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

DBRS Ratings Limited confirmed the Kingdom of the Netherlands’ Long-Term Foreign and Local Currency – Issuer Ratings at AAA and its Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

KEY RATING CONSIDERATIONS

The confirmation of the Stable trend reflects the Netherlands’ solid credit fundamentals amid sound economic performance. The Dutch economy grew faster than the Euro area average in 2018 and, while set to moderate, growth is forecast at above 2.0% in 2019. The labour market remains strong, with the unemployment rate reaching historically low levels. At the same time, the government debt-to-GDP ratio continues to decline and is projected at below 50% in 2019. Moreover, vulnerabilities stemming from the private sector, related to high household debt relative to income and rapidly rising house prices, seem contained. The authorities have adopted measures over the past few years to improve the resilience of households and banks.

The ratings are supported by the Netherlands’ advanced, wealthy, and productive economy, its strong external position and its robust institutional framework. These credit strengths counterbalance the challenges associated with high household indebtedness and the economy’s exposure to external shocks given its high degree of trade openness.

RATING DRIVERS

In light of the Netherlands’ credit strengths and solid economic performance, downward pressure on the ratings seems unlikely. Nevertheless, a severe deterioration in growth prospects or public finances, damaging the Netherlands’ resilience to shocks, could lead to a Negative trend on the ratings in the long term.

RATING RATIONALE

The Dutch Economy Is Growing Above Potential and The External Sector Remains Robust

The economy continues to perform solidly despite moderating. After peaking at 2.9% in 2017, real GDP growth is estimated at 2.6% in 2018. In 2019, the Netherlands Bureau for Economic Policy Analysis (CPB) is forecasting the Dutch economy to grow by 2.2%. The deceleration in growth reflects in part a less favourable external environment. Higher public expenditure is set to be a major growth driver this year, while wage growth should support private consumption. Growth is projected to move closer to its potential of around 1.7% in 2020-2021.

Favourable economic conditions have led to very low unemployment, but also to shortages in the labour market. At 3.6% at the end of 2018, the unemployment rate is below the 5.0% long-term average. Tightness in the labour market is pushing wages up. Rising wages, together with the increase in the VAT low rate and higher energy costs, are fuelling inflation. The inflation rate is projected to rise to 2.4% in 2019 from 1.6% in 2018. Tightness in the labour market is also contributing to a more rapid growth in permanent employment contracts than in flexible contracts. This is a positive development given the relatively high share of flexible contracts that has raised concerns over labour market segmentation and its potential effect on labour productivity. Measures to tackle this dualism are also being adopted.

Downside risks to the economic outlook are largely related to a potential slowdown in global trade or the economy of key trading partners. The Netherlands is exposed to the United Kingdom’s departure from the European Union, as the UK is the Netherlands’ third-largest export destination in terms of value. The CPB has estimated that the GDP loss in the long-term could be 1.2% under a WTO scenario and 0.9% under a free-trade agreement scenario for Brexit. On global trade, De Nederlandsche Bank has estimated that under an escalating trade conflict scenario, Dutch economic growth could be lower by 0.8 percentage points in 2019 and 0.5 in 2020 relative to its baseline. Domestically, public expenditure could turn out lower than planned, resulting in lower real GDP growth.

Structurally, the Netherlands’ economy continues to benefit from high levels of employment, productivity, and education. GDP per capita is one of the highest in Europe, almost 20% above the Euro area average. The level of private sector savings is also sizeable, with households’ pension savings and insurance products accounting for just over 50% of total household assets – among the highest of OECD countries. Aggregate high incomes and savings provide the Dutch economy with an important degree of resilience.

The Netherlands’ external position is also very strong, largely reflecting its trade competitiveness. A robust trade performance and high net savings in the private sector have helped maintain the current account in surplus since the early 1980s. The surplus has averaged 9% of GDP over the past five years, in part supporting the Netherlands’ large net external creditor position, on average at 50% of GDP since 2013. The strong external position provides the country with a significant buffer to absorb external shocks.

Risks to Financial Stability Are Contained

Dutch household debt relative to income, while falling, remains one of the highest of OECD countries. High household debt was 221% of disposable income in 2017. At the same time, the aggregate net worth of Dutch households is the highest among OECD countries at almost 700% of net disposable income. Nevertheless, high household debt could exacerbate an economic downturn in case of negative shocks. In particular, households with low incomes and many first-time homebuyers are exposed to income shocks and declines in house prices. Vulnerability to increases in interest rates seems limited, as residential mortgages are largely fixed-rate. Debt partly reflects tax incentives and is largely in the form of mortgages (for further details, please see DBRS commentary entitled “Danish and Dutch Households: Indebted, Wealthy, and Vulnerable to Rising Interest Rates?”, available at www.dbrs.com).

At the same time, the rise in house prices accelerated in 2018. Since 2013 house prices nationwide have risen by 30%, strengthening household balance sheets. Higher prices have contributed to the reduction of mortgages with negative equity that resulted from the 2008-2013 house price correction (now down to just 6% of total mortgages from almost one third in 2014). Prices, however, are now above the 2008 peak levels and are rising at a stronger pace in the main Dutch cities. Housing investment has not kept up with housing demand. If persistent, strong growth in house prices could increase the risk of a correction. A house price correction and an economic downturn could reinforce each other.

