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 is gradually rebounding from a period of lower growth. The Dutch central bank (DNB) forecasts real GDP growth to accelerate from 0.9% in 2024 to 1.5% in 2025 and 2026 as a catch-up in household incomes is projected to bolster private consumption and as public expenditure increases. Investments and exports are expected to rise thanks to a recovery in global trade and monetary policy easing. Nonetheless, a broader trade war as result of higher US tariffs poses downside risks to economic growth. The fiscal deficit is estimated to remain narrow in 2024 at 0.9% of GDP thanks to higher-than-expected revenues and underspending. However, the fiscal trajectory is set to deteriorate over the next few years, driven by fiscal support measures for households by the new government coalition and higher spending for social security, healthcare, defence and interest payments. The DNB forecasts fiscal deficits at 2.1% of GDP in 2025 and 3.1% in 2026. Nevertheless, the Netherlands has ample fiscal space to accommodate a moderate deterioration in fiscal balances over the medium-term. 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 direct and indirect state 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, but Potential Trade War Poses Downside Risk

The Dutch economy is recovering from a period of lower growth, turning a corner with strong quarter-on-quarter real GDP growth rates in the past quarters. Domestic demand drove the expansion with healthy rises in private and public consumption as well as export growth slightly outpacing imports. The Dutch central bank forecasts growth to accelerate to 1.5% in both 2025 and 2026, after 0.9% last year. The projected recovery will be supported mainly by private consumption and public expenditure, while import increases as result of strong domestic demand will outpace export growth. A boost in household incomes on the back of still strong wage growth, lower inflation and income tax relief strengthens private consumption. Wage growth is projected to decelerate gradually as a tight labour market softens somewhat but will remain above the euro area average. The unemployment rate stabilised at 3.7% in 2024. Investments and exports are expected to rise thanks to a recovery in global trade and easing monetary policy. However, inflation is projected to remain close to 3% with higher input prices continuing to weigh on Dutch price competitiveness. The outlook is clouded by geopolitical tensions. If US tariffs lead to a broader trade war with Europe, this will weigh on the small and open Dutch economy. Although direct trade linkages to the US are rather small, the impact of rising tariffs would likely feed through to the Dutch economy via indirect linkages. While a resulting devaluation of the euro could initially offset some of the negative impacts, effects would be more pronounced in 2026. The DNB forecasts real GDP growth would fall to 1% this year and to merely 0.4% in 2026 in such a scenario, with the unemployment rate rising to 4.5% (compared to 4.0% under its baseline).

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. After a period of temporarily lower growth, it is now growing faster than the euro area again. At year-end 2024, the Netherlands' real GDP stood 8.9% above its Q4 2019 level, compared to an increase of just 4.7% 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.

Fiscal Deficits Are Set to Widen After Better-Than-Budgeted Performance in 2024

The Dutch budget deficit is estimated to remain narrow at 0.9% of GDP in 2024 according to the Ministry of Finance (MoF), up from a 0.4% deficit in 2023 and a balanced position a year prior. Thanks to stronger-than-expected revenues and underspending, the fiscal performance of the Dutch government is again set to exceed budget targets which penciled in a 1.5% of GDP deficit in the 2024 Fall Memorandum (already revised up from a 2.5% deficit projected in the 2024 Spring Memorandum). Expenditure related to the one-off compensation payment following a court ruling on taxation of capital returns is largely included in the 2024 deficit estimation. In the first three quarters of 2024, government revenues rose by 7% largely driven by higher tax and social security revenues on the back of stronger economic growth. Total expenditures also grew by 7% driven by higher spending on benefits, healthcare and employee compensation.

Going forward, the Dutch fiscal trajectory is projected to deteriorate with the newly installed Schoof Cabinet incorporating fiscal measures of the four-party coalition agreement in its 2025 Budget Memorandum. The MoF projects the deficit to widen to 2.8% of GDP in 2025 and to 3.7% in 2026, before stabilising again at around 2.5% thereafter. The fiscal deterioration is driven by reduced personal income tax rates and the extension of lower excise duties on the revenue side and higher spending on social security, healthcare and defence. Rising interest costs are also adding to budgetary pressures. A reform of the military pension costing a one-off amount of EUR 8.5 billion (0.7% of GDP) is pushing up the deficit in 2026. Underinvestment will likely continue to provide upward risk to the budgeted fiscal balances, although the Netherlands Bureau for Economic Policy Analysis (CPB) expects this effect to decrease gradually over the next years. The DNB forecasts somewhat lower deficits of 2.1% of GDP in 2025 and 3.1% in 2026, but nonetheless warns that the government is losing flexibility to react to unexpected economic shocks. If not addressed, increasing ageing costs coupled with higher interest expenditure will further weigh on public finances. Both the DNB and CPB project the Netherlands to exceed the European Union (EU) fiscal rules' deficit and debt reference values of 3% and 60% of GDP in the longer term. The European Commission concluded that the Dutch medium-term fiscal-structural plan is not consistent with European regulations. But as long as the Dutch government respects the fiscal rules' reference values it does not face any required corrective measures. The Dutch government is committed to limit deficits to below 3% of GDP and plans to limit expenditure growth from 2027 onwards as well as reduce tax benefits for renewables.

