coalition agreement but has so far not published detailed budgetary projections. The fiscal agenda of the new government is likely to raise budgetary pressures as it seeks to step up fiscal support measures for households. This includes an income tax cut for middle income families from 2025 onwards, an extension of the current fuel tax reduction until year-end 2025 and a large cut to health insurance deductibles from 2027 onwards. Moreover, a structural increase in defence spending is likely to raise budgetary pressures. The fiscal cost of these new measures is planned to be partially financed through budgetary savings from lower subsidies for renewable energy and higher VAT rates for accommodation and cultural services. However, a sizeable fraction of projected budgetary savings in the coalition agreement relates to uncertain items such as a large structural drop in asylum-related costs and a decrease in EU budget contributions. In terms of investment spending, the new government plans to reallocate funds from environmental programmes to other purposes such as the construction of two additional nuclear reactors and a higher public spending on housing. Taking into account the new government's fiscal agenda and a gradual increase in ageing-related expenditure and intertest costs, the Dutch central bank forecasts the general government budget deficit at 3.3% of GDP in 2025 and 3.8% in 2026. Projections by CPB put the deficit at 2.8% of GDP in 2025 and 3.3% in 2026.

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

The Netherlands has ample fiscal space to accommodate a temporary deterioration in fiscal balances given its moderate government debt levels and a still very low interest burden. General government debt amounted to 43.9% of GDP in March 2024 which is below the debt levels in most other Euro area countries. Moreover, debt affordability is supported by a still very low interest burden, which is forecast to increase gradually to 0.7% 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 9.6 years in June 2024 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% of GDP in 2022. In addition, the government is exposed to indirect guarantees which amounted to 30% of GDP in 2022 and mostly relate to the government's role as an indirect guarantor for the Homeownership Guarantee Fund.

Coalition Agreement Signals Policy Changes in Migration and Environmental Regulations But Broad Policy Continuity in Foreign Affairs

The snap elections in November 2023 have led to a change in government. In May 2024, the far-right Party for Freedom (PVV), the surprise winner of the elections, formed a government coalition with the pro-farmer BBB party and the two centre-right parties New Social Contract (NSC) and People's Party for Freedom and Democracy (VVD). The coalition agreement of the four parties points to policy changes particularly with regard to migration and environmental policies. The new government seeks to reduce the number of asylum-seekers and, to a lesser extent, of labour migrants markedly over the next years. Furthermore, it aims to loosen environmental policies particularly on greenhouse gas emissions and nitrogen reduction which had been a policy priority of the former government coalition.

In terms of foreign affairs, the coalition agreement signals broad policy continuity. The agreement commits to the country's membership in NATO and does not call for a referendum on EU membership which had been an important policy goal of the PVV in recent years. At the same time, certain policy targets of the new government such as an opt-out clause for the EU's asylum and migration policy and a reduction in EU budget contributions are likely to raise tensions with other EU member countries. Overall, 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.

Financial Condition of Banking Sector Is Strong But Commercial Real Estate Exposure is Comparatively Large

Morningstar DBRS regards the financial condition of the domestic banking sector as strong. Banks benefit from strong capital buffers and a good profitability which was boosted by higher net interest income over the past year. Furthermore, the stock of non-performing loans (NPL) is low with the average NPL ratio standing at 1.6% in March 2024. Nevertheless, pockets of vulnerability for asset quality could arise from the sharp increase in interest rates over the past two years which is likely to strain the repayment capacity of some borrowers. This applies particularly to corporate borrowers due to fast pass-through of higher interest rates. The average interest rate on outstanding loans to non-financial corporates stood at 4.0% in June 2024, up from just 1.6% in June 2022. Moreover, asset quality risks for banks' exposure to commercial real estate borrowers in the Netherlands and abroad have been raised by the declines in commercial real estate prices and transactions volumes. The exposure of Dutch domestic banks to commercial real estate is comparatively large. According to the ECB, the net loan exposure of Dutch banks which has been collateralized by commercial property stood at 13.2% of GDP in 2023 compared to an EU average of 7.3%. Asset quality risks from household mortgages, 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. Residential house prices have recovered markedly over the past year. After declining by 6.2% between July 2022 and April 2023, the statistical office's house price index has started to rebound since then. In July 2024, it stood 4.6% above its July 2022 level.

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 which amounted to 10.2% of GDP in 2023. DNB forecasts the current account surplus to remain broadly unchanged at 10.3% of GDP in 2024 and 9.9% in 2025. 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 March 2024, the Netherlands' net international investment position amounted to 46% 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 Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments at: https://dbrs.morningstar.com/research/438811/.

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 (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 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 (Spring Memorandum 2024, April 2024; Draft Budget 2024, September 2023), Dutch State Treasury Agency (Monthly Report State Debt, various issues), Government of the Netherlands (Outline agreement 2024-2028 coalition parties PVV, VVD, NSC and BBB, May 2024), De Nederlandsche Bank (DNB; Spring Projections, June 2024; Financial Stability Report, Spring 2024), CPB Netherlands Bureau for Economic Policy Analysis (Analysis Coalition Agreement 2025-2028, May 2024; A fresh look at the Dutch current account surplus and its driving forces, September 2019), Statistics Netherlands (CBS), PBL Netherlands Environmental Assessment Agency, European Commission (European Economic Forecast, Spring 2024), Statistical Office of the European Communities, European Central Bank (ECB Data Portal), European Environment Agency, IMF (The Netherlands: 2024 Article IV Consultation, April 2024; World Economic Outlook April 2024; 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' 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://dbrs.morningstar.com/research/438810/.

These credit ratings are 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, Global Sovereign Ratings
Initial Rating Date: May 12, 2011
Last Rating Date: March 01, 2024

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