DBRS Confirms Kingdom of the Netherlands’s Rating at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the Netherlands’ long-term foreign and local currency issuer rating at AAA with Stable trends. DBRS also confirmed the short-term foreign and local currency issuer ratings at R-1 (high) with Stable trends.

The ratings are underpinned by the country’s high income per capita and productivity, its elevated private savings rate, and the Netherlands’ very strong external position, driven by the longstanding accumulation of trade surpluses. The country’s strong and tested fiscal framework also supports the ratings as does the low level of corporate sector debt.

The Stable trend reflects the expectation that the Government will keep to its fiscal consolidation programme and put the country’s debt on a firm downward trajectory over the medium-term. Moreover, DBRS takes comfort in the government’s outlining of a number of measures in recent years, which have the potential to lessen the vulnerability of household balance sheets to adverse developments in the housing market and hence make the country’s large banking sector less vulnerable to shocks. DBRS also views positively, the measures adopted to boost growth potential.

The trend could come under downward pressure if the country fails to continue to implement measures which will ensure the sustainability of the public finances over the medium-term. Pressure on the trend could also emerge if the initiatives intended to reduce the exposure of households to adverse house price dynamics do not come to fruition. This could endanger financial stability and increase the potential for negative wealth effects to lower household consumption and growth over the medium-term.

The ratings on the Netherlands are underpinned by the country’s high savings rate, which averaged 26.4% of GDP over the 2005-2013 period. The ratings are further supported by the high level of output per hour worked, which was higher than in France and Germany in 2013. Strong productivity growth has helped the Netherlands to maintain high levels of income per capita, with favourable implications for the country’s tax base. Another source of strength is the country’s current account surplus, which has been high and rising, reaching an estimated 10.4% of GDP in 2013. This increase in the current account surplus has been driven by growing surpluses in the trade in goods, which increased from 4.8% of GDP in 2000 to 8.3% of GDP in 2013.

The government’s progress towards its objective of reducing the deficit to 3.0% of GDP and below, also supports the rating. The deficit narrowed from 4.0% of GDP in 2012 to 2.3% in 2013, helped by the positive effect of one-off measures and is expected to increase in 2014 but to stay, at 2.9% of GDP, just below the EMU threshold. This reduction in the deficit to below the Maastricht treaty threshold has enabled the Netherlands to exit the Excessive Deficit Procedure (EDP). Government debt however, edged up slightly in 2013 to 68.6% of GDP, from 66.5% in 2012. In 2014 and 2015, the debt is expected to rise again marginally to 69.7% and 70.2% of GDP respectively but thereafter DBRS expects the debt to enter a sustained downward trajectory.

Also supporting the rating is the repayment of over three quarters of the assistance provided by the Dutch state to the financial sector during the crisis. These repayments, which have so far amounted to 14.2% of GDP, out of an estimated total intervention worth 18.7% of GDP, have markedly reduced the adverse effect of the interventions in the financial sector on the country’s debt. In addition, risks associated with the country’s large banking system have abated with the reduction since the onset of the financial and sovereign debt crises, in exposures to riskier assets such as commercial real estate, SMEs and the banking sector of the euro area countries which are, or were previously, under some form of financial assistance.

Despite its significant strengths and the recent positive developments, the Dutch economy faces some challenges. In particular, the increase in household debt from 87% of GDP in 2000 to 139.4% of GDP in 2013 could undermine the ability of Dutch consumers to contribute to growth in the years ahead. If the unemployment rate stays at its current relatively high level, consumption and investment could also come under pressure. A further risk for the ratings over the medium-term emanates from the prospects of a markedly lower potential growth rate. Lower growth over the medium-term could call into question the Netherlands’ ability to effectively absorb the costs associated with its ageing population and to reduce public debt.

A sustained reduction in public debt is important not only to improve debt repayment capacity, but also to provide greater room to absorb potential contingent liabilities shocks associated with the highly leveraged household sector and the country’s large financial sector. In this context, DBRS sees the government’s reforms to boost the country’s growth potential and introduce measures to curtail the costs associated with an ageing population, as supportive of the rating. The government’s initiatives to improve the functioning of the housing market and attenuate the pace of debt accumulation by households, together with its commitment to reduce the amount of guarantees (both explicit and implicit) it gives to the banking sector, also provide reassurance that the main challenges are being adequately addressed.

Finally, political risks, whilst still present, have abated somewhat as the loss of support experienced by the PvdA has been absorbed by, to a large extent, the Democrats 66 who are likely to work with the current government in a relatively effective manner until the next general election, due in 2017. Moreover, the downside risks for the economic outlook associated with a potential slowdown in trade flows in the event of an escalation of the conflict between the Ukraine and Russia whilst present, are likely to be mitigated by the Netherlands’ ability to meet a very large part of its energy consumption from its own sources of natural gas and by its trade with countries currently experiencing a stronger than average recovery in economic activity such as the UK.

Notes:
All figures are in Euro unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the Dutch central bank (i.e. de Nederlandsche Bank), the Ministry of Finance, the Dutch State Treasury Agency (DSTA), the Dutch National Statistical Office (Statistics Netherlands), the Dutch Electoral Council, the IMF, the OECD, the European Commission, the European Central Bank (ECB)’s Statistical Data Warehouse and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Carla Clifton, Assistant Vice President
Initial Rating Date: 11 November 2011
Rating Committee Chair: Alan G. Reid
Last Rating Date: 25 April 2014

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