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 42.2% of GDP in September 2024 which is below the debt levels in most other Euro area countries. The MoF projects the debt burden to exceed 50% in 2026 and to continue rising through the forecasting horizon until 2029. The DNB forecasts the debt to remain just below 48% in 2026. Moreover, debt affordability is supported by a still very low interest burden. The DNB forecasts it to increase to 0.9% of GDP in 2026, slightly up from 0.7% in 2023, but well below the 2010-19 average of 1.4%. The pass-through of higher nominal borrowing rates had been attenuated by the extension of debt maturities over the past years. The average maturity of the central government debt somewhat decreased again in the past months to 8.6 years as of year-end 2024. The weighted average yield of capital market issuances in 2024 decreased slightly to 2.7% (down from 2.8% a year prior). Yields have been falling as result of easing monetary policy. Potential fiscal risks emanate from contingent liabilities. The government estimates the total stock of public guarantees at 18.9% of GDP in 2024 including liabilities related to the currency union. In addition, the government is exposed to indirect guarantees which amounted to 27% of GDP in 2023 and mostly relate to the government's role as an indirect guarantor for the Homeownership Guarantee Fund.

Morningstar DBRS Expects Broad Policy Continuity Despite Political Turbulence

Despite the fractured nature of Dutch politics and frequent government turnover, the Netherlands' policymaking is generally effective. 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). Supported by this four-party coalition a partially technocratic government with Dick Schoof elected to serve as prime minister was sworn into office in July 2024. The government priorities include improving social security and housing as well as tightening asylum and migration policy. In terms of foreign affairs, the government programme signals broad policy continuity committing to the Netherlands' membership in NATO and higher defence spending. It views the EU as contributing to the country's security and prosperity, though it wants to limit European legislation to core competencies. The request for an opt-out from the EU's asylum and migration rules and plans to reduce EU budget contributions could raise tensions with other EU member countries. The government has vowed to continue existing climate policy agreements including the reduction of greenhouse gas (GHG) emissions. However, it has yet to adopt new policies on how to achieve the targets as the Netherlands Environmental Assessment Agency found the country most likely to miss them under current implemented policies. A Dutch court ordered the government to ramp up efforts to curb nitrogen pollution. Overall, Morningstar DBRS does not anticipate sharp policy reversals from the new government, but coalition stability may be affected by internal discussions including related to stricter migration rules. 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 Residential Real Estate Overvaluation Risks Are Increasing Again

Morningstar DBRS regards the financial condition of the domestic banking sector as strong. Banks benefit from strong capital buffers and a good profitability. Furthermore, the ratio of nonperforming exposures remains low and stabilised over the past quarters at 1.4% as of September 2024 according to European Banking Authority data. Pockets of vulnerability for asset quality could arise from higher interest rates which could strain the repayment capacity of borrowers. This applies particularly to corporate borrowers due to fast pass-through of higher interest rates, although risks are receding as borrowing costs fell again as result of monetary easing. The average interest rate on outstanding loans to non-financial corporates stood at 3.8% in December 2024, down slightly from the 4.0% peak earlier in the year, but still well above the 1.6% low in 2022. The number of bankruptcies returned to pre-pandemic levels. Moreover, asset quality risks for banks' exposure to commercial real estate (CRE) might emerge, although the CRE market seems to be stabilising with transaction values picking up and price corrections bottoming out. CRE loans account for around 7% of total bank assets. Household indebtedness at 94.5% of GDP in 2023 is the highest in the EU. Asset quality risks from household mortgages are largely mitigated by the still strong condition of the labour market and the long interest rate fixation periods of most mortgages in the Netherlands. The average interest rate on outstanding mortgage loans to households rose moderately to 2.7% in December 2024. After temporarily falling, residential house prices have recovered markedly again since mid-2023 weighing on affordability and rekindling overvaluation risks. In the second half of 2024 monthly year-on-year price growth exceeded 10% in all months, with the Statistics Netherlands' (CBS) year-end 2024 house price index standing almost 15% above its June 2023 level and exceeding the previous July 2022 peak by almost 8%. Further risks to the financial stability in the Netherlands could emanate from geo-economic fragmentation and cyberthreats according to the DNB.

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 9.9% of GDP in 2023. DNB forecasts the current account surplus to remain broadly stable at 9.7% of GDP in 2024 and to decline slightly to 9% by 2026. 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. Around half of all Dutch exported goods are re-exported goods, with the CBS estimating that export earnings per euro of gross re-exports amounted merely to 11 cents (vs. 53 cents for domestic exports) in 2022. Thus, although the value added of 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. As of Q3 2024, the Netherlands' net international investment position amounted to almost 55% 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/449146.

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 (Government Programme, September 2024), Ministry of Finance (Letter to Parliament on provisional realisations of central government income and expenditure for 2024, February 2025; Fall Memorandum, November 2024; Budget Memorandum 2025, September 2024), Dutch State Treasury Agency (Monthly Report State Debt (various issues); Outlook 2025), De Nederlandsche Bank (DNB; Autumn Projections, December 2024; Financial Stability Report, Autumn 2024), CPB Netherlands Bureau for Economic Policy Analysis (Concept Macro Economic Outlook 2025, August 2025; Macro Economic Outlook 2025, September 2024), Statistics Netherlands (CBS), PBL Netherlands Environmental Assessment Agency (Climate and Energy Outlook 2024, October 2024), European Commission (European Economic Forecast, Autumn 2024; Council Recommendation setting the net expenditure path of the Netherlands; Commission opinion on the 2025 Draft Budgetary Plan of the Netherlands, November 2024), Statistical Office of the European Communities, European Central Bank (ECB), European Parliament (The Netherlands' climate action strategy, December 2024), European Environment Agency, IMF (The Netherlands: 2024 Article IV Consultation, April 2024; World Economic Outlook October 2024; International Financial Statistics), OECD (Economic Outlook, December 2024), Social Progress Index, World Bank, BIS and Macrobond. 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 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. Morningstar DBRS' outlooks and credit 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/449140.

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

Lead Analyst: Max Dietz, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Managing Director, Global Sovereign Ratings
Initial Rating Date: 12 May 2011
Last Rating Date: 30 August 2024

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