Given the risks to financial stability and the economy posed by high household debt and rising house prices, and as part of the government’s tax reform, the Dutch authorities will accelerate the reduction in mortgage interest deductibility from 2020. Debt amortisation is also a requirement since 2013 to benefit from tax deductibility on interest expenses. This requirement has contributed to the decline in interest-only mortgages, which now account for close to 50% of total mortgages. The limit on the loan-to-value ratio was also reduced in recent years, although to a still high 100% in 2018. Mortgage lending remains moderate and the banking sector is in a healthy position. Dutch banks are profitable and well-capitalised. Dutch financial institutions have also been planning for Brexit. The large insurance sector, however, is facing challenges because of low interest rates and declining premium income.

The Coalition Government Is Implementing Expansionary Fiscal Policy

The Netherlands benefits from effective public institutions and consensus-driven policies, which more than offsets a somewhat fragmented political landscape. No single political party won a majority in the March 2017 elections. But a new government took office in October 2017, after four parties (VVD, CDA, D66 and the Christian Union) presented the Coalition Agreement following months of negotiations. The centre-right coalition agreed to reform the tax system with the aim of reducing the overall tax burden on households and firms, and to increase investment in education, defence, and infrastructure. On the other hand, energy taxes and the lower VAT rate have been increased. Labour market reform measures were also agreed to tackle labour market dualism.

Despite the expansionary fiscal stance, DBRS expects the government to maintain a sound fiscal position. The fiscal surplus is projected to remain around 1.0% of GDP in 2019. While the budget position is set to deteriorate over the next few years, the structural balance is projected to remain within the -0.5% medium-term objective. Strong growth is supporting tax revenues and lower expenditure on unemployment benefits. Moreover, the fiscal cost from the planned reduction of natural gas extraction is expected to be offset by additional measures.

The government debt-to-GDP ratio is also moderate and declining rapidly. In 2019, the debt ratio is projected at 48.9%, almost 20 percentage points lower than the 2014 peak. Nominal GDP growth, privatisation proceeds, improving primary balances, and lower funding costs have contributed to the reduction of debt since 2015. Moreover, the Dutch Treasury continues to extend debt maturities. For the second quarter of 2019, the Dutch Treasury is planning to issue the Netherlands’ first sovereign green bond, with a maturity of at least 15 years. A favourable debt profile and a lower debt ratio support the shock absorption capacity of public finances.

The long-term sustainability of public finances looks secure. Over the past decade, the Netherlands raised the minimum retirement age, adjusted pension entitlements, and restrained healthcare spending. These measures have helped lessen ageing-related spending pressures. The government has also agreed to progress with additional reforms to the pension system. The country’s effective public institutions, together with a robust fiscal framework, support the sustainability of public finances.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the AAA – AA (high) range. The main points discussed during the Rating Committee include economic performance, risks to the economic outlook, the labour market, fiscal policy, the housing market, and the banking sector.

KEY INDICATORS

Fiscal Balance (% GDP): 1.2 (2017); 1.1 (2018E); 1.0 (2019F)
Gross Debt (% GDP): 57.0 (2017); 52.4 (2018E); 48.9 (2019F)
Nominal GDP (EUR billions): 737.0 (2017); 773.0 (2018E); 810.6 (2019F)
GDP per Capita (EUR): 43,180 (2017); 44,897 (2018E); 46,877 (2019F)
Real GDP growth (%): 2.9 (2017); 2.6 (2018E); 2.2 (2019F)
Consumer Price Inflation (%): 1.3 (2017); 1.6 (2018E); 2.4 (2019F)
Domestic Credit (% GDP): 290.9 (2017); 283.3 (Sep-2018)
Current Account (% GDP): 10.5 (2017); 10.1 (2018E); 9.7 (2019F)
International Investment Position (% GDP): 59.6 (2017); 65.3 (Sep-2018)
Gross External Debt (% GDP): 531.2 (2017); 534.2 (2018E)
Governance Indicator (percentile rank): 96.2 (2016); 96.6 (2017)
Human Development Index: 0.93 (2016); 0.93 (2017)

EURO AREA RISK CATEGORY: LOW

Notes:

All figures are in EUR unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Forecasts based on the Netherlands Bureau for Economic Policy Analysis (CPB) forecasts. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The sources of information used for this rating include the Government of the Netherlands, Ministry of Finance (Ministerie van Financiën), Dutch State Treasury Agency (DSTA), Netherlands Central Bank (De Nederlandsche Bank DNB), Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau CPB), Dutch National Statistical Office (Centraal Bureau voor de Statistiek CBS), European Commission, European Central Bank (ECB), Eurostat, Organisation for Economic Co-operation and Development (OECD), IMF, World Bank, UNDP, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Adriana Alvarado, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: 12 May 2011
Last Rating Date: 10 August 2018

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